The third-party fund administration (TPFA) industry in Europe is undergoing a wave of changes, driven by regulatory developments, technological advancements, and rising investor demands for transparency and efficiency, concluded the Funds Europe third-party fund administration report. The survey, conducted in June 2024, and the results published recently, reveals that the sector faces a mix of opportunities and challenges as it adapts to a rapidly evolving financial landscape. According to the respondents, regulatory scrutiny continues to be a major influence, with fund administrators needing to ensure compliance with directives such as the alternative investment fund managers directive (AIFMD), Mifid II and the European market infrastructure regulation (Emir). These regulations impose stringent requirements on fund managers, demanding that administrators maintain operational efficiency while managing increased compliance obligations.

Increasing technological integration

The growing importance of technology integration was another key theme of the report. The use of automation, artificial intelligence (AI) and blockchain solutions had become essential for fund administrators to stay competitive. The shift towards cloud-based fund administration platforms had accelerated, offering scalable solutions that enhanced data accessibility and improved collaboration between fund managers, administrators, and investors. As digital transformation continued, TPFAs that failed to invest in advanced technologies risked being overtaken by more tech-savvy competitors.

In response to increasing regulatory burdens and the need for enhanced reporting capabilities, outsourcing of fund administration services has continued to grow, says Funds Europe. Fund managers are delegating administrative tasks such as net asset value calculations, investor reporting and compliance monitoring to specialised TPFAs, allowing them to focus on core investment activities. Private equity, real estate and hedge funds have been at the forefront of this trend, benefiting from the expertise and economies of scale offered by third-party providers. Leading administrators, such as Apex Group, IQ-EQ and Alter Domus, have been acquiring smaller firms to strengthen their market positions. However, this consolidation has raised concerns about reduced competition and the potential for service concentration risks for fund managers.

Smaller and mid-sized administrators, on the other hand, have been differentiating themselves by offering specialised services, including personalised client support and niche expertise in areas such as ESG compliance and digital asset administration. The report noted that the European TPFA industry remains poised for continued growth, driven by increasing regulatory complexity, the rise of alternative investment funds, and advancements in financial technology. However, challenges such as cost pressures, cybersecurity risks and evolving investor expectations will continue to shape the sector.

The Funds Europe survey also revealed that is seen as an important development by most respondents, with three-quarters rating it highly. The survey further explored the industry’s for the T+1 settlement cycle, set to be in Europe in 2027, which will shorten the settlement period for most securities from two days to one. The majority of respondents were about the industry’s preparedness for this shift, though custodians generally felt more optimistic than administrators.

Additionally, the migration process from one administrator or custodian to another remains a challenge. Over half of the respondents reported satisfaction with the migration process, but 20% felt it was unsatisfactory, though no one rated it as ‘very unsatisfactory.’ Experts highlighted the importance of setting realistic timescales for data migration and streamlining the process to avoid disruptions.

ESG compliance and sustainability

The growing emphasis on environmental, social and governance (ESG) compliance had prompted many fund administrators to enhance their ESG services. One survey respondent noted the success of their company’s ESG services in assisting clients with data collection, reporting and meeting local and European regulatory requirements. ESG services were expected to play a crucial role in guiding clients’ sustainability strategies and enabling quicker time to market for ESG-compliant investment products.

Security and data privacy concerns

As the use of cloud data grows, the challenges of sharing market data between asset managers and asset servicers have become more apparent. The survey revealed concerns about the security and technical challenges associated with data sharing. Firms must invest in robust security measures to prevent unauthorised access and manage data privacy concerns. The standardisation of data formats and systems, while costly, is seen as crucial to enabling effective collaboration in the future.

The report also noted that the industry faces technical and security challenges, particularly in sharing market data between asset managers and asset servicers. Respondents emphasised the importance of robust security measures to prevent unauthorised access and highlighted the operational complexities associated with standardising data formats across platforms. Despite these challenges, some respondents expressed optimism about the potential for increased collaboration between fund administrators and managers, particularly in the provision of market data.