Asset management firms need to look at “the sins of the past” when aiming to create new operating models and break down siloed technology in the back office, said Jo Parkhill, CASS consultant at Cashfac, on a panel at the Summit for Asset Management (TSAM) in London this week.
“The default position has been to outsource back office technology functions to third-party providers. Historically, legacy systems have been bastardised again and again until they break down. We latch onto these systems until they fail, then try to plaster them with new technology until they curl up at the edges from the strain.”
The UK’s Financial Conduct Authority (FCA) identified “inappropriate technology-led asset management decisions” in its Sector Views publication for 2019 as an issue which could undermine financial stability. “Greater use of big data and developments in artificial intelligence are likely to see growing use of machine-based decision making by asset managers in security selection, asset allocation and trade execution,” according to the report.
The FCA also highlighted the “significant” side effects which could arise from an increasing outsourcing trend: “Any increase in levels of outsourcing, which could exacerbate the likelihood of firm or technology failure, may be offset by increased regulatory focus on third party service provision oversight.” A May 2018 report from Ocorian found that the main drivers for outsourcing were a need to focus on core competencies (21%); lack of in-house expertise (18%); and to drive down overall costs (16%).
Joining Parkhill on the TSAM panel was Mohammed Sidhique, head of operational and technical risk at Bluebay Asset Management. “Every organisation has to embrace change, but at the same time change needs to come with a structure and ownership of your technology,” he said. “Things can become very complex if you’re adding more and more systems.”
Soren Agergaard Andersen, chief risk officer at Nordea Asset Management, was also on the panel. He said that strategic changes “need to start with risk and compliance testing and all parts of the value chain need to be included”. Anderson added that people talk about the front, middle and back office far too much, since the reality is that everything blends together. “I never like the buckets we put things in”.