Since inception, the ESG standards have managed to automate approximately two thirds of all fund transactions and 90 per cent of all nominee account transactions, thus reducing time, costs and risk to the industry. But of the remaining unresolved issues, automating Client Name transactions is probably the most significant issue facing the industry today.

It is estimated that approximately 40 per cent of all Canadian investment fund accounts are now Client Name accounts, meaning a relationship is formed between a client and a fund company. This relationship therefore requires fund companies to hold the records of clients' accounts, file the tax reports, and, in most cases, obtain a client signature to verify account activity.

Client Name manual orders between distributors and fund companies have resulted in the bypassing of the FundSERV network completely.

In fact, a few years back, an industry working group estimated that 30-50 per cent of Client Name orders were not automated. According to Harry Gundy, FundSERV's senior manager of customer relations, that number is actually 70 per cent.

"Through some innovative tracking software we've developed, we can now quantify the actual number of manual trades versus complete automation," says Gundy. "We found that approximately 9 million out of the 12.6 million client name transactions performed via the FundSERV network were not fully automated from order to contract to confirmation. That's 70 per cent — a much bigger number than was anticipated."

FundSERV can determine these statistics because it always receives an electronic confirmation from a fund company once a trade is executed, even if the trade is initiated manually instead of electronically.

There are many reasons why distributors place manual orders directly with fund companies. Some argue it's a more convenient business process and are reluctant to change; others find that fund companies tend to process an order on receipt of the documentation more quickly than if it went through the normal settlement cycle electronically.

Whatever the argument is, regulators are pushing for greater consistency and due diligence in reconciliation from the industry, and the avoidance of shortcuts that can potentially jeopardize the interests of the investors.

From FundSERV's perspective, the opportunity exists to reduce time, costs and risk to the industry if complete automation is fully realized.

When performing analysis, FundSERV generally applies the cost model of $10 per transaction for a fund company to process a manual transaction after all things are considered — data entry, time, training etc. With nine million manual transactions coming into fund companies, that can amount to quite a substantial cost savings.

Gundy believes that there are three factors that contribute to the Client Name manual transactions being directly sent to fund companies:

• formal signature requirements,
  
  
• behaviour by representatives,
  
  
• a lack of industry standards.

"Even if we can somehow manage to eliminate half of Client Name manual transactions through automation, that's a potential annual cost saving of $45 million to the industry," says Gundy. "With the deferral of ESG v19 until 2009, it gives FundSERV, the ESG committee, and the industry more time to find solutions that may become eventual standards."

FundSERV plans to continue to investigate ways in which to solve the many components of Client Name and to propose solutions beneficial to the industry. But regardless of how long it takes to resolve these issues, Client Name will remain a focus on FundSERV's radar going forward.