The management of corporate actions is an old problem. It is, however, still a major challenge and an area of significant risk for many wealth managers who have not invested in automation.
Historically, cost has been the issue. The high cost of systems to automate corporate action processing made them economically unsustainable for medium and small organisations. Additionally, most back office systems provided some form of compulsory action entitlement processing, often perceived as the area of highest risk due to high volumes. This has led to the reluctant acceptance of the mature manual processes that we see today for managing the receipt of notifications, the dissemination of their information, and management of voluntary (and compulsory actions with options) events and their MiFID II transaction reporting requirements.
The present movement towards a modular, best of breed approach to systems has led to the creation of a new generation of cost effective, cloud based corporate actions processing platforms. These, combined with the increasing costs of maintaining and retaining highly qualified staff, have moved the return on investment argument in favour of automation of the whole corporate actions process. And the cost benefits for using such platforms can now be extended to small institutions, who can often see a return within 12 months.
Additionally, there is now greater understanding of where the true risks lie. Although the risk of missing a notification and therefore its potential benefit is significant, the risks associated with different events are not equal. The entitlements generated by compulsory actions are largely allocated by custodians. Should a wealth manager fail to identify such an event, the entitlement will still be allocated and therefore the risks are low and largely limited to timing. However, should a wealth manager miss a voluntary event or fail to manage the election / instruction process within mandated dates, the monetary risk could include the making good of physical assets that were offered as part of the event. As such, even though voluntary events only account for 10-15% of all corporate actions, by their nature they are a much riskier proposition.
The perception of reputational risk is also changing. Access to social media and the internet, as a forum to air grievances and publicise poor service, make a disgruntled customer far more dangerous today than the war of letters that might have occurred in the past. In an environment where even the smallest error can cause significant loss of reputation, institutions need to remove error prone manual processing in favour of automation.
In the context of corporate actions, best practice is about reducing risk and improving customer service in an economically sustainable approach. Receiving notifications from multiple sources should ensure that no corporate action is missed, and quality of information enhanced. The use of technology to manage the process by which these notifications are amalgamated into a single master record offsets the conflicting data scenario, whilst providing a single record of truth which can be confidently disseminated internally or externally to customers. The dates from this master record can be diarised and used within automated workflows to ensure entitlements are known ahead of the ex-date, allowing future cashflow to be proactively managed. Additionally, the same workflows can be used to manage the internal and external deadlines of the voluntary election / instruction process, mitigating the high risk of this type of event. Customer service can be improved by better communications and management of the election / instruction processes, and potentially extended into the provision of proxy voting.
In the past, this best practice would have constituted an expensive aspiration. Today, this can be a cost-effective reality.