FinTech – Breadth of Meaning does not Disguise Potential to Disrupt Existing AM
Models
Anne-Marie Bohan, Partner, Asset Management and Investment Funds and FinTech Group,
discusses FinTech in the asset management sector
For all the buzz about FinTech in recent times, it remains surprisingly difficult to pinpoint exactly what
people mean when they use the term, or exactly how encompassing the “FinTech” industry might be:
in other words, to anticipate all of the likely story. Which is entirely understandable, when taken at its
most broad, the term can be, and is, used to describe any use of technology within the financial
services sector.
On that basis, there are as many narratives in the FinTech industry as there are in financial services.
It is also, of course, possible to analyse and describe FinTech both from the perspective of the
technology which enables and facilitates financial services, as well as from the perspective of the
regulated services which are thus facilitated. So, while distributed ledger technology (“DLT”) (the most
well known of which is blockchain) or cloud computing are key facilitators of FinTech, they clearly have
broader application outside financial services. These and other technologies therefore have to be
considered, from a FinTech perspective, in the context of the ultimate regulated service they enable.
And while there are some legal and regulatory FinTech themes which are common to all such
regulated services, there are many issues which remain, and which into the future will increasingly
become, specific to the type of financial service being provided.
Within the asset management industry, FinTech is not a new concept, although it may not always
have been so called. Indeed, nor will the more recent talk of “RegTech” (broadly speaking, the
application of technology in managing regulatory requirements ) come as anything new to asset
managers, administrators and depositaries, which have for years relied on sophisticated IT systems to
manage and monitor investments, investors and any associated risks.
Frequently, those IT systems are leveraged on an outsourced basis, including very often on an intragroup basis. The outsourcing of IT and IT-enabled services attracts considerable regulatory attention,
whether under the MiFID organisational requirements (which will be updated under MiFID II, requiring
review of existing arrangements), AIFMD and UCITS obligations imposed variously on AIFMs,
management companies and depositaries, or through the application of general outsourcing principles
by regulators, such as the Central Bank of Ireland’s requirements for administration firms.
In addition to the regulatory attention on outsourcing, there is an ever increasing regulatory focus on
cybersecurity risks, typified by the recent Central Bank of Ireland Cross Industry Guidance in respect
of Information Technology and Cybersecurity Risks (which deals with IT outsourcing as well as
cybersecurity), and the application from May 2018 of the General Data Protection Regulation, which
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will introduce both significantly increased sanctions (up to €20 million or 4% of global turnover,
whichever is higher) and mandatory breach notifications. Developments in relation to international
personal data transfers, with the invalidation of the Safe Harbour regime, the introduction of the EUUS Privacy Shield, the proceedings currently before the Irish High Court in relation to the European
Commission approved standard contractual (or model) clauses, and the unknown shape of Brexit,
have also presented both managers and investment fund service providers with ongoing outsourcing
challenges and opportunities. The fact that ultimate responsibility for any outsourced services remains
firmly with the regulated firm, the increasing prevalence of multi-strand outsourcing by firms, and an
uptick in security and privacy concerns, have all meant that outsourcing, and all that it entails, has
moved steadily up the agenda for boards.
While FinTech solutions are nothing new in the asset management industry, what is newer is the
potential for FinTech disruption to existing models, from advisory services through product distribution,
and from custody through asset transfers. Use of DLTs, such as blockchain applications, in the
investment fund and, in particular, in the custodial, industries has the potential to change the
underlying market infrastructures in a fundamental manner.
However, significant regulatory
developments and market participant collaborations are likely to be needed before DLT can live up to
this full potential. The use of artificial intelligence and algorithm based robo-advisors is also on the
increase, whether as FinTech startups or incorporated into wider service offerings by established firms
(such as Vanguard and Schwab in the United States), with estimates indicating the market, driven by
lower individual levels of available cash for investment, lower costs and changing perceptions of trust,
will have assets under management of in excess of $2.2 trillion by 2020. This may be small in the
grand scheme of the investment management industry, but represents estimated growth at average
annual rates of 70%. Again, however, there are likely to be further developments from a legal and
regulatory perspective, as legislators and regulators seek to contextualise new technologies and new
applications of existing technologies within the asset management and market infrastructure regimes.
As with other financial services, FinTech is an unfolding story that both poses challenges, while also
affording opportunities, to those involved in the asset management industry. While some emerging
plots are seemingly obvious, there are undoubtedly twists to come, and participants will need to pay
close attention to the dialogue between industry, technology and regulation so as not to miss any turn
of events.
This article first appeared in Finance Dublin’s Investment Funds 2017 Report October 2016.
Please get in touch with your usual Asset Management and Investment Funds Group contact or any of
the contacts listed in this publication should you require further information in relation to the material
referred to in this update.
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articles and briefing notes written by members of the Asset Management and Investment Funds team,
can be accessed at www.matheson.com.
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aspect of the themes and subject matter discussed, nor is it intended to provide, and does not
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