2. What's wrong with today?
Hidden costs to industry
Extreme market complexity in Australia has made corporate actions a siloed, scale business – which we are all paying for
Sourcing event data is the single biggest cost for Australian brokers...
Superficially the costs of managing Australian corporate action data are on par with global peers. Globally the cost of sourcing and managing corporate action data makes up 56% of the cost of a corporate action – whilst in Australia that number is 54%. Yet this market average is misleading. Custodians and Broker-dealers (who sit between the complex market infrastructures and their investor clients, as the central point of accountability) are struggling much more than their global peers to source their event data. Australian brokers' data sourcing costs alone take up a huge 46% of the total cost of their corporate actions. This single cost is more than the entire cost to brokers of processing events (i.e. from data entry onwards) – meaning that it costs more just to source basic event data than it does to process the event through the system.
...whilst custodians struggle to manage their data processing costs
Custodians appear to face a slightly different challenge.
Whilst their data sourcing costs (i.e. feeds alone) are only 22% of the total cost of a corporate event, their costs of validating, cleaning and enriching the data make up 35% of the total cost of an event.
This very high cost is most likely due to the two-tier structure of custodians (where a local custodian and a global custodian will both be running duplicative sourcing and verification processes on their event data) but the end result is difficult to ignore: over one-third of the cost of a corporate action is spent on preparing an event for processing – usually by hand – adding significant risk and time to an already challenging process. Across the intermediary landscape the evidence is clear - the complexity of the operating model is directly impacting the P&L of market participants. And that cost has to be borne somewhere.
Investors are hands-off - but for how long?
Compared with their global peers, Australian investors spend 13% less to source and manage their corporate action data – creating a more acute imbalance and concentration on intermediaries than in most markets around the world.
That investors receive the significant majority of their event data in manual formats (over 65% by websites and portals) also implies acceptance of high levels of operational risk amongst the buy-side – in an area that has been proven expensive to get wrong.
In the short-term this outsourced operating model brings clear challenges. Large funds receive and reconcile different event information on the same events (i.e. from different custodians) – creating additional layers of costs and increasing processing risk. A superannuation fund could quite easily oversubscribe its investment in a particular firm, and violate regulations around ownership limits if an action was processed improperly. And, as the last to know about events, many managers are faced with unnecessarily short instruction deadlines – that add risk and opportunity cost to voluntary events in particular.
Managing corporate actions at arms-length can quickly become a false economy.
With some of the largest superannuation funds now being subjected to significant regulatory scrutiny (notably in APRA’s ‘Your Future, Your Super’ reforms), it is unclear how tenable this lack of oversight will prove over the coming years.
Aimed at improving the efficiency, transparency and accountability of superannuation funds nationally, APRA's drive will increasingly look at costs associated with elements such as corporate actions, and determine whether cost inefficiencies associated with them are being passed on to consumers.
In parallel, growing pressures on investors to exercise shareholder governance by actively voting in Annual General Meetings will increasingly challenge existing norms in the proxy voting space - where voting five days before an AGM is entirely acceptable.
“There are a few of us dinosaurs around today – and we’re not getting any younger. The problem is this won’t all be fixed in our lifetime”
Talent management: a ticking time-bomb?
Beyond these corporate action costs, one risk factor is quickly escalating in importance and urgency: people.
Our research highlighted that manual processing and exception handling are the biggest challenges to Australians’ ability to process events properly today – considerations that are felt 10% more strongly in Australia than elsewhere globally.
Whilst Australian market participants may have grown to manage the inherent risks of event and market complexity, they have done so largely by relying on core staff to fill the gaps wherever necessary. This might have helped the industry to thrive in the past, but today this reliance on FTE constitutes not only a major (short term) operational risk – but also a key management concern for the future.
Over the last 10 years, the majority of custodians and brokers have offshored between 80% and 100% of their Australian corporate action processing, meaning that long-established industry expertise is concentrating on a shrinking number of people in Sydney and Melbourne. The combined effects of the coronavirus and then a recent wave of industry-exits (as people have left the industry to begin new careers outside of finance) have then accentuated this already worrying concentration by reducing the supply of new talent and the ability to train new specialists.
The result is an increasing, industry-wide reliance on a stagnating and ageing talent pool. As each year passes, the need to simplify and automate corporate action processing grows more urgent- in order to keep our pensions and investments safe.
We're all paying for these market inefficiencies
Corporate action data sourcing and management is more expensive at every stage of the Australian market than it is in many equivalent global markets – and we are all paying for those costs today.
We may not all see the custodians or brokers passing on their processing charges and risks to superannuation funds as part of their safekeeping brokerage fees today - and so these costs remain largely hidden. But, in light of greater regulatory scrutiny and the drive for increased market-wide transparency, it is likely that we will see this more clearly in the near future.
Nor are we aware of the fact that a simple dividend payment can take 25 days to pass from the issuer to the investor – or of the significant losses in interest earnings that accumulate across the industry every day.
It doesn’t mean the costs aren’t there though or that each of us (as the end-investors in every cycle) aren’t bearing them today.
If you would like to learn more from ASX about how the Real Time Corporate Actions Service can simplify your operations then please reach out!
