The last few years have seen an unfamiliar spotlight trained on the Australian registry market. For a largely unheralded corner of the funds industry, it has been a time of upheaval, with the structure of the market changing amid a spate of dealmaking. Notably, this has seen a long train of global custody banks outsourcing their registry functions, and this is ongoing with new entrants looming and further M&A activity likely.
It reflects an industry that has been in a state of flux and must now set a clear course for the future. Registry providers face an environment in which more is demanded of them while they strive to protect already thin profit margins. They are adjusting to a shifting funds landscape in Australia, as fund managers experiment with new forms of distribution. And they are faced with an evolving suite of available technologies, which offer the hope of unlocking profitable efficiencies alongside the challenges of adoption and integration. After a period of considerable change for registries, some of the biggest challenges and most difficult decisions still lie ahead.
Challenges pile up
Many of the changes affecting registry providers in Australia are no different from those experienced by their counterparts around the world. All are having to contend with the reality of more demanding clients. In a 2021 survey of fund administrators in Europe and the US by Deloitte, almost all respondents (90%) cited an ‘increase in client expectations’ as one of the main drivers of innovation. Another important factor, mentioned by 60%, was the ‘growing volume and complexity of reporting requirements’. In addition, 40% highlighted ‘clients’ expectations for more insights/data’ as one of the industry’s biggest challenges.
Other common problems include fee compression and the increasing burden of regulation. An unavoidable reality of asset managers being squeezed on their own fees is that they will try to pass that on to their asset servicers, half of whom identified this feedback loop as a major challenge in the Deloitte survey. Most also acknowledged that new regulation arising from the shift to sustainable finance and ESG would ‘strongly impact their strategic agenda’.
Alongside client expectations, profit margins and the looming burden of new regulation, Australia’s registry providers must also address local challenges. As the ultimate administrators of fund records, they are affected by every evolution in how funds are constituted and distributed. As a result, they have found themselves on the frontline of a major shift in the market structure, with the number of financial advisers having fallen by almost 40% since 2019. For registries, this creates multiple headaches as a traditionally intermediated market adjusts to new forms of distribution. With some asset managers seeking a more direct-to-consumer approach, while others create dual access versions of their funds, administrators are now having to reconcile data coming from different directions and via sometimes unfamiliar routes, often more convoluted and less efficient than those they replaced.
We can therefore add growing operational complexity into a landscape where registries were already under pressure on multiple fronts, being asked to do more for less. As funds become more multi-faceted – both in the assets they contain, with alternatives on the rise, and in terms of how they are distributed – the job of the registry gets tougher in turn. While the increasing outsourcing and specialisation of registry means there is less scope to offset fee pressure through additional services.
It Is a situation that will only become more difficult without changes to the way registries work. All eyes, therefore, are now turning to technology – a potential solution, but in some cases also an existing problem.
The legacy trap
At industry events on technology and digital transformation, one comment above all often gets CTO heads nodding around the room: the idea that a disproportionate amount of spend goes not on innovation and product development, but on maintaining legacy IT systems that in some cases are now decades old.
Systems which were built for one purpose have had to grow and adapt as the job of the registry has become more complicated – from one that originally encompassed a straightforward record of trading in mutual fund units, with contract notes and statements of account, to a world in which the registry must provide information on transactions, cash holdings, fees, commissions and retrocessions, as well as contending with a market comprising a growing range of alternative products and distribution channels, and demanding more intricate reporting.
The upshot of all these changes is that registry providers must handle growing volumes of data, coming from multiple directions, which can be slow to move from one place to another. They are running just to keep up, bolting on more and more functionality to systems that are expensive to maintain and were not built to carry the burden that is now demanded of them.
A brighter future
A more optimistic picture emerges if we look forwards to the future of the registry market, and the role technology could play. One obvious source of cheer for registries is that their job, by its nature, lends itself to the use of key technologies, most obviously via automation of the rules-based processes that are the foundation of maintaining an accurate register. Straightforward but time-consuming tasks such as account opening and onboarding are obvious targets for automation: in Calastone’s recent global survey on the subject, ‘client account opening’ was the biggest priority for asset servicers, cited by two-thirds of respondents. As a whole, asset servicers in Deloitte’s 2021 survey comfortably rated transfer agency – aka registry – as the component of the funds ecosystem with the greatest potential for digitalisation.
The Australian market may have some way to go to take advantage of these opportunities. Our research suggests that Australian asset managers and servicers have the potential for improvement when it comes to automation adoption: 34% rated their organisation as ‘fully’ or ‘mostly’ manual, compared to a global mean of 17%. They are also less likely than the global average to be making use of machine learning, AI or robotic process automation.
At the same time, there appears to be a clear focus in the Australian market on harnessing automation to drive down operational costs: this was cited by 74% of respondents as the main driver for pursuing automation, compared to the global average of 60%.
Automation is just one tool that registries can consider in their digitisation push. The transition of data and workflows to the cloud is an ongoing process for many that promises to deliver operational efficiencies, while the adoption of a microservices approach in systems architecture allows for a modular approach to developing a tech stack for new and evolving needs, reducing implementation risks and costs.
Another key trend is the emergence of distributed ledger technology (DLT), which has quickly gained traction in the Australian market: Calastone’s research suggests just over a third of asset managers and servicers are looking to make use of it in the next 12-18 months, compared to a global average of 23%, and behind only Singapore.
By harnessing DLT, also known as blockchain, registries could potentially make major advances in how they handle data, bringing currently disparate sources onto a common platform and helping to eliminate or automate much time-consuming data gathering and reconciliation.
They would also be preparing themselves for another coming wave in asset management, that of tokenisation, whereby assets are rendered as digital tokens that can be held and traded via DLT. There is significant scope for this to widen access to alternative asset classes, give potential for greater personalisation of investment strategies and to lower the cost of trading through efficiencies. With trillions of dollars in assets set to be tokenised in the coming years, it is a shift in the market and disruption of the value chain for which all participants need to be ready.
From cloud to new systems architectures, automation and tokenisation, a raft of technologies is beginning to transform the landscape for registries. However, that does not mean all need adopt the same solutions at the same speed. Every registry is in a unique situation which calls for a different mix of technologies and a different pace of progression. There is no set template, only a toolkit of options which will need to be used according to context and need. Yet at a time when the challenges facing registry providers are more apparent than ever, almost all paths to progress point to some form of accelerated digitalisation.
As the scope of their work continues to expand while fees remain under pressure, registries cannot go on as before. In an uncertain and evolving market, where client and regulatory demands will continue to increase over time, the only way to thrive will be to develop systems and processes that are durable, scalable and digitalised – capable of flexing and adapting whatever is thrown their way, letting technology bear the load.