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A bumpy road ahead

A bumpy road ahead

The political context in Europe and the US will have a significant influence on regulatory policy and rule-making in 2017.

Julie Patterson

Wealth & Asset Management, EMA FS Risk & Regulatory Insight Centre

KPMG in the UK


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We start a new year with a number of signposts on the regulatory road ahead but considerable uncertainty about the surface of the road or the overall direction of travel. The likely impacts and consequences of key political events in 2016 underline that financial services regulation is not the sole prerogative of regulators. The new political context within Europe and in the US will have a significant influence on regulatory policy and rule-making in 2017 and beyond, as well as on the conditions in the global capital markets.

At the global level, the debate on investment management and systemic risk continues. Also, IOSCO maintains a steady work programme for the sector. It is not yet clear, however, what impact the new geo political environment will have on the trend, post-financial crisis, towards the convergence of worldwide regulatory standards. Will the trend slow, or will it even be reversed? The answer is most likely to be seen first in debates about banking and capital markets regulation, but it will soon begin to influence regulatory policy for investment management and funds.

Within Europe, 2017 will be a major year for investment managers in implementing many new rules, while navigating volatile and uncertain market conditions. But it is also very important that firms keep their eye on the growing web of further regulatory proposals. Many post-crisis rules are coming up for review (the AIFMD, for example) and there is a raft of new regulation on the horizon. Some of that regulation is already taking clear shape, such as the Shareholder Rights Directive and the recently agreed second directive on occupational pension funds (IORPD II). More is yet to reach the detailed design stage – the Commission is considering the need at European level for rules on loan-originating funds, for example.

In response to feedback to its Call for Evidence on post-crisis financial services regulation, the European Commission has set out a number of actions. Many of these will impact investment managers or investment funds, either directly or indirectly.

European Commission’s response to its Call for Evidence – key elements for investment managers:

  • Assessment of the proportionality of the remuneration rules in AIFMD and UCITS V, with a view to aligning the regimes.
  • As an initial follow up to the consultation on cross border distribution of funds, the Commission intends to explore the feasibility of simplifying the range of authorisations needed to provide these services across the single market.
  • ESMA has been asked to analyse the evidence submitted on UCITS restrictions as regards the use of OTC derivatives.
  • A report on EMIR (the Regulation on OTC derivatives).
  • A review of liquidity in the corporate bond markets.
  • A legislative proposal on recovery and resolution for CCPs.
  • Review of the Capital Requirements Directive (CRD & CRR).
  • In the context of the review of the EU macro-prudential framework, consideration of the merits of expanding this framework beyond banking.
  • A comprehensive review of reporting requirements in the financial sector, including the launch of a financial data standardisation project.
  • Action Plan on retail financial services to be published in early 2017.
  • A comprehensive assessment of European markets for retail investment products to look at distribution channels and advice.
  • A mapping exercise of national transposition measures to identify gold-plating provisions.
  • Consideration of the merits of improving protections under the Investor Compensation Scheme Directive.
  • An internal FinTech task force has been set up to monitor technological developments affecting the financial sector and to develop appropriate responses.

Meanwhile, the action plan under the Capital Markets Union initiative continues to take shape, although the overall timetable remains unclear. The individual work streams under the CMU banner may not seem individually to be significant (such as amendments to the Prospectus Directive to ease access to listing by SMEs), but collectively they comprise a welcome package for the industry at large and indicate the Commission’s commitment to reducing unnecessary regulatory burdens.

Retail markets will remain a key regulatory and supervisory focus. The heated debates about fund costs and charges in the implementation of MiFID II and the PRIIP KID received another boost in the form of an interim report issued by the Competition Division of the UK Financial Conduct Authority. It made a series of strong remarks based round the core finding that there is weak competition in the industry even though there are many players in it. Given that both the Commission and ESMA are also looking at the broad area of costs and charges, and that the Central Bank of Ireland is expected to issue conclusions of its investigation into charges in Irish funds, it is clear that this subject will be prominent in 2017 regulatory debates.

The combination of a heavy regulatory agenda and an uncertain path underlines the need for firms to remain alert throughout 2017 to the direction of travel for the investment management and funds sector while they implement MiFID II, the PRIIP KID and other new rules. Successful firms will be those which have in place efficient and effective mechanisms for the identification of, planning for and implementation of regulatory change.

Critical questions for firms to address:

  1. What is our process for identifying, planning for and implementing regulatory change?
  2. How consistent are we at spotting indirect impacts on our business arising from regulatory proposals targeted at the capital markets, infrastructure, clients or distribution channels?
  3. How effective are we at analysing that intelligence and factoring it into our business strategy and operational programmes?
  4. How efficient are we in implementing regulatory change? Could we do better at adopting a holistic and connected approach, rather than a piecemeal and “just in time” approach?
  5. What is our strategy regarding the increased supervisory focus on our industry? Do we want to be ahead of the game or caught behind?

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