As an organisation, we eagerly analyse the different inputs received. These range from advice at client meetings through to public surveys. Over the last years, our clients have urged us to work on “going the extra mile” to differentiate our services from the competition. Over the past two years we have adopted a “5% challenge” to improve service quality by 5% each year. Even if clients say the service is outstanding and one scores straight sevens in the Global Custodian Survey, there is potential to improve.
But measuring that improvement is often difficult as it reflects the quality of service more than quantitative measures. Obviously, we can improve the quality of service through our market advocacy efforts. As one who grew up as the lone UK bank executive calling for a CSD and the elimination of the time delays on registration of UK securities, I appreciate the challenge of any client to differentiate fully between market inefficiency and supplier performance. In our region, the challenges we face in this area include manual settlement matching processes, over engineered and local language KYC processes, unclear record dates, complex proxy voting processes, and unique local market regulations.
The NeMA session showed a surprisingly low 60% of the audience felt that sub custodians met client expectations. This is an amazing figure as NeMA tends to be weighted by number in favour of the sub custodian constituency. The interpretation has to be that clients believe there is room for improvement. And we, as sub custodians, have to treat that as a challenge.
From feedback from the conference and off line conversations, the key areas of concern centre around the response time on queries, the quality of web sites as well as pricing transparency and simplicity. There is also concern at the opaqueness of some sub custodians’ strategies and the quality of legal support. There is a split on the relative value of regional versus local versus global sub custodian networks. As all of these are fundamental to the UniCredit offering, we need to consider them in turn.
First, it is worth noting that the issues raised indicate, as many clients have told us, that core services provide less potential for differentiation than they did in the past. Basically, although there are differences in such service quality, the major suppliers in most markets have a comparable core service. This means it is hard for a buyer to define the differentiating factors between successful and unsuccessful bids for business. Often, but not always, the differences are qualitative rather than quantitative. Qualitative differences relate to the way service is delivered more than the actual service components themselves.
Response times are a great case in point. Almost everyone has adopted the 24 hour rule for responses but, if this means that a message is received that the issue is under investigation, that rule is meaningless. And clients rightly expect, given the real time nature of the bulk of record keeping and the accessibility of historic data, clear responses to queries to be provided much more promptly. Delays beyond the 24 hour rule must be explained and should be limited to issues where third party input is required or which depend on retrieval of information from the archives.
And that leads into the quality of web based offerings, with coverage of both e banking and web sites. Global custodians (as distinct from domestic institutions) have little interest in settlement instructions over such websites as they prefer SWIFT interfaces. But they do see value in the platforms as information systems. This covers securities and cash current and historic transaction related data; corporate, income, and proxy event activity as well as the more public general economic and market reports. And the data needs to be consistent and all- embracing where the supplier is a multi-market one. It is amazing how many suppliers still operate web sites on a location by location basis rather than through a single and uniform gateway.
Pricing, according to the NeMA debate, had to be transparent and simple. I still struggle with the unbundling debate as I have always felt that the ad valorem plus transaction charge (with discounts for STP instructions) is an excellent model. The market appears to have moved in favour of this model rather than an unbundled one with more focus on the components driving pricing. These include local market charges, FTE support (which amounts to around 60% of the cost base of most in our market), cost of liquidity provision, and a long term positive return on notional capital to cover risk and any operational losses.
Legal support is a challenge. Ideally the market would produce a template sub custodian agreement. I have been involved, in distant and much simpler times, with attempts at such an exercise in the ISSA environment. Even then it failed to gain traction! But there is a challenge for sub custodians as each buyer requires their own bespoke legal agreements. There is a marked disinclination to accept the overall jurisdiction of local law. And that has to be married with the current fast changing liability environment and the growing complexity of service provision especially when faced with the challenges and idiosyncrasies of multiple local laws in the different locations covered.
One of the worrying areas for buyers is the problem of clearly understanding sub custodian strategies. They need comfort of the commitment of their provider as well as of the quality of their service. Our approach is simple. We have three core client segments, based on blending domestic and cross border activity to ensure scale in each of our markets. The segments are domestic institutions, corporate trust related and cross border investors through their agents. We have a focus on a single geography, where we believe we excel, and that is the Central and Eastern European markets from our gateway in Austria. We are positioned within Global Transaction Banking, a core service of the Group, as a regionally managed service interlinking with the payments/cash product and our capital markets/treasury colleagues. We also work closely with Retail and Private Banking for distribution of domestic products and Financial Institutions Group to ensure coherent and collective client management.
As the NeMA debate noted, local providers have a cost challenge as markets become more demanding. Regional providers can spread cost over multiple markets and staff up the skilled personnel needed to understand client needs. Global providers can do likewise but they have a challenge to provide consistent on the ground support in those smaller, and often unique, markets when their model shows a small subset of their locations providing the bulk of their revenues. It is no surprise that the jury remains almost permanently out on this issue.
That again keeps us, as a supplier, on our toes as we look for that elusive 5% per annum improvement in our service quality to ensure that we continue as the CEE preferred provider of securities services to our diversified client base.
John Gubert
Chairman
Global Securities Services
Executive Committee