Accelerating automation in Malaysia’s funds industry ______

Blog / 16 Jun 2020

Leo Chen, Managing Director - Head of Asia

Malaysia has not been excused from the disruption being caused by COVID-19, although the country has now reopened its economy and eased lockdown restrictions. Despite a loosening of the lockdown measures, normality in Malaysia is unlikely to resume anytime soon, especially as businesses are still being encouraged to work from home wherever possible.

One by-product of the COVID-19 social distancing requirements is that it is likely to force the domestic funds industry into transitioning away from manual processing towards a more automated solution.

A continued reliance on traditional processing not only causes operational challenges for asset managers, but exposing investment firms to disintermediation by more agile and tech savvy disruptors.

Take events in China, for example. In just six years, Ant Financial – an offshoot of e-payment giant Alibaba – challenged the funds’ model by taking an existing brokerage business and leveraging the Alipay payment processing platform. Ant Financial now runs one of the world’s largest money market funds – Yu’E Bao, which currently looks after US$150 billion.

So how could fund managers adapt this to their business model?

Malaysian managers disrupted by COVID-19

The country’s fund management industry, which collectively looks after around USD$191.73 billion in assets (as of June, 2019)[1], has been adversely affected by COVID-19. As with many other markets, domestic fund managers were forced to implement their business continuity plans (BCP) at incredibly short notice. Many have since told staff to work remotely until notified otherwise.

As the crisis deepened further, the country’s regulator – the Securities Commission Malaysia (SC) – reminded fund managers of their obligation to act in the best interests of customers, before adding it expected firms to have robust BCP and cyber-security measures in place. [2]

Remote working has created a number of operational challenges for Malaysia’s growing funds industry. One of the biggest impediments is that the sector continues to be highly dependent on manual processing, an activity which has been disrupted by this new working normal.

Take fund transactions, for instance. These are often paper-based and reliant on e-fax so the ability to successfully complete transactions has been severely compromised.  It is a problem that has been made worse by the fact that trading volumes are now at record levels.

Similar to regulators in the United Kingdom, United States, Europe, Hong Kong and Singapore, the SC in Malaysia will want to have assurances from fund managers that they have weathered the disruption and their systems and governance processes did not buckle under the stress. Operational resilience is expected to be an area of regulatory scrutiny, not just in Malaysia but globally.

The importance of automation

Business resilience is not just a case of crisis planning. It is essential that firms embrace automation and straight-through-processing (STP) as it can help them mitigate risk and strengthen their operational infrastructure, particularly during periods of volatility. Through digitalisation, remote working can be performed more seamlessly, making for a safer and better client experience.

While automation can play a vital role in facilitating better risk management (i.e. by eliminating errors and duplications) and reducing operating costs, it will be equally important in ensuring the domestic funds’ industry remains competitive and relevant to its customers – especially under-served millennials – moving forward.

Automation as a strategic benefit

Recent analysis by Luno indicates that Malaysia’s millennials are not only enthusiastic savers but avid users of technology. Even though Malaysia’s millennials are yet to fully embrace investing, 100% of those surveyed by Luno acknowledged they had a savings account. This could be a potential opening for fund managers.

However, the process of buying and selling fund units continues to be cumbersome and intermediated, as does the actual fund reporting. A number of asset managers – for example – will simply share performance information with clients in monthly emails or even via physical correspondence. This does not make for a positive user experience, and could preclude asset managers from attracting capital from Malaysian millennials.

If asset managers are to win mandates from millennials in places like Malaysia, they need to become more accessible. This can be done through automation and digitalisation. For example, some investment firms may choose to adopt disruptive technologies such as a blockchain-supported market infrastructure or even tokenised assets.

By doing so, managers will not only generate significant operational savings, but they could attract younger investors, many of whom are often deterred from buying funds due to the inefficiencies, costs and complexities involved.

Automation and digitalisation are key

The importance of automation in operational risk management has been laid bare for Malaysian asset managers by COVID-19. Looking further afield, automation will be integral in helping the industry digitalise, and attract younger audiences, potentially sparing it from the risk of disintermediation.

 

[1] Asia Asset (August 16, 2019) Malaysia fund industry assets up 2% in June, 8% in first half on stocks, bonds

[2] The Asset (April 9, 2020) Malaysian regulator upholds investor protection during Covid-19

Leo Chen, Managing Director - Head of Asia

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