Principles such as the one commonly known as ‘Four Eyes’ have developed over many years. They are often the result of a change in regulation, enhanced compliance needs and issues that have enveloped the industry from time to time.
However, these ‘Good Practices’ have been developed against a backdrop of bad technology infrastructure and dated legacy software. An example is a surprisingly accepted need to regularly reconcile disparate systems before feeling comfortable with issuing information.
Even the largest systems have developed in a piecemeal fashion, which means the system we typically use to process transactions is a different system to one we use for fund accounting. Likewise, Compliance is often another separate system. And then, this is exacerbated as the range of instruments used by Fund Managers to get returns means companies use different software to handle derivative instruments as their existing software does not cater for anything classified as “exotic”.
To overcome these issues, many companies use “data warehousing” techniques. However, is this just another accepted norm that has come about because of dated disparate systems and “bad IT”? Moving data from many places to one just so that you can do something with it is simply not good use of resources, nor efficient IT. Any processes that are used to reconcile these systems, whether manual or automated are viewed as good practice. Nonetheless, no one questions or denies that these processes are a necessary part of our daily requirements; the issue I have is how we arrive there.
Furthermore, trying to keep partial records, as many fund managers often do in Excel, is a headache, but one that nobody seems to question. If the transaction, accounting and compliance software were all part of the same system driven from a single entry, the need for consistent reconciliation simply evaporates into thin air. Simplifying this hugely complex infrastructure removes the need to be constantly ‘Box Ticking’.
Let’s take this one stage further. Presume, fund auditors were presented with a simple, single structure that consistently produced the correct output, without the need to have evidence of reconciliation. Could that auditor not move to a system-based testing procedure instead of an output based one? Surely, this is less prone to mistakes, as expecting auditors to find errors amongst the ‘forest’ of output produced at year end is unrealistic. Also, with all the data in a single database could we not then contemplate producing interim and final accounts at the touch of a button (as well as the audit file). There are certainly tools available such as Business Objects, Tableau and Looker that can-do extraordinary things with data.
Over the last 40 years we have seen some real milestones in terms of technology. When computers were first introduced (in any numbers) in our industry in the early 80’s they were monolithic grey boxes that sat in locked air-conditioned rooms. They cost hundreds of thousands of pounds and were restricted to holding as much data as most of us have on our mobile phones today. A revolution occurred with the advent of the personal computer and the ability to process data at our desks. A further milestone was achieved when Microsoft produced packages like Excel and Word. Suddenly, users had tools to use that were independent of the technical teams that existed in most organisations.
Nevertheless, the biggest revolution of all, of course, was the Internet. This effectively ‘melted’ the walls that existed around a department or organisation. As it developed it, opened a myriad of possibilities around communication and moving data. The advent of the Cloud is another of these innovations that is revolutionising the workplace. People will use software in the future the way that they order a book from Amazon.
If we apply this to an Investment Management operation where many have been outsourced and may not even exist on the same continent, let alone the same office, we can see the possibilities.
What If a fund manager could enter an “Order” (like the Amazon book). Let’s then suppose that single entry undergoes enrichment so that it can be verified (confirmed), sent to all interested parties and then accounted for in a single system without any human intervention, with all parties working from the same data. Fund Managers, Administrators and Prime Brokers (Custodians) can view separate instances of a single entity. Using cloud technology, Fund Managers have access to the administrators records and run the fund(s) from these. Maintaining fund positions is easier when you do everything (positions, liquidity and debtors and creditors). And all processes are compliant and meet the needs of the regulator. Utopia?
If you were starting with a blank sheet of paper, this is surely how you build software with today’s technology infrastructure.