New regulations around data, disclosure and performance promise to increase transparency and accountability while taking aim at problems like greenwashing. But the challenge of implementing the required data management tools and processes will be huge, along with the associated costs, say experts.
Speaking at Investment Magazine’s Investment Operations Conference in late March, David Bell, executive director at the Conexus Institute, ran through some of his work on the flow-on impacts of Australia’s Your Future, Your Super reforms including its annual performance test and the Best Financial Interests Duty.
On the performance test which APRA is set to administer, funds will have to monitor eight live series of performance, and will “start running into trouble” if they fail at any one of those.
“There’s going to be this new measurement process of rolling performance, rolling attribution, rolling risk management decisions, that you have to make, and all that has to be made at the trustee level,” Bell said.
“You have to think about what level of tracking error or what degree of tracking error every single investment decision brings to your portfolio relative to the Your Future, Your Super benchmarking process.”
On the proposed Best Financial Interests Duty, it is currently hard to be precise about what exactly will be required, Bell said.
“But the way to think about it is that the onus of the burden of proof has been reversed. So really what you have to say there is: ‘What information do I need on every investment decision and every operational decision I’m making to be able to provide that burden of proof that it is being made in the best financial interests of my membership. And so the data requirements there are potentially unlimited.”
Craig Roodt, director, investment and wealth advisory at Deloitte, said the challenge of understanding, mapping and tagging increasing amounts of data, and directing it towards various insights and reporting standards, is only going to grow, particularly with the Australian Prudential Regulation Authority’s upcoming expenses reporting requirements.
“The expense reporting is literally going to be reporting almost every expense item as a line item and that’s going to get captured and recorded,” Roodt said. “So no longer will you be able to say: ‘Well, we paid our administrator to do a whole lot of things.’ It’s going to be: ‘You paid for things, what were you paying for?”
Regulatory burdens aside, those who nail the data game may see opportunities for active returns in alternative asset classes including cryptocurrency, with public disclosure laws and widely available research eliminating much of the “information advantage” internal analysis once brought to public markets.
“So certainly in private markets in alternative assets where you’re using different sources of data, that’s exactly where there can be a competitive advantage for an asset manager,” Roodt said. “But again at the same time, you’ve got to collate that data, which is more difficult to begin with, you’ve then got to work out how to measure it. You’ve again got to work out which bits are relevant.”
Philippe Tassin, head of asset owners and asset managers, Asia Pacific, at BNP Paribas, talked through some of the implications of the European Comission’s capital markets union 2020 action plan, the proposed MiCA regulation of crypto assets, and Sustainable Finance Disclosure Regulation (SFDR).
The regulation promises greater transparency and accountability, along with action against greenwashing. But the challenge of implementing the data management tools is huge, and so are the involved costs.
He gave the example that complying with European regulation around carbon footprint benchmarks has forced BNP Paribas to contract with seven different data providers, at enormous cost.
“Behind the scenes the cost is a big elephant in the room of all of that because at the end of the day, we need to put in place something that makes value for the pensioner, for the investor, and not to kill what we are doing in parallel–by streamlining, by collecting, by designing something as standard as possible with data we can rely on, working potentially with different sources day after day,” Tassing said.
