In 20171 we conjectured that the new political context within Europe and elsewhere was likely to have a significant influence on future regulatory policy and rule-making. Our insight has been proven correct. After the financial crisis, regulators around the globe agreed common aims to enhance the integrity of markets and to reduce risks for governments and consumers. There was consensus on the overall regulatory agenda and priorities, leading to a convergence of worldwide regulatory standards. That consensus now appears to be breaking down: there is a parting of the ways.
The US administration believes the raft of post-crisis regulation has encumbered its asset management industry. There is a desire to deregulate. Within Europe, each piece of post-crisis regulation has a review clause, but each of these reviews has a different due-by date. There are some calls to review rules in the round and to consider their rationalisation, as has happened in the US.
The emerging difference in policy approach is especially clear in the ongoing debate about systemic risks inherent in asset management activities and investment funds. Outside the US, the application of a banking policy mind-set to open-ended funds continues to create tension within the global industry. The need for debate on leverage and on liquidity risk management is understood, but the narrow focus on widely_held open_ended funds is questioned. The growth in exchange-traded funds has brought them under the spotlight, but the direction of the debate is difficult to call.
As regards supervisory activities, though, there is a common global theme - increased scrutiny of the asset management sector. Regulators are evolving their supervisory approach, seeking increased resources and harnessing technology. They continue to focus on governance, culture and conduct. Europe, MiFID II2 has thrown up a number of implementation issues and questions about fragmentation of the single market. Elsewhere, a number of emerging themes chime with MiFID II, such as increasing focus on named individuals and clarity of roles, and on risk and compliance functions. Product governance and disclosures remain firmly in regulators' sights, as do fund distributors in general and financial advisers in particular.
The protection of client data has emerged as a major priority, with big questions for asset managers about what data they hold and whether they may need to restrict cross border flows.
Simple and meaningful cost disclosures for funds remain firmly on the regulatory agenda but are elusive. And an increasing number of regulators are also scrutinizing the level of costs and charges. Are investors being put front and centre?
The word competitiveness is beginning to re-enter regulatory language. The European Commission has made it a priority for 2018 to remove barriers to creating a more competitive pan-EU investment landscape, including for personal pensions. However, there are questions about whether its proposals will result in more red tape, not less.
“Brexit” will impact cross border flows between the UK and the rest of the EU, in both directions. Also, the EU regulatory approach to the provision of portfolio management from one jurisdiction to another - or “delegation” - looks set to become more demanding. For a more detailed consideration of the workings of the current passports, see Brexit: Impact on asset managers and investment funds article.
It seems that asset managers will need to navigate a complex distribution landscape for some years to come.
Regulation is also entering new areas of the asset management business. It is evolving to facilitate the development of “fintech” and to be fit-for-purpose in the digital age, for example. Regulators recognize the benefits of new technologies and are seeking to accommodate them, but they are also concerned about existing risks that could be heightened by the new forms of services. Cyber security, robo-advice, crowdfunding and cryptocurrencies are all under consideration.
Sustainable investing was until recently considered a matter only for asset managers and investor preferences. This subject, too, has now entered the regulatory mainstream. Initiatives relating to environmental, social and governance (ESG) factors and socially-responsible investing (SRI) have received regulatory support in several countries. See the previous edition of Regulatory Insights for more detail on the European Commission's proposals.
As institutional investors increasingly ask more questions about ESG and SRI - in part prompted by their own beneficiaries' demands, in part by regulatory suasion - the long-standing debate about whether consideration of ESG factors or SRI fits with fiduciary responsibility is evolving. Also, some regulators are beginning to ask questions about diversity in the work force.
While navigating an increasingly complex regulatory landscape, asset managers will need to keep their eye on the reviews of post-crisis regulation and further regulatory proposals. It seems that the industry will need to operate within and manage uncertainty, for some time to come.
1 Succeeding in an uncertain regulatory landscape
2 Markets In Financial Instruments Directive, revised
KPMG’s Evolving Investment Management Regulation report reviews the top regulatory challenges for the global investment and fund management industry.