Q: Linedata’s latest survey of the asset management industry found that investment compliance is second only to portfolio management when it comes to asset managers’ technology budgets over the next 12 months. Why do you think it is attracting such a large share of IT spending?
A: On the one hand, we know that it is a busy year for the regulatory calendar, with a large number of proposed and new regulations in the pipeline, such as the Names Rules amendment in the US this September. So, there is an ever-growing set of demands on compliance teams in that respect, which makes being good at regulatory compliance never really “good enough."
At the same time, I think we’re seeing that a bigger share of compliance programs today are really about operational risks and operational efficiency, as much as they are about regulatory risks. There are new controls and limits being applied to asset managers’ investment and trading activity all the time, and effective compliance means ensuring those restrictions and in-house policies are adhered to, but without adding significant time and complexity into the process. That’s really only possible with the right technology in place.
Q: Can you share examples of how investment compliance monitoring demands are increasing?
A: There are a range of controls on investment teams that need to be implemented and monitored. For example, to ensure that only certain team members are permitted to conduct specific types of trades, or to confirm that the fund’s composition of its holdings does not stray beyond pre-defined limits.
Recently we’ve seen a rise in the number of banned securities because of international sanctions. Those lists are being updated all the time and it is up to compliance teams to ingest all of that information and ensure it is being followed. Firms don’t want to be in a situation where compliance teams have to manually update that information based on lists coming from third parties, and then deal with IT teams to incorporate it into the tools that business users are working with. The more that manual work is involved, the more costly it becomes, and the greater the operational risk that arises.
Q: How can teams add more value for the business as investment compliance technology gets more sophisticated?
A: One of the primary reasons we’re seeing compliance functions attracting technology spending is that as these systems become more advanced, they can take on additional requirements from other parts of the business, such as client management. In doing so, compliance can reduce inefficiencies across the business. More sophisticated investment compliance systems can automate other jobs associated with a portfolio or account.
For example, if you can configure the software to deliver automated notifications when a wealth manager needs to be alerted about a particular client issue, it removes the need for someone to be continuously monitoring that situation manually. The modern compliance engine is like a super computer which can be programmed to analyze data to identify certain scenarios, and then generate notifications and reports when there is a criteria match. Most commonly these are compliance related situations, but the same data can be relevant for tasks throughout the organization.
Q: What are the implications of artificial intelligence (AI) for investment compliance?
A: I think investment compliance monitoring teams will tread quite carefully on AI to begin with, as the function is naturally risk averse. But we’re already seeing scenarios where the technology can be applied to bring significant benefits to the business.
Example #1 is around investment rules and portfolio limits. Currently, you may have notifications built into portfolio management software that detects when a fund has strayed beyond a particular boundary in terms of its holdings. Compliance teams will then be required to dig into the fund documentation to review the source language of the rules and interpretation to ensure that no adjustment is required. AI-driven tools can enable users to find the relevant interpretive language by simply typing a question into the software application. It can produce a relevant response plus an audit trail of the information source.
Example #2 concerns data from third-party benchmarking providers. These providers make regular changes to industry classifications which can have a knock-on effect on the investment rules a fund strategy is following. Managers want to know when those changes are going to occur and whether the new sector compositions will impact their compliance status. Right now, that involves requesting an IT person to build queries that can pull that information from a database, on an iterative basis. An AI solution allows a manager to enter a query and get an instant view of which rules and the impact to them will be affected by the changes coming in. This intelligence puts them in a position to get ahead of any changes, while minimizing effort and team resources.
Q: Thoughts on what's next?
A: Asset managers face a balancing act with their technology budgets as they look to gain more efficiency across their businesses to maintain profitability, while continuing to invest in the areas of digital transformation that support their long-term growth and value.
In the past, investment compliance software might not have been the first thing to come to mind that fits this description. But today is a different story - with increasing regulatory and investor demand for transparent reporting, combined with sophisticated compliance systems capable of supporting more business functions. Responses from 265 global asset managers in Linedata’s recent Survey fully support this view with half saying investment compliance will attract the top share of IT spending this year.