By Robin Farnan, Managing Director, Financial Technology Services, BT
The role of global custodians in the safekeeping of investment managers’ international assets deserves more widespread awareness, particularly following industry events such as the Madoff scandal and the market instability experienced in the aftermath of the global financial crisis. Custody activity is critical to the safe transfer of assets – and with nearly £80 trillion conventional investable assets globally, this is no small task. However, where trustees or pension fund managers are concerned, custody and asset servicing has typically been viewed as a low-priority back office activity. While it is true that the activity, in the main part, concerns back-office processes, given its role in risk mitigation, it is far from low-priority.
Global custody emerged out of the internationalization of investment activity, which in some respects outpaced international custodians’ capacity to build a global infrastructure, hence their reliance on (local) sub-custodians or agent banks.
But the desire of financial services companies to seek opportunities in markets outside of their current operations shows no sign of waning, meaning that the role of custodians in ensuring the safekeeping and transfer of assets will become even more important. According to research, “The art of connecting global business”, carried out by BT as part of our involvement in the International Festival of Business 2014, three quarters of financial services global business decision makers feel that expansion into other countries is essential for success. In turn, the value of, and need for, custody services will increase, and custodians must make sure that the reach and scale of their own infrastructure is adequate enough to respond to the needs of their customers.
That financial services organizations want to expand overseas is not surprising but, for global custodians, it is nonetheless encouraging that the global financial crisis and the resulting regulatory environment have not stymied firms’ international ambitions. In terms of the markets considered most desirable for expansion, the USA, UK and Hong Kong are the top three for financial services business leaders, with 33% each. On a global level, potential customer base is viewed as the most important reason to enter a new market for financial services firms, at 62%, followed by tax and governance reasons at 52%.
However, the barriers to international expansion are still being keenly felt by the organizations we surveyed.
– Nearly half (46%) of financial services reported government regulation as an external challenge when moving to new markets.
– Concerning internal challenges, 41% of respondents in financial services believe their organization’s technology is a hindrance to expansion.
-Moreover, 47% of UK financial services companies see tax and governance as important when expanding operations into new countries or territories, this being equal to IT skills in the target market.
Reliable communications across all territories is viewed by financial services organizations as the most important element for successful expansion, with 53% citing it in their responses. This is particularly pertinent for global custodians whose role involves the communication of all instructions associated with the transfer of securities.
And, connected to this, when asked if their own organizations’ current set up supports their global requirements, just 27% of financial services companies felt their technology was completely equipped to do this, and only 17% believed communications needs could completely be met. Both these scores are the lowest across all industry sectors surveyed.
Technology is gaining more airtime in the financial markets than ever before, to the extent that, today, it is considered a fundamental enabler to achieving international ambitions. And, at a time when financial services firms want to unlock the potential of new customer bases and investment opportunities, the art of connecting global business has become as important as more traditional considerations such as the governance and tax regimes of a target market.
In recent years, the financial community has been focused on developing the tools, instruments and infrastructures that safeguard financial stability so that firms can focus on their core business, performance and growth. Without doubt, as firms look to expand, there will be a growing desire for international standards for best practice processes, supported by efficient technology and communications infrastructures. This represents a significant opportunity for custodians, and one they should look to capitalize on.