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Maximizing Efficiency and Enhancing Operational Oversight

Whether it’s remote working due to the Covid-19 pandemic, an accelerating trend towards outsourcing or increasing scrutiny from regulators, the past year has shone the spotlight on the crucial operational oversight function in the middle office of financial institutions. With this being a highly topical subject, Ben Pumfrett, Head of Product and Profitability, Middle Office, at RBC Investor & Treasury Services, recently moderated a panel discussion with institutional asset managers on the challenges faced by those responsible for operational oversight, and considered the best ways to tackle them.  Ben shares the five key themes that emerged from the discussion.

The first topic was that the sheer volume of data now available, needing to be validated and exceptions identified and managed on a daily basis, is an occupational hazard for those working in operational oversight. Demand for information and provision of data is constantly growing, and identifying the exceptions and their materiality, while also relaying relevant information to middle office stakeholders can often be a challenge. To address this, those with operational oversight at asset management firms spend considerable time upskilling their teams in areas such as risk management so that they become a value-add rather than just an operational processing unit.  Staff at many firms are moved into different roles at regular intervals to broaden their understanding of the business. 

Organisations must understand not only their own operating model, but also the third party’s, and how the two merge and sync

The second theme highlighted was governance. The past few years have seen many organisations outsourcing functions to third party providers, and the pandemic has accelerated that trend. While outsourcing typically leads to cost savings, it also creates its own challenges, the biggest being how to build a governance framework to oversee the external party. For effective governance, organisations must understand not only their own operating model, but also the third party’s, and how the two merge and sync. Some firms outsource to multiple providers and that means adopting a consistent, risk-based approach when overseeing them all.

The third big topic was the role of technology and the key role it is now playing in operational oversight.  Of particular note is the use of tools that filter and flag exceptions for review and remediation. Advances in technology are encouraging vendors and service providers to develop more innovative products for their clients, and many are taking on an increasingly advisory role. It’s important for asset managers to establish a risk-based approach that is repeatable and can navigate the vast amount of data available, and sophisticated exception-based management facilitates operational efficiency.. Many firms use a net asset value (NAV) oversight tool or trade management dashboards, effectively monitoring the work of the company's administrator on a near real-time basis. While this is not a new concept, it is gaining more interest and higher levels of adoption.

The need for regulators
to have access to
real-time data is likely
to become more
important in the future

Increasing operational oversight by regulators was the fourth theme. One thing that presents a challenge  for regulated firms is that even though regulators are working to a common goal, they have slightly different areas of focus and slightly different red lines. There is also an increasing emphasis on governance and the need for regulators to have access to real-time data is likely to become more important in the future.

The final theme was how the middle office has to grapple with nuances in oversight in different jurisdictions. Most organisations look at the most stringent regulator and aim for that as the standard to adhere to. The challenge is that because the regulations continuously evolve and aren’t necessarily aligned, it’s difficult to future-proof oversight models. As a result, models have to be monitored and reviewed on an ongoing basis to ensure they are in tandem with existing and potential regulatory updates and rewrites.

Enveloping all these themes, one thing stood out, and that was that people and their knowledge are key to successful operational oversight. Within the asset management industry, churn in the role tends to be low so it’s vital to keep staff motivated and constantly developing. Many firms work with industry groups and service providers to ensure they are up to date with the latest developments and best practice. That way, the oversight function can be well equipped to tackle whatever challenges are thrown at it in the future.

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  1. Originally published by Global Investor Group (March 2021)