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Andy Milner

A Regulatory Perspective on Robo’s

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Andy Milner

An interesting short video on the US regulation climate:

 

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WWW.ASSET.TV

The regulatory landscape continues to evolve as it tries to keep up with robos and digital advice platforms. Luis Garcia of ACA Compliance Group breaks down SEC exam focus areas and compliance

 

 

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    • Rob Carter
      By Rob Carter
      The UK is a hotbed of fintech activity, and it has not escaped the attention of investors worldwide. so what can we expect in 2018?
       
      Last year, almost £3bn of venture capital found its way in to the UK’s tech sector, a record high and nearly double the figure for 2016. British fintech firms attracted almost four times more funding in 2017 than Germany, and more than France, Ireland and Sweden put together. This year promises to be even bigger, but what are the exciting developments driving those investment flows?
       
      Here’s what to expect in 2018 across five key areas we’ve identified:
       
      Open Banking
      One of the most exciting developments to land in the UK financial sector is Open Banking. Under these new rules, which came in to force in January this year, banks must share their customers’ financial data with other FCA-authorised institutions, if customers request them to. This includes bank and credit card transactions and information about spending habits, for example. The aim is to improve competition in the marketplace and ultimately help consumers get a better deal. It should also foster much greater innovation, as new alliances are forged between traditional financial services firms and fintech startups. This is already starting to happen – First Direct has partnered with fintech firm Bud, Barclays is working with Flux, and NatWest has teamed up with FreeAgent. Banks are working hard in-house too: HSBC, for example, has launched a beta app which will allow customers to see all their accounts on one screen, even those from rival providers. Expect more innovation and unlikely partnerships in the banking sector this year.
       
      Wealthtech
      Wealthtech refers to the specific type of fintech which is used to solve problems and improve user experience in the wealth management and investing world. The definition includes robo-advisers like Nutmeg and Wealthify, as well as micro-investment services and digital brokers. They focus on the under-served mass market of people who would like to invest but only have small savings pots to play with, or who perhaps can’t afford financial advice or wouldn’t be economically viable clients for traditional financial advisers to take on. Robo-advice and micro-investing tools help to democratise investing and make it accessible to a much wider consumer base. Although some of these companies may take time to become profitable, the assets they manage are set to grow rapidly. Deloitte estimates the $2 billion in assets under automated management globally today may grow to as much as $7 trillion by the year 2025.
       
      Cryptocurrencies
      So strong has been the hype around cryptocurrencies that some listed companies in totally unrelated sectors have linked themselves to the space by changing their names or the focus of their businesses. Just adding the word ‘blockchain’ in somewhere has proven enough to send their share prices soaring (see Long Island Iced Tea Corp, now called Long Blockchain). But there may already be signs that the bubble could burst – highly volatile Bitcoin has fallen a long way from its lofty highs, and there is a regulatory threat from financial watchdogs globally following a crackdown by South Korea. There could be interesting developments to come in cryptocurrencies this year as companies navigate the new landscape.
       
      Regtech
      Regtech refers to the use of technology to help financial services firms better comply with regulation. It’s been dubbed ‘the new fintech’ and it is a fast-growing area. Regtech businesses help other firms to meeting their reporting and compliance obligations, monitor transactions, and manage risk. Firms like Funds-Axis, DueDil, and Silverfinch are part of this growing movement. Deloitte says: “RegTech has a very bright future, with a huge amount of opportunity for those developing this type of technology to automate and enable the world of regulatory assessment and control management, bringing clarity and control to an area of the business that is so incredibly important, but so often cumbersome and time-consuming.” With the Financial Services industry under more regulatory pressure than ever and drowning in legislation, Regtech should be a fascinating area to watch.
       
      Artificial intelligence
      When you think of AI, you might think of chatbots being used to replace customer service people, or voice command technology like Amazon Alexa. But the applications of AI in fintech go much further. It can be used to spot suspicious transactions and cybersecurity threats, or predict consumer behaviour and make more accurate predictions based on these insights – for example, whether someone will be a future credit risk. Machine learning can be used to create a customised investment portfolio based on someone’s personal interests and preferences, updating it as their preferences change over time. The possibilities are endless, and who knows how the FS industry could change when AI reaches its full potential?
       
      As always, only time will tell when it comes to forecasting the future but one thing is sure, the UK fintech market is thriving now and will continue do so for a long time.
    • Rob Carter
      By Rob Carter
      It’s 2017 and technology surrounds us as never before. Asset Managers are investing a lot of time and money to get to grips with both FinTech and the new kid on the block RegTech. At AlgoMe we’re fascinated by the way technology is changing the world of work and skills. We’ve put together some key technology themes which we think will be big this year and what to watch out for too.
       
      Big data analytics
      Big data is creating a buzz across the business world and is one of the most important challenges and opportunities facing financial businesses today. IDC, the global market research, analysis and advisory firm, predicts that the big data and business analytics market will grow from $130 billion to $203 billion by 2020. The problem is, firms collect swathes of customer data, but without the tools to mine these so-called ‘data lakes’ correctly, they are not getting analytics they can develop actionable insight from. Done correctly, it’s immensely valuable and more than just analysing customer behaviour – analytics can be used to predict the regulatory and operational risks the firm itself could face. For example, using technology to analyse the root cause of any previous regulatory breaches could prevent the same mistakes from recurring in future. The FCA has acknowledged that it too could use big data analytics to reduce the reporting burden on firms. Last year it launched the Regulatory Sandbox to help firms innovate and this has already produced some interesting results in the world of banking technology. Some companies are launching Data Analytics as a Service for the Asset Management industry and the knock on effect will be a demand for professionals with new skill sets to embrace this new opportunity.
       
      Machine learning
      No doubt you’ve probably heard of robo-advice, but there are also other ways that machine learning can be applied in financial services. Possibly the most disruptive of technologies to break into the financial services space, you should expect to hear more about machine learning and robo-advice (with a soupçon of AI thrown in) this year.
       
      Just last month LendingRobot, a specialist online investment-management service or so-called “robo-advisor,” announced its launch of a hedge fund which is administered without human intervention. Silicon Valley has also woken up to the opportunities and companies like Sentient Technologies will be grabbing headlines this year.
       
      P2P platforms and other lenders use algorithms to make lending decisions and predict bad loans. There are also firms which use machine learning to scour social media and news sites for trends to give their clients signals to trade on. The FCA has noted that because machine learning can automatically refine processes in reaction to user input, they could replace some of the complex, high volume tasks firm need to perform to remain compliant.
       
      For now, there’s no need to grab your coat and head for the door; technology hasn’t taken over quite yet! However, understanding how these trends will impact your business area will be essential in the coming months. 
       
      Cybersecurity and fraud prevention
      With MiFID II a big headline for 2017, the need to adopt new technology to support compliance has never been more apparent. The regulatory burden for Asset Managers can be lightened by RegTech as it can be used effectively to monitor transactions, trades and communication in real time, all the time. By correlating information gathered from different sources, powerful calculation engines can highlight errors, gaps and current trends in financial crime to help firms shore up their defences. With financial institutions a regular target for hi-tech cyber criminals, fighting fire with fire has never been more important. We expect this area to become more central to the industry in the short term.
       
      Automation
      The Asset Management industry suffers no shortage of data but it is faced with management and automation challenges. Organisations are increasingly looking towards technology in their operating models to simplify administration and, where possible, to reduce the costs associated with fund managers doing things manually. It’s a great way to reduce the pressures on margins and increase overall performance.
       
      In 2017, you can expect to see a lot more companies like CG Asset Management adopt automation. Performance reporting, regulatory reporting, investor communications and fund expense management are key pressure points for companies struggling to move away from the legacy systems they have always used or for those who have bought pick and mix technologies that will not integrate seamlessly.
       
      This is a major investment for an organisation and a positive direction for the wider industry to move towards – it will also mean bringing your teams up to speed with new platforms and technologies very swiftly.
    • AlgoMe
      By AlgoMe
      You’ll hear thought leaders speak on resilience and the future of open banking, and will have the opportunity to meet other fintech industry professionals and members of the Innovate team throughout the afternoon and during networking drinks.
       
      FCA Innovate was created in 2014 and encourages innovation in the interest of consumers. We provide regulatory support for small and large businesses that are developing innovative products or services.
       
      FCA services includes Sandbox, Advice unit, Direct Support and Regtech.
       
      FCA Innovate in 2019 - Edinburgh
      WWW.EVENTBRITE.CO.UK Join us in the heart of Edinburgh and learn how FCA Innovate’s services can benefit your organisation in 2019.  
    • Luuk Jacobs
      By Luuk Jacobs
      The FCA Asset Management Market Study (AMMS) was launched in November 2015 with findings reported in April 2018 (PS18/8).  The implementation of AMMS by Authorised Fund Managers (AFM’s) is to be achieved by September 30, 2019. It includes ‘a package of remedies to ensure fund managers compete on the value they deliver, and act in the interests of the millions who entrust them with their savings’ according to the regulator.
       
      For the industry, this creates a new menu of rules and guidance covered by this directive. Not only are they widespread, but they bring SMCR into play as well. Here are four key areas which need to be planned for and adequately accommodated:
       
      a requirement for AFM’s to make an annual assessment of value (the “Value rule”), as part of their duty to act in the best interests of the investors in their funds a requirement for AFM’s to appoint a minimum of two independent directors to their boards the introduction of a new prescribed responsibility under the Senior Managers and Certification Regime (SMCR) to bring individual focus and accountability technical changes to (i) improve fairness around the way in which fund managers profit from investors buying and selling their funds and (ii) facilitate the movement of investors into cheaper share classes
      The impact of the above might seem rather like MiFID; just another regulation to comply with but thought through in more detail, it will have a material impact on the industry. The implications will have an impact on executive levels including NEDs and here’s how:

      The Chairman of the Board of the AFM (either executive or non executive ‘NED’) will become an SMCR position with the responsibility to ensure that the firm complies with its obligation to carry out the assessment of value, the duty to recruit independent directors, and the duty to act in the best interests of fund investors. This last element would, for example, include ensuring the appointed portfolio manager is the right one for the job. Currently these are usually longstanding appointments. This will add weight to the FCA’s requirements on assessing value for money and acting in the best interest of investors, and as a senior individual (the Chairman) will be held accountable.
       
      The question then becomes how the Board and Chairman get the information based on which they can make this assessment. Up until now most AFM Board members are executives of the Management company, with arguably limited external perspective and challenge to how the fund is operated ie a very tunnelled and internal view. These executive Board members might have a perceived knowledge of their company.
       
      A NED has the challenge to get independent understanding of the Asset Management Company and especially these days around the Risk and Control Management Framework, not just the fund strategy(ies), its performance and value for money. Hence which reports will the NED be provided with to ensure him/herself of the sustainability of performance and value for money?

      The UK industry manages £7 trillion in assets and firms offering products with particularly poor value for money may struggle to justify their offering and be put under pressure to reduce fees, improve the quality of service, or move investors into better value share classes.
      Equally, with no exemptions for the smaller players in the industry, this could even lead to closure of funds due to the additional cost for NED’s, providing of information and other associated admin. Over all, the industry will be a need to upgrade even further the Risk and Control Management Framework to ensure the Board’s working and for the Chairman to be able to sign off his/her SMCR duties.
       
      Being a NED in this environment of changed responsibility, greater emphasis on further investor protection and likely still being surrounded by a majority of executive members on the Board, will be challenging. 

      Hopefully the new cooks in the kitchen will have the challenge to make existing cooks realise that the taste of the consumer has changed and therefore the meal needs to be cooked differently.
       
      FCA Asset Management Market Study.pdf
    • Andy Milner
      By Andy Milner
      In the last few years the wealth management industry has witnessed some impactful trends, such as a decrease in customers’ trust of traditional financial services, more interactive client experience through goals-based planning, and a shift to digital as customers’ primary channel preference for the services they receive from financial institutions.
       
      The steady rise of digital entrants into this area and the significant shift in customers’ channel preferences and spending habits have led to the development of two key groups for advice-based wealth management: software platforms that provide fully automated investment services (Robo-advisors or “Robos”) and human advisors equipped with robust automated capabilities like analytics and digital tools (“Advisor 2.0”).
       
      In this paper we look at the emergence and maturing of Robo-advisors and review these along with the traditional human-advisor-based firms and their adoption of technology advances. The incumbent firms are exploring and investing in sophisticated tools and technologies such as advanced analytics and AI to provide a richer toolkit for the advisor and enabling a more insightful experience for the customer. While Robo-advice provides an efficient platform for investing, the importance of the human element cannot be emphasized enough, as seen by the gradual convergence by both sides towards a hybrid (human + robot) approach. It remains to be seen what the model will evolve to, but it is for certain that the human element will be at the center of it.
       
      © 2018 Ernst & Young LLP.
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