Earlier this year, we highlighted that the regulatory agenda was growing and advancing, in response to and despite the pandemic. The latest outputs from the European Commission and ESMA underline the sheer scale and pace of regulatory change over the next couple of years.
We will discuss this theme for the financial services industry at large in this month's edition of KPMG Regulatory Horizons. The key points for investment managers, wealth managers, funds and distributors are summarised below. Investment managers will also be impacted by work on capital markets issues, including the wider MiFID II/MiFIR review, market abuse, EMIR, central securities depositaries, trade repositories, data reporting service providers and benchmarks. And some firms will be caught by changing requirements for listed companies and corporate reporting.
The overall message is that regulators and supervisors have set themselves, and therefore regulated firms, an agenda of vast scale and fast pace, to move the industry through recovery to a new reality.
Is our management of information and communications technology (ICT) risks aligned with our business strategy? How well do we manage our ICT systems and tools? How effective is our oversight of third-party ICT providers?
How effective are our business continuity arrangements and risk management processes? Do they ensure continuity and regularity in the performance of investment services and activities?
Have we undertaken a thorough review of all aspects of our liquidity management framework? Can we evidence how we monitor investor behaviour in times of stress and what we do to mitigate potential issues? Are we enhancing our stress testing scenarios?
Are our product governance arrangements fit-for-purpose, aligned to regulatory expectations, robustly and objectively challenged, and delivering good customer outcomes?
What is our process for setting, minimising and monitoring costs and charges? Can we evidence good value for investors?
Are we preparing sufficiently quickly and fully to meet EU regulatory expectations on the incorporation of sustainability factors in our investment process, product governance, disclosures and remuneration policy?
The Commission's capital markets recovery package contains several measures, including changes to MiFID II, of which three are of direct relevance to investment managers:
The amendments are expected to be adopted by end-2020, and the Commission is expected to produce a more comprehensive MiFID II review proposal in Q3 2021, at the earliest. Meanwhile, ESMA continues to issue consultations and review reports.
This wide-ranging package aims to enable and support the potential of digital finance in innovation and competition, while mitigating the risks. It comprises a Digital Finance Strategy, draft regulations on digital operational resilience (DORA) and on markets in crypto-assets (MiCA), consequential amendments to existing legislation and a pilot regime on market infrastructure based on distributed ledger technology (DLT).
The long list of actions under the Digital Finance Strategy include: harmonised rules on customer onboarding in 2021; an interoperable cross-border framework for digital identities; an oversight framework for critical third-party ICT providers, such as cloud service providers; clarity on how financial services rules should apply to artificial intelligence (AI) applications; an open finance framework; and protections for digital finance customers.
A new digital operational resilience regulation (DORA) will establish a comprehensive framework for all regulated financial institutions. It will streamline and upgrade existing financial legislation, create more coherent and consistent incident reporting mechanisms and introduce new requirements where gaps exist, with the aim of:
MiCA will clarify the application of existing rules to crypto-assets and introduce a harmonised legal framework for crypto-assets not covered by existing rules, including authorisation, capital requirements, conflicts of interest, governance, custody of reserve assets, complaints handling etc.
Amendments to existing regulations include:
ESMA's programme (PDF 608 KB) for 2021 is set against a changing landscape, including “movement of the regulatory cycle towards supervision and enforcement” and a continued need to develop EU capital markets, “reinforced by the fact that the largest capital market has left the EU”. Activities relate to:
Much of the programme will directly or indirectly impact investment managers and investment funds:
This article was originally published on kpmg.com by Julie Patterson, Wealth & Asset Management, EMA FS Risk & Regulatory Insight Centre, KPMG in the UK.