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Succeeding in an uncertain regulatory landscape

Succeeding in an uncertain regulatory landscape

Around the globe, the investment and fund management industry is implementing new requirements and responding to supervisory requests and reviews.

Julie Patterson

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

KPMG in the UK


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And there are more changes on the horizon. Within Europe, the reviews of post-crisis regulation will generate a considerable amount of discussion and potential rule changes over the next three years, and other legislative initiatives are underway under the “Capital Markets union” (CMU) banner.

The likely impacts and consequences of key political events in 2016 and 2017 underline that financial services regulation is not the sole prerogative of regulators. Geo-political risks are not new for the industry. At present, though, there is heightened awareness of the direct impact that these risks are having on regulation, both prospective rules and the supervisory approach to existing requirements. The potential for unexpected policy U-turns is making firms cautious about future business plans.

The drivers for regulatory change differ between jurisdictions, but there are common themes. The industry is increasingly being challenged about its business model, commercial relationships, customer propositions and its role in global capital markets. Its role in and impact on the global capital markets is being scrutinized, across the piece but, in particular, in those areas where the industry is growing, such as exchange-traded funds. At the same time, policy makers seek the industry’s support in providing retirement savings and supporting economic growth. KPMG’s 2017 Evolving Investment Management Regulation report (PDF 2.47 MB) discusses the key regulatory themes:

  • Policy conclusions of the global debate about investment and fund management activities and systemic importance: initial policy recommendations are focused on liquidity management in open-ended funds but will be widened. Some national regulators are already taking action, and more data on derivatives use, leverage, liquidity and portfolio composition are being called for.
  • Continued scrutiny of firms’ culture and conduct, including stewardship, and corporate and fund governance: there is little standardization about how corporate governance is defined and implemented, but there are a number of emerging themes, such as increasing focus on named individuals and clarity of roles, and on risk and compliance functions. Prudential requirements, outsourcing, best execution and trade allocation, and payments for investment research are all exercising regulators and industry.
  • An intensifying spotlight on costs and charges, both their disclosure and pricing levels: the implementation of MiFID II will bring about fundamental changes to industry commission practices, and several other countries, too, have introduced new rules in this area. Moreover, the number of regulators scrutinizing the level of charges and their disclosure is increasing.
  • A shifting environment for product regulation: around the globe, some funds are being brought into regulation for the first time while others are being liberalized and allowed to invest in a wider range of assets or target a wider range of investors. Within Europe, the industry is focused on implementing the new MiFID II target market rules, while more national regulators are permitting unauthorized funds (the AIFMD requires only that that the manager be authorized).
  • The cross-border distribution of funds and investment management services is in flux: under CMU, the European Commission is intent on tackling remaining barriers to the cross-border distribution of UCITS. On the other hand, the Asian fund passports are moving slowly, the AIFMD non-EU passports have not been introduced and the ramifications of “Brexit” loom large.
  • Regulators welcome FinTech innovations, but express concerns: technology can have positive impacts. It can bring efficiencies in transactions in fund units, for example, and help firms and regulators meet the increasing demands for data, including fiscal authorities’ demands for information on fund investors. However, innovation is causing regulators to question whether existing rules and supervisory approaches are fit for purpose. In the light of recent attacks, they are especially concerned about cyber-security, money laundering and terrorist financing risks.

The combination of a heavy regulatory agenda and an uncertain path underlines the need for firms to remain alert throughout 2017 to intense regulatory and media scrutiny of the sector, while implementing new rules. Successful firms will challenge and adapt their financial and operational models. They will have in place efficient and effective mechanisms for the identification of, planning for and implementation of regulatory change.

Questions for CEOs
• Is our culture and conduct good across all levels and all departments?
• Are we challenging our approach to costs and charges, and their disclosure?
• Are we prepared for fundamental changes to current cross-border distribution models?
• Are we prepared for increased demands from regulators for data?
• Are we keeping pace with new technologies and operational risks?
• What is our process for identifying, planning for and implementing regulatory change?


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