GC Friday Interview: Richard James, Chief Operating Officer, Royal London Asset Management

Earlier this week, Royal London Asset Management (RLAM) extended its outsourcing relationship with HSBC for another ten years, whereby HSBC will continue to provide custody, fiduciary and outsourced investment administration services to the asset manager, as it has done since 2006. Richard James, chief operating officer of RLAM, explains the decision behind outsourcing and how the industry is working with regulators regarding the process.
By Janet Du Chenne(59204)
Earlier this week, Royal London Asset Management (RLAM) extended its outsourcing relationship with HSBC for another ten years, whereby HSBC will continue to provide custody, fiduciary and outsourced investment administration services to the asset manager, as it has done since 2006. Richard James, chief operating officer of RLAM, explains the decision behind outsourcing and how the industry is working with regulators regarding the process.

What made you first outsource investment administration to HSBC?

RJ: This goes back to about 2005, when we first started seriously thinking about whether to look at an outsourced option rather than the operating model we had in place at the time, which was all the services provided by our own back office, in-house. The kind of factors that led us to believe that outsourcing was the right course of action were: we were a mid-sized asset manager and we were finding it increasingly hard to compete for talent in London, compared to investment banks and some of the large asset managers who were prepared to break the bank to hire some of the people we wanted to get hold of. So part of it was about being able to ensure continuity of quality staff. Another part of it was about trying to outsource the ever increasing cost of keeping technology up to date and the general total costs of ownership of having the right set of systems to support the back office and link up to the markets and so on. And part of it was around making sure that the management team were able to focus on the activities and the people where we have some competitive advantage, for example around the marketing and the fund management, rather than the back office.

How did you deal with the loss of control that goes with outsourcing?

RJ: It was definitely a concern, particularly around the front office community at the time when we outsourced. We had done a smaller outsourcing actually a couple of years before when I outsourced a fund accounting operation in Edinburgh to J.P. Morgan (that was subsequently moved to HSBC in 2007, following on as part of the main implementation.). So we had a bit of a precedent in place for part of our back office arrangements just for collective schemes. So we used that as a bit of a test bed if you like and we put in place a fairly comprehensive governance structure around the outsourcing arrangement and a good flow of information back into the fund managers to make sure that those kinds of concerns were mitigated. So when we came to do the HSBC deal, which was much bigger in scope and scale and services luckily we were pushing against a bit of an open door already. But again we put in place a pretty comprehensive governance structure and we were quite happy to allow fund managers to have access to HSBC people to talk about particular concerns or issues or themes.

Has that been carried through in the new deal?

RJ: It has. The FSA had their thematic review and the Dear CEO letter, so we really have been putting more and more governance in place. And I guess the main theme is looking to insure ensure we’ve got all the evidence of that governance structure in place. This is just the way that the FCA has been pushing the industry generally — to not only have the controls and good procedures but to ensure that they are working can be evidenced. So that’s where we’ve been going the last couple of years.

What has changed since the crisis?

RJ: Obviously as part of their Dear CEO letter the FCA asks some pretty awkward questions. What do you do if your provider goes bust? What is your exit plans? To what extent can you look through into their services and understand how their corporate structures support the provision of your services and all of those things. You’ll be aware that that created an awful lot of work across the industry.

The whole industry has done a lot of work in understanding how, particularly for the global banks, the entity structures impact on the ability to recover services and what is a critical service and what’s not and we’ve done more work on exit planning. They’ve always been done to some extent. I think what’s happened is that since the FCA’s thematic review and the Dear CEO letters people have spent more time and effort on it and all the parties across the industries have come together to really try and think through what the risks are and part of it has been educating the FCA as well. These are big contracts and you can’t just pick them up over night and move them to another provider.

It’s months if not years of work to move them between an HSBC or a J.P. Morgan and so on. There have been various discussions and I think part of it has been about helping the FCA to understand the realities as well.

As an industry we can’t actually provide the answer the FCA wants to the question what happens if your provider goes bust, what do you do in the short term, how do you protect investor interest and so on because you can’t simply have services provided by HSBC on Friday and on a Monday arrange for another party to pick them up and provide them. So there has been an awful lot of work in understanding how the recovery and resolution plans of the major banks extend across the range of services that are provided to the asset management industry, what falls outside of that and what doesn’t fall outside it and therefore what kind of orderly wind down and transfer process can be achieved.

And that is still work in progress really and for all the participants. It’s definitely shone a light on it and forced us to think in more detail about what can actually be don’t. done.

Will there be any operational changes as a result of the new deal?

RJ: There’s nothing as a result of the extension of the deal that changes in that sense. We continue to keep the services under review and look at what HSBC can provide additionally for us but no we don’t anticipate any staff shifting around.

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