Back Office Services are usually broken down into Registry, Custody and Investment Accounting.
The output of these functions for a unitised vehicle ultimately provides:
- Safe and accurate recording and holding of the assets of the fund - Custody
- Accurate valuation of the units in the fund and the production of financial accounts - Investment Accounting
- The accurate recording of investors' details and their holdings of units - Registry
- Communication with investors including receiving new funds and paying out withdrawal requests – Registry
The services may also extend to checking that a fund is compliant with its investment mandates and to reporting on the performance of the fund.
Outsourced or In-house?
The Unit Trusts Act 1960 requires that the assets of unit trusts must be vested in the name of the Trustee or its appointed nominee. This is to protect investors and ensure that the assets are not registered in the name of the manager of the fund. In most cases this means that a custodian independent of the fund manager is appointed to provide these services.
With regard to Registry and Investment Accounting, the provision of back office services is expensive and can require significant investment in specialist systems and trained staff to ensure a quality service. For this reason it is often only very large fund managers that choose to offer the services themselves. Accordingly in New Zealand it is common for fund managers to outsource their back office services.
What's happened in the last few years?
The introduction of the Portfolio Investment Entities (PIE) regime in October 2007 effectively removed the need to calculate tax at a fund level and placed it at an individual level meaning that registry systems needed to become more sophisticated to calculate tax for each individual investor.
The introduction of KiwiSaver in 2007 led to a large number of new investors registering for this product.
These two factors have led to a large increase in the demands on registry services both in terms of volumes and complexity.
In the Investment Accounting space, the introduction of International Financial Reporting Standards (IFRS) for financial years beginning January 2007 represented the most significant shift in financial reporting in New Zealand for more than a generation. Its implications are still being wrestled with by investment accountants across the industry.
What lies ahead?
In the next few years it is likely that the majority of change and challenge will come from new regulation. A recent discussion paper from the Ministry of Economic Development canvases the idea of a requirement for fund managers and custodians to be licensed, additional reporting by KiwiSaver schemes to the regulators and additional regulation around investment accounting functions.
The above proposals will provide additional challenges for sector and have the potential to see some consolidation occur.
How does it all work?
To help simply illustrate, let's imagine that Mrs Smith (the investor) decides to invest $10,000 in a unit trust run by "Rock Solid Investments Limited" (the Fund Manager). Rock Solid Investments states that the funds will be invested in New Zealand shares.
If Rock Solid Investments is a large company, they may provide the Back Office Services themselves. Alternatively, they may have arranged for an agent company to provide these services on their behalf.
Mrs Smith completes an application form and sends her cheque off to Rock Solid Investments or their agent. The application form and the cheque will be sent to a Registry team. The function of Registry is to record the name and address and contact details of Mrs Smith and to purchase units in the unit trust with her $10,000. The Registry team will send Mrs Smith an acknowledgement saying she is the owner of x number of units in the fund.
The Registry team will pass the $10,000 to the Custody Team who (upon instruction from the Fund Manager) will purchase New Zealand shares with the funds. The Custody team may run compliance checks to ensure that the investments of the fund are within certain parameters. These checks can be run elsewhere in the process. One of the important legal functions of the Custody provider is to ensure that the assets are legally owned by the Unit Trust and not by the Fund Manager.
The Custody team will advise the Investment Accounting team of the number of shares now owned by the unit trust. They will value the shares and so determine a value for the fund. This valuation will be divided by the number of units in the fund to determine a unit price. The unit price will be sent to the registry team to revalue Mrs Smith's investment. In simple terms, if the value of shares has gone up, then Mrs Smith's investment will now be worth more than $10,000. If the shares have decreased in value, then Mrs Smith's units will now be worth less than $10,000.