In recent years the FinTech industry has experienced significant changes on every front, from increased regulatory requirements to growing investor expectations. In this article, Eric Johnson, DFIN’s president of Global Investment Companies, addresses the top issues facing fund and asset companies heading into 2022.
At this time last year, the outlook for 2021 was heavily influenced by the global pandemic and how FinTech companies were pivoting to meet shifting needs. How did DFIN see that play out over the last 12 months?
Without a doubt, firms that had adopted software and tools to help advance digitalization saw the greatest results across all aspects of their operations.
On the regulatory side, the FinTech industry experienced what we here at DFIN called the “Trifecta of Change.” The new SEC 30e-3, 498A and iXBRL regulations came into effect within six months of each other. All three were significant regulatory changes, driven by the SEC’s move toward modernization, which were potentially solved, simplified or enabled through the use of technology.
There’s also the ever-present pressure to cut costs and increase efficiency in the middle and back offices. Here too we saw digitalization changing the industry’s business model. From a middle office perspective, data-driven solutions that optimize and aggregate multiple systems can help firms be more efficient, especially with increasing pressure on margins. As for the back office, robotics and machine learning solutions can improve and replace many manual functions, saving time and reducing errors.
And last, but by no means least, is how the pandemic thrust digitalization into overdrive as businesses everywhere scrambled to create a viable and secure work-from-home environment. Cloud-based solutions enabled that — and now the “new normal” is simply the norm in meeting business needs and, increasingly, workforce demands.
Heading into 2022, what factors do you see shaping the industry?
I think the push toward modernization and evolution of documents to data will rapidly continue.
On a global basis, we’re seeing a significant change in the amount of data that regulators require, as well as the pace at which regulations are happening. Here in the U.S., the use of iXBRL will expand as part of 498A and also for Form N-2 for new fund launches. In the case of 24F-2 filings, we’re seeing the transformation from EDGAR HTML to structured XML, enabling better data mining by the SEC.
In the EU, regulations are expanding the scope of data necessary to support new requirements such as PRIIPs, MiFID II, DC Workplace Pension and the U.K.’s Cost Transparency Initiative. We also see the reporting requirements for most regulations evolving more rapidly. For example, MiFID II’s European Template has been in effect for three years and is already at version 3.1. The same applies to PRIIPs — the EPT V1 was released in 2018 and we’re currently working on version 2 of that template.
In Canada, the wide-reaching Accessibility for Ontarians with Disabilities Act (AODA) requires compliance with Web Content Accessibility Guidelines 2.0 for all public-sector websites, impacting the web-hosting requirements for investment and insurance firms.
While the regulatory intent of modernization is to create a simpler experience for investors, it has created greater complexity for the industry at large. The demand for data transparency has never been this high. Having one centralized repository for all global filings in a Regulatory Book of Record (RBOR) is more critical than ever.
New products and options like Alternative Investments and Crypto are on the rise. How do you see the industry responding?
Great question. Each one presents its own set of challenges and opportunities.
Take the Alternative Investment market. It’s grown considerably in recent years — now representing over 20,000 specific Alternative Investment funds in the U.S. and over 22,000 different Alternative Investment funds in the EU.
The Alternative Investment market was once an unregulated industry, typically required to adhere to only corporate governance requirements of home jurisdictions and managed through spreadsheets. It now faces greater regulatory pressures. In addition, there are cyber and accuracy risks associated with spreadsheet-oriented production, as well as an inherent lack of collaboration. Enterprise software solutions can provide a greater degree of confidence and efficiency in managing an Alternative Investment portfolio.
We’re also beginning to see more regulations put in place to establish standardization in the global Crypto arena. Here in the U.S., Congress recently introduced 18 new bills that directly impact cryptocurrencies, blockchain technology or central bank digital currencies.
Regulations are needed to determine what data transparency looks like for these new products and to assess the risks for financial markets and investors.
Let’s talk about investors. How do you see their expectations and experiences changing?
Over the past two years, we’ve seen a remarkable movement toward greater diversity, equity and inclusion taking place in our society.
People now expect more from the companies they do business with and invest in, driving the growing interest in Environmental, Social and Governance investing or ESG. Investors are no longer just tracking financial returns. They are measuring corporate culture, climate impact and overall sustainability.
Currently there is no standardization around ESG fund disclosures and the basis for how ratings are assigned. Establishing consistency across ratings will give investors greater visibility into a fund’s holdings.
Investors are also looking for a high level of personalized digital interaction. This is especially true for the new generation of investors who want the same kind of experience they have when they order something online. Investors want to be “a click away.”
So, the challenge for FinTech companies is how to meet these investor preferences and behaviors while providing the best level of information in the format users can understand. Doing so will create a more equitable experience for all investors, empowering them to make better informed decisions.
What is your long-term view of the investor experience and how firms will adapt to meet it?
Investor expectations will continuously evolve, and firms will meet them by leveraging technology. Getting a ream of disclosure documents in the mail every few months is no longer acceptable.
Firms will need to constantly evaluate the type of content they provide to investors, as well as the formats they receive it in. Is the content engaging? Is the interface intuitive? Are they using innovative technologies such as QR codes to provide a seamless, one-click experience, how, when and where investors want it?
We also see a trend developing around an issuer-driven model, shifting from third-party intermediary control. Regulators and the FinTech industry all have an interest in this. A change in the model could ultimately allow asset managers to have complete control and ownership of the compliance process, enabling them to provide an investment experience that their customers have grown to expect.
As we head into 2022, I think the regulatory landscape will continue to evolve. We don’t see the wave of new and updated rulings slowing down. And as investor expectations change, more than ever, the industry will be expected to meet them.
As markets fluctuate, regulations evolve and technology advances, DFIN provides innovative technology, industry expertise and data insights to help you make confident decisions. Learn more about DFIN’s end-to-end risk and compliance solutions.