Featured in A-Team Insight:
By Kifaya Belkaaloul, Head of Regulation, NeoXam.
With just over 150 days until the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) changes, the financial industry must confront a looming implicit costs conundrum – and fast.
The update to the regulatory framework on January 1 seeks to ensure that asset servicers undertake a more detailed and standardised approach to calculating implicit costs. It is difficult to argue with the EU’s rationale behind the change. In an era for markets regulation characterised by transparency, these hidden costs – which are often buried within the fabric of highly complex financial instruments – are inherently opaque.
Demystifying them seems a sensible move, at least on paper. In practice, it presents a major challenge for asset servicers and may prove insurmountable if the necessary precautions are not taken well ahead of time.
Time to choose
Historically, implicit costs have been difficult to quantify for asset servicers, let alone disclose with precision. Using the updated PRIIPs method, referred to as the ‘full PRIIPS’ or ‘arrival price’ method, implicit costs are calculated as the difference between an asset’s arrival price, also known as its mid-price, and its execution price. These costs stem from various sources, such as bid-ask spreads and the impact of trades on market prices. Accurately capturing them requires detailed historical trade data.
Asset servicers have traditionally relied on people to provide the necessary oversight and elbow grease to manage and report this data. But this approach is fraught with the potential for mistakes and inconsistencies. Human error, varying interpretations of data, and the sheer volume of information to be processed can lead to inaccuracies that undermine trust in the disclosed figures. In a landscape where precision is paramount, the traditional methods simply cannot meet the heightened regulatory expectations. To put it frankly, the change presents a fundamental choice for asset servicers: embrace automation or risk obsolescence.
Automated systems can process vast amounts of data with unparalleled speed and accuracy, ensuring all relevant information is captured and analysed consistently. By leveraging advanced algorithms and machine learning, patterns and anomalies that might evade the attention of human analysts are easily identified. This not only enhances the reliability of cost calculations but also ensures disclosures are consistent and transparent.
Compliance and beyond
The benefits of automation also extend beyond mere compliance. For asset managers, gaining access to accurate and reliable cost information fosters greater trust and confidence. They can make more informed investment decisions, knowing that the cost data they rely on is both precise and consistent. This, in turn, strengthens the overall integrity of the financial markets, promoting a healthier investment environment.
In addition, automation frees up human resources to focus on the more strategic elements of their role. Rather than being bogged down by the humdrum of data processing, analysts can concentrate on higher-value activities, be it interpreting trends, refining investment strategies, or enhancing client relationships. This shift not only enhances operational efficiency but also delivers greater value to clients.
Some will inevitably argue automation comes with its own set of challenges. Securing the funding for its initial implementation and upkeep springs to mind. But these costs are dwarfed by the benefits. After all, the alternative – continuing to rely on manual processes – risks non-compliance with regulatory standards, potential penalties, and a dent to client trust, not to mention brand credibility.
The upcoming PRIIPs regulation amendments must be viewed as a clarion call for asset servicers to modernize their operations. Reliance on human oversight is no longer sufficient to meet the demands of the new regulatory landscape. Automation offers a robust solution, enhancing the reliability of cost calculations and disclosures, while fostering greater trust among asset managers. As we march towards this new era of financial transparency and accountability, embracing automation is not just an option; it is a strategic necessity.
