KPMG's Regulatory Barometer

The new KPMG Regulatory Barometer aims to help firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change.

Financial services firms have to handle frequent regulatory updates from multiple sources and it can be difficult to distil the volume and complexity of regulatory change into a single view. The first edition of the Barometer identifies nine key regulatory themes and assigns them each a regulatory impact score based on attributes such as volume of updates, complexity and time to implementation. The theme scores are aggregated into an additional single metric to represent the overall level of regulatory pressure — over time, we will track these scores to gauge whether the relative pressure is rising, falling or remains constant.

We don’t expect all of the key themes to impact equally across all sectors or even all firms in a sector — certain topics or aspects within themes may be more or less relevant for wealth and asset managers and, at individual firm level, there may be different interplays, trade-offs and tensions depending on business models and exposures.

Below we pull out the key messages for wealth and asset managers to help direct you to the most relevant sections of the Barometer for your business. We hope you find this useful and welcome your feedback.

Regulatory requirements affecting wealth and asset managers are broadening and deepening, while investor demand is increasing. Greenwashing is a key concern across Europe. Regulators are therefore prescribing disclosures and product labels to inform investor decision-making. At the same time, firms are expected to integrate sustainability considerations more fully into their own investment decision-making, financial advice and product governance processes. The volume and scale of new regulatory requirements, as well as clients' expectations, mean this topic should be a critical area of focus for firms. Broader regulatory developments, including the further development of taxonomies and increased corporate reporting, should enhance the flow of relevant information to wealth and asset managers, but will also directly impact some firms.

Wealth and asset managers welcomed the recent implementation of more proportionate capital requirements for MiFID investment firms in both the EU and the UK. With the critical implementation phase now complete, firms should have re-assessed their capital requirements and updated their reporting systems. Firms can expect the new prudential regime to evolve and develop over time.

As regulators seek to enhance the emerging regulatory framework around the trading and issuance of crypto-assets, asset managers' confidence and willingness to include crypto-assets in their portfolios may increase. The debate on whether crypto-assets should be permitted in retail investment funds continues to evolve, but many regulators remain cautious. Wealth and asset managers are also exploring where and how artificial intelligence and machine learning can be embraced, but appropriate use cases will need to be found. Firms can expect supervisors to have regard to IOSCO's most recent guidance.

Given the importance of their role as agents, wealth and asset managers will need to implement regulators' new requirements robustly to ensure critical services are identified, systems are resilient, and client and proprietary information is protected. Firms will need to continue to ensure they are appropriately overseeing all delegated and outsourced activities, such as fund administration, technology solutions and portfolio management services. The precise impact of regulators' proposals to enhance oversight of critical third parties that provide services to asset managers remains to be seen.

The continuing regulatory reviews of margin practices seek to ensure a reduction in the volatility of margin calls that are passed on to asset managers in times of market stress. Wealth and asset managers will also watch keenly regulatory developments around wholesale markets data in the hope of securing better and more cost-efficient access to data and benchmarks, which are key to informing investment and execution strategies.

In both the EU and the UK, regulators are seeking to expand the available range of asset management products for retail investors, while recalibrating their approaches to investor protection. Increasingly, supervisors are focused on whether retail funds and wealth management services deliver fair value to investors, and firms need to look through intermediated arrangements to their end clients. Product governance requirements are also being strengthened, for example via the FCA's Consumer Duty and ESMA's review of firms' product governance arrangements and its guidelines. Importantly for wealth and asset managers, the link between consumer protection and sustainable finance is strengthening. Regulators' concerns regarding greenwashing and their revised product governance requirements should be reflected in firms' product manufacturing and approval processes, and the accuracy of their disclosures.

Liquidity management in open-ended funds (OEFs) remains a key regulatory topic for fund managers to monitor. Analysis of the repercussions of the March 2020 “dash for cash” for OEFs in general, and for money market funds in particular, is concluding at international level, but regulators in the EU and the UK continue to consider their response. As market participants, wealth and asset managers will need to continue to contribute to LIBOR transition, monitor secondary market reforms and review their trading arrangements where needed.

The evolving nature of the EU-UK border and the regulatory requirements governing market access continue to be of critical importance to wealth and asset managers on both sides of the Channel. Firms should be monitoring regulatory developments regarding substance and delegation arrangements, particularly as the EU's AIFMD review nears its conclusion. Regarding fund marketing, progress continues to be made in rolling out the framework of the UK's Overseas Funds Regime, but firms require more certainty and information as to how it will be operated. As noted above, wealth and asset managers and their counterparties will need to track regulatory requirements impacting financial market infrastructure, particularly regarding the EU's time-limited equivalence for UK Central Counterparties.

In addition to cross-sector requirements being introduced by regulators, fund governance and depositary oversight remain specific areas of focus. Fund management companies should be tracking supervisors' expectations, particularly in the case of “host” or third-party management companies.

We don't yet know how all the current regulatory initiatives will play out in detail — but the Regulatory Barometer is here to help you track new developments and stay on top of the evolving agenda. Please share your feedback with us and look out for the next issue in 2023.