Business drivers for change

Change can come from any direction and is as frequently unpredictable and disruptive as it is planned and staged. There are many business drivers for change, but they often fall into one of two categories, which can be classified as ‘Business Defence’ or ‘Business Development’.

Change drivers can originate from within the business, perhaps as a result of growth or restructuring initiatives, or from the external environment, due to requirements coming from government or regulatory bodies. See Figure 1.



The drive for compliance 

The significant burden of remaining compliant with the plethora of ever expanding applicable financial regulation is a very pertinent example of a driver of business change brought about by the external environment. Ongoing changes to regulations worldwide make it essential for corporate secretary and company and trust management service providers to dedicate sufficient expert resources to oversee corporate governance, involving close data management and the de-risking of business processes. 

To illustrate with a specific example, the Foreign Account Tax Compliance Act, enacted in 2010 as part of the Hiring Incentives to Restore Employment Act, is an important development in US efforts to combat tax evasion by US persons holding investments in offshore accounts.

Under FATCA, US taxpayers holding financial assets outside the United States must report those assets to the IRS on a new form attached to their tax return. Penalties apply for failure to comply with this new reporting requirement. Reporting is required for assets held in taxable years beginning on or after 1 January 2011.

In addition, and of particular interest to practitioners and service providers in Cayman, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. This new reporting regime applies with respect to payments made by foreign financial institutions to covered accounts on or after 1 January 2013. In addition, the FFI’s entering into agreements with the IRS will also be required to apply a withholding tax. 

Although the details of the new reporting and withholding requirements pertaining to FFIs are yet to be communicated, there is little doubt that they will introduce additional complexity and overhead to an already stretched compliance and governance function. 

There is no doubt that the routine tasks associated with administering the affairs of a portfolio of clients have increased noticeably for both the large and small service provider as the corporate and trust administration function has accommodated requirements to report and disclose in order to ensure that entities under management are compliant with statutory and regulatory requirements. As FATCA demonstrates, there is also no indication that these requirements will lessen in the foreseeable future.

The drive for efficiency

Within the wider sector, performance figures published by Gartner in 20101, demonstrate that the performance of wealth management institutions slipped in 2009/2010. For instance, although Wealth Manager’s assets under management did increase by an average of 14.3 per cent in 2009, revenues actually declined by an average of 7.3 per cent. In addition, the average cost-to-income ratio increased by an average of 2 per cent from 2008, meaning that as revenues fell and cost-to-income rose, the average profitability declined.

Against this backdrop, there is a pressing requirement to ‘do more with less’ to alleviate pressure on the bottom line. Fiduciary service providers are increasingly revisiting their business model and have begun to investigate ways to improve the efficiency of corporate and trust administration by exploring the automation of the highly manually intensive front-office and back-office processes that introduce cost. The implementation of standardised workflows, process management, straight-through processing and the self-service client model have the potential to radically improve efficiency and mitigate risk, whilst also improving oversight and standardising client deliverables. See Figure 2. 

If these ratios can be improved by the application of technology, overall profitability will improve

But technology doesn’t work, right?

Despite the fact that technology is often an integral part of business change, there is a widespread perception that innovation is not delivered quickly enough and that technology solutions do not meet the exact requirements of the business. There are examples where transformation has not proved wholly successful such as in the retail banking sector, where Internet or online banking has become prevalent, but where widespread security concerns remain. There are also numerous examples of true technology ‘horror stories’, not the least of which can be found in the UK:

A 2010 investigation found that the total cost of the then government's 10 most notorious IT failures was equivalent to more than half of the budget for Britain's schools. Parliament's spending watchdog described the projects as "fundamentally flawed" and blamed ministers for "stupendous incompetence" in managing them. The most costly programme was the mammoth £12.7bn IT scheme to revolutionise the NHS. The investigation revealed that just 160 health organisations out of about 9,000 were using electronic patient records delivered under the scheme.

However, where technology has been specified, planned and implemented correctly with the right remit and with the right partner there is every chance of success. Some of those success stories are right here in the Cayman Islands.

One particular company’s executive management expressed a desire to invest in improving the governance associated with the corporate administration practice. Their aims were to gain efficiencies and tangible savings by automating high volume/high demand processes which were intensively manual; ongoing risk mitigation; improvements in oversight and the standardisation of external client deliverables. Through the process of thorough mapping and prioritisation, nine workflows were identified as the most manually intensive and high volume transactions. By implementing both the appropriate technology solution and changing corporate procedures and related policies savings gained through the process of workflow automation ranged from 35 per cent to 81 per cent across the set of transactions. For one particular high volume transaction, the net effective savings translated to 54.4 man days per year based on prior year performance.

Cayman and technology – a jurisdictional advantage?

There is evidence to support the hypothesis that Cayman may have a jurisdictional advantage in leveraging technology to address the drivers for change that we have identified in this article. It is a fact, for example, that MCS Ltd was recognised by Microsoft as the “Information Management Partner of the Year” for the Latin American region, beating off stiff competition from 14,000 partners in geographies including Mexico, Brazil and other much larger markets. This award recognises MCS’s deep organisational core competency in the Microsoft SharePoint platform and is not insignificant in a broader context given that the effective management of information is a very important component in the delivery of incremental efficiency – which, as we have discussed, contributes directly to improved bottom line profitability.

As organisational efficiency comes under the microscope, the application of technology to reduce operating costs comes to the fore. A very large number of Cayman fiduciary service providers also benefit from usage of the ViewPoint Entity Administration solution. ViewPoint is the leading global software solution for the management and administration of entities such as companies, trusts, partnerships, foundations and funds. ViewPoint provides a complete practice management solution to cover the needs of professionals directly or indirectly involved with private client and entity management industries. 

It is the appropriate application of relevant technologies which holds out the promise of the Next Generation Fiduciary Service Provider Platform. This platform will both enable the evolution of an organisation that can break out from the boundaries of a fixed ratio of entities to administrators, thus improving cost-to-income ratios and ensure that a flexible framework is delivered to facilitate full compliance with regulatory requirements now and in the future. 

On 24 February 2011, over 70 attendees gave up their time to preview version 7 of the Viewpoint application at The Ritz-Carlton, Grand Cayman. Version 7 promises closer integration between modules and a seamless workflow process. This degree of interest bodes well for Cayman and is indicative of a forward thinking mentally that will continue to deliver success to all stakeholders with an interest in the jurisdiction.