Distributed ledger technology (DLT) such as blockchain could help asset managers more easily identify their clients and lower costs, the FCA has suggested, though the prospect of advisers being disintermediated remains distant.
In a discussion paper on DLT, the regulator said such tools could allow companies to “assign a record to a customer’s identity at a very granular level of detail, and keep this detail throughout that record’s life cycle”.
This practice could help fund houses that face a growing number of obstacles when attempting to identify customers. The rise of platforms and other links in the value chain, such as discretionary fund managers (DFMs), have further clouded firms’ ability to know their clients.
Asset managers will often use third-party transfer agents to aggregate orders and custodians to maintain its client records. But introducing blockchain or another form of DLT could create greater efficiencies for fund groups at a distribution level, the FCA suggested.
“DLT might offer the ability to represent or create proof of ownership when the customer places an order at both the consumer level and at the fund level simultaneously, effectively bringing the consumer closer to the point of origin of the financial product,” the regulator said.
Some in the industry believe the technology could prove useful if it helps fund houses more easily pinpoint the people behind investment decisions that transpire on platforms.
Alan Gadd, Artemis head of product and distribution development, said: “We are looking at who’s making the investment decisions [behind platform data]. A DFM could be making decisions for themselves, or making decisions for 500 advice firms, which shifts more money.
“On a platform you cannot tell who has triggered that. So anything that opens up the transparency has got to be a good thing.”
A distributed ledger is a database of transactions, parts of which are able to be accessed by a number of users. This contrasts with traditional databases that are typically “owned and operated by a single trusted entity”, according to the FCA.
Financial firms, including asset managers, are in the early stages of considering whether such technology could make their own transactions cheaper, faster and more secure.
The potential advantages of such technology being harnessed by asset managers could be numerous. While fund firms could operate more efficiently, some have also suggested giving the likes of the FCA access to such a ledger would eliminate the need for traditional regulatory reporting.
However, not all parties would necessarily benefit. In its discussion paper, the FCA implied that blockchain could prompt the acceleration of a trend that has long concerned intermediaries: asset managers seeking to circumvent their services and deal with clients directly.
“From a fund perspective, this gives [asset managers] a more transparent view of who owns how much, and reduces some levels of intermediation and hence cost through its distribution network,” the regulator said.
“This might make it easier to provide direct-to-consumer [D2C] financial services if that option is desirable.”
But not all concur with this view. Mr Gadd suggested the appeal of advice was unlikely to be diminished amid such technological changes.
“I don’t see this undermining the adviser community, who are in demand because of the service they are offering, which is quality advice,” he said.
“I don’t think blockchain per se will change the behaviour of investors.”
FCA announces new phase of Project Innovate
The FCA has said its “regulatory sandbox”, in which the watchdog works with financial services firms seeking to develop innovative technologies, has received a further 77 applications for assistance.
In a speech delivered last week, executive director of strategy and competition Christopher Woolard said 31 applications had been accepted with a view to progressing towards testing. The FCA’s first cohort included 18 firms, many of which focused on DLT.
Mr Woolard said the regulator was entering a “new phase” of Project Innovate, and would seek to work with other international regulators to examine their approaches to innovation.
The UK initiative seeks to help businesses tackle regulatory barriers to innovation in a bid to help them develop appropriate products and services. “We believe regulation has a part to play in making sure the right conditions exist for competition,” Mr Woolard said.
