4. Realising change
Corporate action change is not only needed but the case for transformation is highly compelling. Why then do we still face such huge challenges across our industry? What is getting in the way of meaningful progress?
73% of investors have corporate action projects planned in 2021-2023
It is no surprise that investors are leading the industry's corporate action transformation journey over the next 3 years, given that they feel corporate action risks most acutely,
With the action centred amongst Asian investors, fund managers are turning to primarily to API connectivity as their key solution for data automation - as a replacement to the fax / email connectivity that dominates investor-side corporate action traffic today.
With 60% of Banks equally focused on increasing API connectivity (to investors), this channel looks set to provide a flexible and scalable channel for automation - in a community where SWIFTNet and other mechanisms are relatively scarce.
That less than half of CSDs are driving corporate action projects is cause for concern. Faced (generally) with ageing legacy platforms that limit the scope and potential for meaningful change, those CSDs that are acting are focused first on replacing their platforms before then turning to their connectivity and messaging. Upstream corporate action automation appears to have become contingent on the wider system architecture plans of CSDs.
"People don't accept these data challenges any more"
72% of us are turning to system change as step 1
Across the industry, the roadmap for corporate action change is very consistent. First we need new technology to house and process our events - and then we can leverage that technology to automate our data flows.
With those in North America and Asia leading system automation globally, the clear short term priority is for banks, brokers and investors to acquire new corporate action platforms that can meaningfully reduce the volume of EUCs and manual work-arounds that they rely on today.
With those new platforms in place, they can then leverage the advanced technologies to receive new, automated data sets (including ISO20022 messages) and to drive new processes by leveraging Artificial intelligence.
These plans coincide well with CSDs' focus on delivering ISO20022 connectivity as a leading priority overall - putting the industry on a convergence path (of automated messaging and technology) around 2023.
Surprisingly, we see a continuing belief amongst European respondents that our old tactics (primarily additional hiring and adding more data sources) is still a viable plan of action for the near-term. Given the recent market and platform changes triggered recently by SRD II, this conservatism is a surprise but perhaps reflects the true, slow pace of technological change across the industry.
Exchanges and Banks : targeting 13% savings in event processing costs
The central pillar of corporate action transformation amongst Exchanges, Banks and Brokers is a 13% reduction in event processing costs.
Given the visibility of this cost amongst participants this focus is no surprise - but it does further highlight the fact that data costs continue to be overlooked in the transformation journey.
Event processing costs and the cost of risk make up 29% of the total, but we are leaving >50% of our costs (derived from data sourcing, validation, verification and interpretation) untouched in our current plans. Are we letting the high visibility of event processing and our ignorance of other costs dictate the wrong corporate action roadmap?
Perhaps not. With end-investors seeking to achieve their target of a 15% reduction in data sourcing costs, there is no lack of pressure on their core providers (notably custodian banks) to facilitate these savings by disseminating more dependable and more automated event notifications to investors. By investing in better processing and fewer internally-driven errors, custodians can not only help investors to consolidate their sourcing costs but they can also remove the root causes of their own errors (whilst potentially leaving those of upstream providers unchallenged).
Maybe the industry is just following the priorities that their customers are setting them.
"We have half-automated our corporate actions. But we can't get the business funding to finish the job"
Securing funding is the biggest obstacle to change
Over 30% of respondents see their biggest obstacle as being the business case to trigger change. In an area where $2 million in errors is standard, why do we struggle so much to secure funding for our corporate action transformation?
Our poor cost tracking plays a role here. If half of us is unable to quantify 40% of our corporate action costs today, then it is difficult for us to accurately foresee (or measure) how automation and innovation will impact our total costs. We risk under-estimating or under-reporting many of the compelling benefits of corporate action change.
Often-cited too is that "there is no customer demand" for us to change our corporate actions. With custodians routinely absorbing the cost (to investors) of corporate action errors, it is perhaps understandable that investors are not putting these risks at the top of their vendor roadmaps. Yet this is changing. As more and more investors include corporate actions in their performance scorecards, this area is set to become increasingly central to the customer relationship.
And everyone's corporate action problem is different. How can you model the benefits of other people's corporate action innovation on your own business when the market, customer, asset and activity mix is entirely different? The continued lack of transparent, industry-wide reporting on errors and remediations will continue to undermine change until action is taken.
CEOs are 75% less aware of corporate action risks than the back office
Whilst the market volatility of 2020 and the time-criticality of SRD II's deadlines have helped to raise awareness of corporate actions throughout the business, there is no doubt that stakeholder education is still an essential first step in successfully driving change.
Today, only the back office, finance and compliance functions are properly aware of the risks and costs of corporate action processing - to the point where CFOs (not COOs) are the most aware C-level managers in this space.
That leaves almost all budget owners as being unaware of the impact that corporate actions are having on their business (with an average awareness of around 40% of that in the back office).
Focused as these stakeholders are today on client-led and regulatory priorities, it is imperative then that these budget owners hear a message that resonates with them.
In order to realise meaningful, enterprise-wide change, corporate action owners need to re-frame their messaging so that it is fit-for-consumption by wider audiences. Corporate actions underpin the customer relationship, they are critical to regulatory compliance and they are a core part of tomorrow's cost reduction journey.
We need everyone across the organisation to see corporate actions that way.