When the new rules come into force in 2022, firms risk being swamped beneath a mountain of data. What’s needed is a strategy for working smarter not harder, says Darragh Pelly
By the end of this year, insurance companies must start producing the new version of the standard information document on packaged retail investment and insurance products (PRIIPs), recently mandated by the European Commission. The changes will also affect asset managers selling UCITS funds, since the new PRIIPs document will replace the existing key investor information document (KIID) that they must currently publish for retail clients.
While many wait with trepidation for the new standards to be approved, a few have seen opportunity hiding inside the PRIIPs problem. They recognise the chance to change the way data flows into their organisation, how it is handled, and processed. Addressing the looming regulatory risk around PRIIPs could have a much wider impact, transforming and future-proofing other everyday (BAU) operations. This would permanently reduce the costs and business risks their firms face.
PRIIPs sets out a range of information on the products, including costs and projected returns, and their suitability for different investors. So far institutions have mainly been focusing on the effect the new rules are likely to have on their ability to sell retail products – the main concern being that the way they calculate projected returns under the three standard scenarios is changing.
The Commission is worried the current projections are too optimistic and create a mis-selling risk. Their solution is to require firms to use much longer runs of historical data to project likely returns – 12-15 years rather than five years at present – in order to incorporate a much wider range of market conditions. As a result, projected returns under adverse scenarios are likely to become less attractive.
Complying with the new rules creates a headache for institutions because they will have to source far more historical performance data from their internal systems and external fund providers to create updated projections that will probably look less attractive. If the data doesn’t exist, they will have to buy proxy data from one or more of the major index providers, import it into their systems and use it to create synthetic benchmarks to feed into their new projections.
Having to source a lot more data to create the new performance projections only adds to the huge and expensive challenges that PRIIPs presents. Insurance companies already face a major hurdle in gathering data on costs and fees from the scores of investment managers and other organisations involved in providing data for the retail funds they sell – asset managers, custodians, depositaries, transfer agents etc. The data arrives in multiple formats and must be manually cleaned and structured before it can be processed. For multiple millions of rows of data, that’s slow and expensive.
If companies think PRIIPs will mainly make their sales challenge harder, they need to think again. In fact the new rules are going to hugely increase the pressure on operations teams, who are already struggling with manually processing vast amounts of data.
Not only will they have much larger volumes of data to gather and process, but from January, they will have to update their PRIIPs performance history every month. In addition to this, for UCITS funds the annual KIID production process will be replaced by ad hoc (rules-based) updates for KIDs. Together that multiplies the workload on their operations teams by 12.
Unless these processes can become much more automated than they are today, the risk is that the additional workload will overwhelm firms’ existing systems. This clearly creates major business and regulatory risks. Firms that outsource these operations, meanwhile, will face significant additional costs due to the increased volume their providers will have to deliver.
An opportunity for strategic change?
The above sounds like a doomsday scenario – and if they leave it unaddressed, firms face major risks. But the PRIIPs changes also represent an important opportunity to address existing ways of working that are expensive, inefficient and risky, and replace them with a system that is far more automated. The key features of this new system should be the ability to link automatically (via APIs) to external data sources, accept data in whatever format it is provided, and then clean and structure the data so it can be processed with the minimum manual intervention.
A system that can do this will solve far more problems than just the PRIIPs headache that is now climbing the agenda for insurance companies and asset managers. Soon firms will have to do something similar with ESG data from external providers, and again if they wish to access the Pan-European Personal Pension Product (PEPP) market. Undoubtedly, there will also be new versions of other existing regulations that will require additional data and new processes.
So why not look at the bigger picture beyond PRIIPs and take a strategic view of all regulations facing your firm today and on the horizon. Is there a way you can work smarter, not harder, and implement a framework for all regulatory disclosures (both known and unknown)?
Darragh Pelly is COO of Reitigh Software