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Investor Money Collections Accounts

May 14th 2020:

Interested in learning more about investor money collections accounts? Watch this on-demand webinar now to find out more about managing transfer agency risk with a focus on the transfer agency reconciliation process.  Fund Recs COO Ciaran Walshe and Head of Operations Brian Lehane share their expertise. 

Webinar recording: Investor Money Collections Accounts

Featuring Ciaran Walshe and Brian Lehane

Video Transcription


Brian Lehane: Hi everyone. Welcome to today's webinar in our series, where today we're going to be discussing investor money collection accounts and managing transfer agency risk. We're going to have a particular focus on the transfer agency reconciliation process and IMR regulation. For anyone who doesn't know me, I'm Brian Lehane, I'm head of operations at Fund Recs. And I'm joined by my colleague, Ciaran Walshe, our COO and in-house transfer agency expert. How are you, Ciaran?

Ciaran Walshe: All good, Brian. Cheers.

Brian Lehane: Good stuff. I'll ask you to do a proper introduction and a bit of background in a minute, but I just want to kick off by thanking everyone for joining us today. I think we know from our own experience that people are extremely busy at the moment with the added stresses of minding kids, and vulnerable family members, on top of trying to get the day job done. So we do appreciate you all taking the time to log in.

Brian Lehane: A bit of housekeeping, the Q&A section is open. So if you look down at the bottom of your screen, you should see an icon for Q&A. Towards the end of the webinar, we'll look at the Q&A and we'll try and answer some of the questions that are coming in. And I'll keep an eye on it, so if there are any questions that are relevant to what you're discussing Ciaran, I might throw them at you at the time.

Ciaran Walshe: Lovely.

Brian Lehane: In terms of the webinar, this is a relatively new series we started since we've been remote working. And I suppose, in the absence of conferences and networking opportunities and everything else, there's a few companies out there who are doing a series of these webinars, and we found all their webinars useful, so we hope ours is too.

Brian Lehane: If there are any topics you'd like us to discuss, or if you have any comments on the webinars we're doing, we're always more than happy to chat about it. So just give us a shout, and if there's any companies you think would be interesting to get on one of our webinars to do a bit of an interview, please reach out to us. We're always happy to talk about interesting topics and interesting companies. Without further ado, I suppose Ciaran, could you give us a bit of background and a bit of an introduction?

Ciaran Walshe: Cheers. So for those who don't know me, I'm Ciaran Walshe, COO at Fund Recs. I've been with Fund Recs for the last five years. I look after all aspects of the operations within Fund Recs. Before joining Fund Recs, I worked in an investment operations role within Mercer, and before that I would have worked in SEI Investments in State Street, within fund administration, and would have worked on plenty of transfer agency projects.

Brian Lehane: Good stuff. I suppose, to kick us off, most of our ordinary audience would be transfer agency professionals themselves, or would have a good knowledge of the transfer agency process. But for those who don't, I think you're going to run us through some of the high level risk factors involved.

Ciaran Walshe: Yeah. So what I plan on discussing and covering would be manual processes, the risks that they bring. MIS reporting and audit trail, and where the lack of these introduces risks, and then we'll take a look at the impact that IMR has had. So I think the single biggest risk in the industry would be a NAV error, and anyone in the industry that can contribute to one of those. So it's mitigating the risks associated with that, and trying to reduce those.

Five Manual Processes That Can Introduce Risks To An Organization

Ciaran Walshe: So I think for manual processes, we've got five different processes up here that can introduce risks to an organization. So operational risk, fraud, staff retention, client retention, and reputation.

Ciaran Walshe: So I think for operational risk, there's a long list of these, but examples within Transfer Agency, I'd say, would be mismatching any trades, managing late payments, not knowing what transactions make up the balance on your account, booking trades to incorrect investors, or marking trades as completed, in error. So all of these operational risks can be mitigated if you remove and reduce the manual processes involved.

Ciaran Walshe: This kind of brings us onto fraud as well. I think it's one area that fraudsters will focus on, it's the transfer agency. The amount of transactions that are made between transfer agents and investors on a daily basis. There's an awful high risk there in what can be attacked. So I think any payments that are made in error, they're going to result in losses for TA. Whereas I think if you have an approved trade within your system, and have a lean reconciliation process, we are going to capture all of these, and you're going to question all of these fraudulent transactions an awful lot quicker than you may, if you didn't have this process in place.

Ciaran Walshe: Then I think if we look at staff retention, it's something I always come back to when we talk about risk, nobody went to college and dreamt about taking and bashing PDFs or Excel files. I'm not sure about you, Brian, but I certainly didn't...

Brian Lehane: That's what I spent four years dreaming about, Ciaran, I don't know what you're talking about.

Ciaran Walshe: So all of this manual processing, nobody wants to do it. It's boring, it's repetitive. It's not adding any value. Staff aren't going to be engaged. They're not going to be motivated. If you want to retain staff and retain quality staff, they want to be adding value in the chain and in the full workflow. Downloading statements manually, running reports in different systems, trying to manually collate different information, picking and bashing. It's not adding value and nobody wants to be doing it. So I think, if you can get away from that, you're going to retain an awful lot more staff.

Brian Lehane: I mean, fund admin, it's a pretty large industry in Ireland at this stage, right? So if I'm in a fund shop, where I am doing this manual work and manually ticking and bashing, and downloading statements and stuff like that, I mean, there's plenty of places down the road where I don't have to be doing that, and I can be adding value to my clients. And if I'm an employee, I know which of the two of them I want to be working in.

Ciaran Walshe: Exactly. Exactly. The more value you're going to add, the better you can become with that job as well. Nobody's going to get promoted for taking and bashing better than the next person. It's all about adding value, and where that can be created. I think that feeds into client retention as well an awful lot. The more errors that you have, the higher risk you're going to have of retaining your clients, and the more manual the process, the higher the risk.

Ciaran Walshe: So if you can automate your processes, you're going to retain an awful lot more clients, and if you automate your process, you're going to retain all your staff as well, or sorry, an awful lot more of your stuff.

Brian Lehane: It's something we've probably seen as well. I mean, we do a lot of demos, a lot of sales demos, things like that. It's beginning to happen more and more, where admins are coming to us for a solution because investment managers are requesting that these processes are automated, that an investment manager is not going to go with an admin who doesn't have these processes automated, right?

Ciaran Walshe: Exactly. The better process you have in place, the lower the risk there is for your clients, and the better process you have in place, the cheaper you're going to be able to do it.

Ciaran Walshe: I think if we look at reputation as well, what errors your reputation in the industry is going to reduce, whereas if you have a straight-through process or as close to a straight-through process as you can achieve, you're going to retain your clients. You're going to have an awful lot better reputation in the industry, and that will allow you to attract new business. And the opposite is true then as well, if your reputation is there for errors and that side of it, you're not going to be able to win new business, and that pulls a massive risk on any business or any firm.

Ciaran Walshe: And one other thing then is, I think, the opportunity cost. So if you have errors, if you have staff that aren't engaged, if you're resolving issues for clients, that's taking away from what all of your staff could be doing, adding value for your clients, making your clients an awful lot happier, and winning new business, and being able to service these new business. So if you've got your workforce looking out for these new clients rather than resolving issues, you're going to be able to service more clients with the same headcount.

Brian Lehane: And that's the big part of it, I suppose, it's scalability. That if you don't have these processes automated, you're just going to end up throwing more staff at the problem. And more staff at the problem, the more clients you get on board, which isn't really a scalable solution when most fund admins are so focused on cost at the moment.

Ciaran Walshe: Exactly. Exactly. And the margins are so tight that, if you've got errors, they're going to cost money. If you win new business, you're going to have to add new headcount, whereas you should be looking at the opposite side of it. If you have the right system in place, you can do an awful lot more with an awful lot less. And I think what straight-through processing or STP can be achieved when you automate all of this, it's not going to be possible with manual processing. I think at the minute across the industry, straight through, or STP, a lot of the time it'll stand for straight through people, or straight through paper, rather than a straight through process.

Brian Lehane: I suppose we've spoken about it from a client and staff level. What about from a management perspective? What value can be added here?

How MIS Reporting Can Help Reduce Risk

Ciaran Walshe: So control and oversight to all of these processes is what you need, and if you've got the right system and process in place, you'll have oversight and you'll be able to focus on the high-impacting items. So it'll take us to MIS reporting and where we can reduce an awful lot of risk, if you've got MIS available at the touch of a button. So I know Excel and VBA, they're very useful and powerful tools. And we've all used them for years, but they're not built to be reconciliation products, and they struggle with datasets, but don't provide any MIS. So I think completing Recs is a timely process, and a risky process if you're doing these manually, and you don't get the added functionality of MIS.

Brian Lehane: I think it's something we've seen where, I mean, we've both worked in back office fund admin, where at month-end, or quarter-end, or whatever the period is, the Excel file gets sent around the office, and you list all your breaks that are on your team, and this file can be floating around the office for a week or two. By the time it gets to management, it could be next to useless.

Ciaran Walshe: Yeah. If you want to resolve issues, and you want to be able to focus on the high-impacting items, you have to be doing that in real time. I think if you are trying to resolve an issue, and the information you have is two or three or four weeks old, it is very, very hard to do. The fines that could be in place could be an awful lot higher. The risk involved in that is increasing day on day, rather than actioning that in real time.

Brian Lehane: And I guess, from a team management perspective, especially when you take current events into account, where all of a sudden we're all working remotely, where a lot of us would not have worked remotely before. And we go from being in a team environment, where I can shout it over my shoulder to the person I'm working with, to everyone's at home in a bedroom, on a laptop. Systems like this are even more important from a team management perspective, where you can actually get an oversight of where your processes stand at any point, or get a live view of it.

Ciaran Walshe: Exactly. And that's something I'll touch on later in this. I have a couple of slides outlining that, but if you want to see what Recs are completed, what time they were completed at, how many Recs user A has completed today, you have all of that available, as you've got MIS in place. You can manage all of that, and then you can use these stats to drive your team, and to improve your team. But I think some of the examples that can be extracted, like you can see what investors are always late with their funds, and you can track that and you can give them information at the touch of a button, rather than trying to go through day after day, and trying to manually collate that.

Ciaran Walshe: If you're receiving retention funding late from particular funds, you can track that. There's an awful lot of trends that you can extract from MIS and focus on these trends to reduce the risk, reduce these from happening, and then you can really increase the straight-through processing that you'll have. And then I think other bits and pieces that you can get are overdrawn balances, basis point impact, get day counts. You can focus on items that are greater than five days or so on. Or if you want an item, if it's greater than a particular value and a particular day count, you can extract that. Once information like this is in a system, you can extract it in whatever way you want really.

The Importance of Audit Trails

Brian Lehane: I suppose we've spoken about some of the operational controls in place, audit trails and the likes are becoming a lot more important, especially with these automated systems that, when internal auditor or external auditor or whatever it is comes in and looks at your processes, they want to be able to see what happened, who did it, when they did it, what the processes are that are taking place, and how can an automated system like this, I suppose, give people peace that the processes that are taking place are correct.

Ciaran Walshe: So similar with the MIS, you'll have all of that on a daily or weekly or monthly basis, whatever process you want to put in place, but with an audit trail, every action is tracked within a system. If you are looking at an Excel process or a manual process, you can have people with a signature into a cell on an Excel file or a timestamp, all of these can be fudged. There is no proper lockdown, whereas with a system, everything is tracked. Everything that a user has updated or any manual intervention, all of this is tracked, and you can focus on these and you can review these on a daily basis.

Ciaran Walshe: So you get a full breakdown of who did what, when it was completed. I think controlling change within the industry is a massive area of risk, and when you have a system in place with audit trails, you can control change an awful lot easier.

Brian Lehane: I guess, with something like this. I mean, people are used to, when you're doing these reconciliations manually, everything has to be checked because everything was done manually. So you basically have to check the whole reconciliation. When you move into an automated system like this with auto match rules, with things like that, it allows you to move more towards a kind of an exception-based process.

Ciaran Walshe: That's where our staff can be adding value, if they are looking at everything on an exception base, rather than end-to-end. If you're just focusing on the exceptions, resolving these, you're adding an awful lot more value than downloading your files, putting everything together, reconciling every single transaction manually, and then focusing on the exceptions. Whereas if you have a system in place with a full audit trail, you don't have to worry about that side of it.

Ciaran Walshe: These have been reconciled based on investor IDs, transaction IDs, and so on. And if you can focus on that, you're going to be able to get through an awful lot more, and add an awful lot more on the exceptions. And I think the Rec process is such a key area in the TA cycle, that the audit trail is crucial for that oversight.

Brian Lehane: Absolutely. I suppose, in Irish transfer agency circles, the big change over the last number of years is the IMR regulations. They've been around with us for a while, but I think from our own experience, we've still seen massive discrepancies in how different firms are dealing with it, and how different firms are going about it. I suppose the big part of the regulation was the segregation and the designation of assets. Do you want to quickly run through that?

Ciaran Walshe: So I think every firm would have had their own process in place, and probably a lot of them still do have some sort of a custom workflow for themselves, but with the segregation and designation of assets, if you're completing manual Recs, and there's any sort of volume on a daily basis, it's going to be very hard to segregate cash within these accounts. If you've got a system that's reconciling these on a transaction by transaction basis, it's going to outline every single transaction that's sitting on your account that is due to be closed.

Ciaran Walshe: So like with segregation, you should just be holding investor money within these collection accounts, non-investor money should be held separately. Any of these non-investor monies have to be identified within, I think it's five days, and if you've got all of this in place, and you've got your day counts from the MIS and the audit trail that we went through already, you're going to be in a much better position, and if you cannot of reconcile any of these items within these systems, they're highlighted just right away.

Brian Lehane: We're actually getting one question and to tell me my voice is very quiet. So I'm going to try and talk a bit louder. So that's something I haven't been accused of in the past.

Ciaran Walshe: No.

Brian Lehane: I suppose, again, from an IMR perspective, do you want to take us through the six principles of the regulation?

Ciaran Walshe: Yeah. So with the IMR, there's six principles that have to be complied with, the six principles that the whole regulation is based around. So with a lean reconciliation process, you're going to look after a lot of these by default, but if I go through them one by one, with segregation, so that this is where the TA will hold and control the investor monies in the collection account, and they will control it while it's in transit between the fund and the TA, and between the investor and the TA.

Ciaran Walshe: Designation then, this is where the TA has to ensure the investor money is clearly identified, and this is within its internal and external records. Then we have reconciliation. This is ensuring that the TAs are aware of, they're maintaining appropriate records, and of what is in these collection accounts. If the rec wasn't to take place, the risk that the investor money mightn't be properly reconciled, or mightn't be properly accounted for is greatly increased.

Ciaran Walshe: Then number four, we have daily calculation. So this is essentially, do you have enough funds in your accounts to cover what is due to investors on any given day? If you don't, this has to be covered by the financial service provider.

Ciaran Walshe: Then five, we have risk management. This is where each financial service provider would have to appoint a pre-approved control function. So this will be the head of investor money oversight, or the HIMO, and their responsibility will be to develop and maintain an investor money management plan, an IMMP. So each financial service provider should have these in place.

Ciaran Walshe: And then number six is your investor money examination. This is your audit. So if you have, and this is where the central bank is obtaining independent assurance that the investor money is safeguarded. You have everything in place to look after these. So I think, as I said, with a fairly solid reconciliation process, a number of these are going to be complied with by default.

Brian Lehane: And I guess that's it, right? Because it's a relatively new regulation, some transfer agencies are kind of struggling with, not that they're struggling, but they're unsure of exactly what they have to do on a day-to-day basis, because there's been, I suppose, limited guidance from the CBI. I think you're going to go run us through kind of what Fund Recs looks like as an automated solution, just through a few slides, but before you do, I have a couple more questions here that might kind of dovetail nicely with it.

Brian Lehane: So Claire has asked how does Fund Recs handle the TA issue of having two money movements on the bank, versus one approved transaction on the admin side, and I have one from Michael asking us, using an automated Recs system, is it possible to mark subs and reads as complete in the TA system, once they've flown through the cash Rec?

Ciaran Walshe: So for the first one, we'll have two money movements on the buying keel of the cash coming into the TA account, and the cash going out. What we do at Fund Recs is we'll match that off in step one, so we'll match the cash coming in with what you have in the TA system, that will sit on the TA account until that cash is paid out, so that we, even with the one approved transaction, the ETA system, we bring that through a two-step process, and then you get to review that. And what was the second question?

Brian Lehane: The second question was marking items off in the TA system as completed.

Ciaran Walshe: Yes. So once there is order IDs or transaction IDs coming through the Rec system, we do it for a number of clients where we will build a file with a date, transaction ID, and the amount, and the amount that's completed. So if I was expecting a retention in today, of 10,000, and that has come in, I've got my transaction ID, I've got my date, I'd flip that back to the TA system, and all of that is a straight-through process. So we deliver those back to our clients, once a Rec is marked as completed.

Brian Lehane: Do you want to give us a run through of the Fund Recs way?

Ciaran Walshe: Yeah. So I've just a couple of screenshots, rather than going into the detail of a demo. If anyone that's on the webinar wants a demo of our solution, my details will be on the screen at the end. So the page I have up here at the minute is our dashboard. Here you'll have oversight as to all of your accounts, the status for today, the balances on these accounts, you can submit and approve these from the dashboard, where there's no movement, and your full oversight there on the dashboard.

Ciaran Walshe: Then each fund will have a calendar page. You'll have a full history of a fund here. You'll see all of today's imported files, and then you'll have a breakdown by transaction type, and then a summary of your closing balances as well. On this view, you've got a full history and then you have an audit trail on each of these accounts. So if it comes to year-end audits, or interim audits, you've got all of this information available at the click of a button.

Ciaran Walshe: Then within our Rec, if I look here, step one, we step two, and we have review. The page I'm on at the minute is the review page. So then step one would be matching the cash into the TA account with the TA system, and then we could match that with pending transaction with the cash that's being paid out in step two. Anything that's still sitting in step two will be part of the closing balance. So on the one that I've highlighted on screen there, we have a balance of 230K. I've expanded my view at the bottom to see my own applied items. So I can see I have seven transactions there. They are all pending subscriptions, possibly timing issues that have to be moved up to the fund. And I can explain what investor monies per investor are actually sitting on this account at any given time.

Brian Lehane: Good stuff. I guess that's the end goal of all of this, to get to a stage where you can explain your balances at any given stage. That's the big takeaway.

Ciaran Walshe: Exactly. And then the last one I have here is just MIS. So anything within the system can be extracted as well. If there's overdrawn balances, the number of Recs that are completed, the percentage of straight-through processing that has been achieved on a given day, any open items by day count, and then different notes that have been added and the day as they have been on that Rec. So all of that information is available, and we're constantly working with clients to build out this view, and build out this MIS, so that the stats that are relevant and that they need on a daily basis are available to them.

Brian Lehane: Good stuff. You have your summary slide up there, I suppose. Do you want to give us some key takeaways?

Ciaran Walshe: So I think automating the rec process will deliver, improve risk management, more STP, reduced FTE, and the ability to manage our costs. So if you can reduce your operational risk, your risk of error, or your risk of fraud is going to be reduced. And you're going to have a much leaner process. So for audit purposes, having everything automated and tracked is going to make the whole audit process an awful lot easier. And then I think for a management level, having the live MIS, and having that oversight in place puts them in a much stronger position to be able to deal with these, rather than waiting till, as you've said earlier, for the Excel spreadsheet to go around to all teams within an organization to get populated, and even when that is populated, there can be errors on that compared to what actually happened. And you have no oversight on that. And you're not going to be able to resolve issues.

Ciaran Walshe: So I think having live information and being able to react to these issues in a live environment really puts these firms in a more strong position. And then the final one, I think, is staff retention. If you have attracted quality staff, train them up through the process, and they're able to manage all of this, retaining those staff is key to any firm. If they can retain these staff, they're going to be in a much better position to service their clients.

Brian Lehane: I think that's it for us, Ciaran. I think you've answered all the questions that have come in. To everyone who joined in, just thanks again for joining us today. I hope you took something out of the webinar. I know I learned a bit of stuff. Thanks, Ciaran. We'll be making a recording of the webinar available afterwards. So we will share that recording with you in a couple of days, once it's completed. And I suppose, if you'd like to discuss anything further, Ciaran's email address is up on screen there, or you can reach out to us at fundrecs.com to get in contact, and we'd be happy to discuss it with you. Thanks again, Ciaran.

Ciaran Walshe: Cheers Brian.

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