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Responding constructively to closer regulatory scrutiny

Responding to closer regulatory scrutiny

Investment managers are facing volatile capital markets, in which they must seek to achieve the best possible returns for their clients.

Julie Patterson

Director, Asset Management

KPMG in the UK


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Investment managers are facing volatile capital markets, in which they must seek to achieve the best possible returns for their clients. The UK electorate’s decision to leave the EU, which has resulted in considerable uncertainty within Europe and is coupled with an uncertain political and social environment in other parts of the world, is causing nervousness among investors and adding to volatility. The slowing of economic growth in emerging markets and continuing low interest rates in developed economies are furthering that unease. And as fiscal authorities continue to home in on aggressive tax avoidance practices, the investment industry’s role is being questioned.

At the same time, the industry is coming under ever closer regulatory scrutiny, as revealed in our latest global report, Evolving Investment Management Regulation 2016. In addition to the continuing policy debate about systemic risk, it is being challenged to justify and reduce its charges and to control other costs paid for by its clients. Long-standing arrangements between firms and intermediaries are being made transparent, and new regulation is requiring fundamental changes to firms’ business models.

National and regional regulatory priorities, encouraged by the efforts of IOSCO¹, now look very similar in many parts of the world. The impact of greater information sharing and the widening and deepening of international policy debates is clearly seen. As well as being focused on similar issues, regulators are adopting similarly active approaches to supervision. Regulators around the globe are getting closer to firms and investment funds, seeking to deepen their understanding of how investment management businesses operate and the potential risks to clients and the capital markets. This is giving rise to a steady stream of information requests from regulators and policy makers, adding to the operational challenges for firms as they implement the many new post-crisis rules.

Investment firms have the distinct sense of someone breathing down their necks. This is uncomfortable and at times frustrating, but firms need to respond constructively to this closer scrutiny. They need to engage in open and positive dialogue with regulators, be open to challenge, rectify misconceptions and highlight unintended consequences. Successful firms will be proactive and keep on the front foot. They will demonstrably act in their clients’ best interests in all matters.

Through positive regulatory dialogue and actions, firms will secure a larger slice of the growing investment pie. The role of the industry — bringing those with money to invest together with enterprises in need of funding — is in increasing demand, as government and bank funding remains constrained. New capital markets are opening and regulators are providing for new types of investment products. Governments are rising to the challenge of encouraging their citizens to provide for their own retirement and to save in order to spend. New tax-incentivised savings accounts are being introduced or existing ones extended. Investment funds will likely be the underlying investment components for much of this new business, increasing monies managed by the industry and intensifying the search for investible assets.

Critical questions for firms to address

  1. Are we open to challenge about our business model and activities: how are we delivering to our clients and operating in the market?
  2. Are we engaged in constructive dialogue with the regulators?
  3. Is the culture of the firm focused throughout on the customer?
  4. Are we controlling the costs and charges borne by our customers?
  5. Are we on top of what is coming down the regulatory pipeline?
  6. Are we spotting the new opportunities arising from regulatory change?
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