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Straight talking

For a number of years, there has been growing recognition of the inefficiencies of the old paperand phone-based communication processes between intermediaries and providers in the mutual fund market.

The original idea was that electronic messages would result in major imp-rovements in efficiency.

However, the industry in Europe, including the UK, faces some important questions about the scale of benefits to be gained from using straight-through processing, even among its most ardent supporters.

Unless we are able to answer these questions, particularly for intermediaries, then straight-through processing will fail to achieve its potential.

If users are to get benefits from straight through processing, then there are two things that matter to them:

1: What do they have to do to get information into or out of the system?

2: How much is the information worth relative to receiving it in the traditional format?

A criticism levelled at existing systems in the UK and Europe is that they only deliver significant benefits to a small part of the market.

This is either because the current options for connecting to the service are inappropriate – due either to the expense or the lack of technology expertise in house – or because important benefit areas are missing from the functionality.

It is clear that the UK industry needs something to fill the hole between the low-cost, lowvolume, low-benefit browser connection and the highcost, high-volume, potentially high-benefit “hub” connection.

In essence, it should give users the opportunities to transfer files of information between their own systems and providers at a fraction of the cost of a full “hub” connection.

In the eyes of the IT professional, this is less sophisticated than full straight-through processing. It is a highly attractive solution for much of the industry, whose volumes are too big for the browser and too small for the “hub”.

It is also being considered by a number of major industry players as a stepping stone to an eventual straight-through processing solution.

For example, one company employs five full-time staff to handle the placing of around 750 deals a day by phone. On a conservative basis, it can achieve the same result at 40 per cent less cost in less time and with fewer errors using file upload.

In addition, some of the most technologically advanced intermediaries saw the use of electronic messaging as a major area of future business benefit but had decided to employ standards based on XML messaging techniques and were looking for this connectivity to be available.

This is also of substantial interest to the software vendors and there is considerable interest in this development, which will go live later this year.

As far as functionality is concerned, the provision of automated settlement features will deliver three major benefits to the entire industry.

First, it will allow the automation of Isa business, enabling intermediaries to open Isa accounts with product providers, which is not possible while fund supermarkets are order-only.

Given the continuing importance of Isa business to many intermediaries and some providers, this is a major development.

Second, automation and standardisation of payment processes across the industry will reduce the surprisingly large number of people involved in making payments and sorting out payment queries.

Third, the current uncertainty over actual payment dates means that intermediaries holding client money end up holding sizeable “idle” cash balances. The much higher degree of certainty that comes from automated settlement will mean a decrease in the cost of this “idle” cash.

Of even more significance for intermediaries holding client money is the development of capabilities for reconciling nominee accounts electronically.

Major intermediaries estimate that they can save between 50 per cent and 90 per cent of their current cost base in relation to this activity by using straight-through processing. They can also dramatically reduce the risk of regulatory criticism in this highly sensitive area.

Intermediaries reap the most benefit but major providers are estimating that they could save up to 20 per cent of the staff costs currently devoted to handling reconciliation queries.

Last but by no means least, there has been a lot of progress in developments that will assist the bigger IFA. An increasing number of these are recognising the importance of improving their client servicing.

At the same time, they are finding that the quality of their current databases is a major impediment to doing this in practice.

The development of techniques for “data clean-sing” have already shown impressive results in the pilot stage.

Together with a new message type, to be launched later this year, the goal of achieving and maintaining an accurate database that supports improved client servicing and follow-on sales is within sight.

None of you will need to be told that life in the mutual funds industry is getting tougher. What this means is that the leeway for making mistakes is getting less.

No one would claim that, so far, a failure to embrace straight-through processing has resulted in loss of competitive advantage but that situation is about to change.

This is the point at which straight through processing starts to move from being classified as a minority interest for early technology adopters.

Like other technology innovations before it which once had the same status such as cash machine cards and mobile phones, there will come a day when the industry will find it difficult to remember how it operated on a traditional basis.

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