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Fund administration in Ireland survey 2012 Managing uncertainty Leading business advisors Foreword Fund administration is one of the great success stories of the Irish economy. From humble beginnings in the early 1990s, the Irish funds industry has become a global player, servicing assets in excess of US $2.4 trillion and employing 11,000 people.1 These assets are held in both Irish and non-Irish investment funds across the traditional and alternative asset classes. Ireland continues to benefit from the trend towards onshore, regulated funds and the jurisdiction has attracted a whole new wave of fund administrators in recent years. Yet fund administrators globally are facing increasing challenges related to market uncertainty, regulatory change, cost and fee pressures, operations and service levels. These trends were confirmed by our recent Fourth Annual Global Fund Administration Survey.2 In our Fund Administration in Ireland Survey we aim to drill down into these findings and gain further insights on strategy and operations as well as views on specific regulatory changes such as the Alternative Investment Fund Managers Directive (AIFMD), Foreign Account Tax Compliance Act (FATCA) and corporate governance. The findings reveal the extent of the uncertainty and challenges facing fund administrators in the current environment, when fees may be falling due to asset volatility but client and regulatory demands on administrators are increasing. How do administrators future proof their business models, enhance their profitability and provide more value added services? In the following pages we set out the key industry issues, views and priorities as articulated by Irish fund administration CEOs. We hope you find the survey report an insightful barometer of industry trends. Regards, Brian Forrester Partner, Investment Management Advisory 1. Based on statistics from the Central Bank of Ireland and the Irish Funds Industry Association. 2. Available at http://www.deloitte.com/view/en_IE/ie/industries/financial-services/investment-management/131640cc51512310VgnVCM2000001b56f00aRCRD.htm 2 Contents Executive summary 4 Strategy and operations 7 - Overview 7 - Costs and market uncertainty 7 - Service levels 7 - Revenue growth 8 - Product growth 9 - Fee models 10 - Human resources 10 - IT systems 11 - Process and productivity initiatives 11 - Looking to the future 12 Regulatory change 13 - Overview 13 - AIFMD 13 - FATCA 16 - Fitness and Probity regime 18 - Voluntary corporate governance code for fund service providers 18 - Central Bank outsourcing regime 19 - The regulatory horizon 19 Conclusion – it’s a balancing act 20 Appendix – respondent profile 21 Executive summary The survey was carried out in December 2011/ January 2012 and all companies providing fund administration services in Ireland were invited to participate. We received responses from 17 fund administrators, accounting for 80% of assets serviced in Ireland.3 Respondents service a mix of both traditional and alternative investment funds and include both large scale and smaller fund administrators. Finding a balance In addition to regulatory change, the survey found that Irish fund administrators face challenges in relation to cost and fee pressures, market uncertainty, increasing client demands and pressure on service levels. The pressure on costs and fees is closely related to the ongoing market uncertainty. Administration fees, typically calculated as a proportion relative to net assets, are negatively impacted by the current asset volatility and smaller fund launches. On the upside, administrators are buoyed by new business and additional volume from existing clients. New entrants to the Irish fund administration market in recent years confirm the strength of Ireland’s service offering as a centre of excellence for regulated funds. Administrators continue to invest in their business to drive efficiencies through technology and the development of talent while low staff turnover has also enhanced productivity. Add in the increased business levels associated with a move of product onshore and it is clear that opportunities exist for fund administrators, even in this uncertain market. Cost and fee pressure The imperative to drive down costs has resulted in ongoing efficiency initiatives and consolidation, which in turn leads to further fee competition. Fund administrators are being asked to do more by their clients since the financial crisis, as investors demand more frequent and detailed reporting. Over time administrators can find themselves taking on ancillary activities for which they are not necessarily remunerated. Administrators are also concerned about service levels as they balance cost efficiency programmes with increasing client demands and business growth. In response to these challenges, some fund administrators expect changes to fee models, such as charging individual fees for non-core services. However, in light of competitive fee pressure the scope for charging higher fees may be severely restricted. Strong revenue growth Irish fund administrators are bullish on revenue growth with almost 40% of respondents projecting increased revenues of over 20% for the financial year 2011. This revenue growth is mainly attributed to new client take-ons and additional volumes from existing clients. The roll-out of new services plays a role but to a lesser extent. The fund administration business model is clearly focussed on continued expansion but challenges around cost containment and fee pressure indicate that a greater focus on client profitability may be required. The fund administration business model is clearly focussed on continued expansion but challenges around cost containment and fee pressure indicate that a greater focus on client profitability may be required. 3. Based on the analysis of data from the Lipper Ireland Fund Encyclopaedia 2011-2012. 4 Low staff turnover According to responses staff turnover is at an all-time low of 6% which helps service levels, but fund administrators may continue to face resourcing pressures due to rationalisation. While the recruitment of general staff is no longer a significant issue in the Irish labour market, experienced hire recruitment can prove challenging. Efficiency initiatives Many fund administrators have already implemented efficiency initiatives and set up low cost offshore centres. Further efficiency programmes alone may no longer deliver the desired level of cost savings in the current environment and in a more uncertain market, fund administrators may not be able to rely as much on continued expansion to ease cost pressures. Industry consolidation and rationalisation is likely to continue in response to the cost reduction imperative. However, fund administrators will also need to re-focus their business strategies with a greater emphasis on client profitability, targeting of key client segments and the provision of value-added services to achieve a more sustainable business model over the longer term. Rebalancing the fund administration model Assess client profitability vs. cost to service - Is supporting this client viable? Target client segments - Match your service offering to the right clients New services Value added, middle office Strategic initiatives Mergers, consolidation, alliances Operational efficiency Automation, standardisation, work practices, offshoring, outsourcing, staff development Managing regulatory change This survey considered only some of the regulatory issues that will impact Irish fund administrators in the years to come. The findings show that while regulatory change will create an additional compliance and operational burden, some regulation may also present opportunities for the Irish fund administrators. How fund administrators respond to regulatory change will have a significant impact not only on their operations but also on their market positioning and client perceptions. AIFMD opportunities but also challenges AIFMD will have significant strategic, compliance and cost impacts for the global hedge fund industry, however a majority of Irish fund administrators do see potential business opportunities. These include the setting up of regulated onshore product in Ireland and the provision of a new range of services as fund managers seek to outsource complex data and reporting requirements. Fund administrators are highly concerned by the AIFMD’s depositary liability regime and to a lesser extent by the valuation rules and operational requirements. FATCA compliance burden FATCA is generally viewed as a business threat due to the onerous reporting and withholding requirements that will come at significant cost and risk for funds and their service providers. For many respondents these implementation and compliance costs outweigh any potential benefits of FATCA from a service provider perspective. Administrators are concerned over the uncertainty surrounding the regulations and the impact FATCA will have on asset gathering and the distribution network. The application of withholding on investors is viewed as the single greatest challenge under FATCA. 5 ... - --nqh--
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