This report is our look at regulation in the investment management industry. Our focus in the Evolving Investment Management regulation, Clarity leads to opportunity report is on the key areas where regulation combined with other pressures is forcing asset managers to make significant changes. The key areas are structural market change, data and reporting, risk governance, conduct, culture and remuneration significant changes. The key areas are structural market change, data and reporting, risk governance, conduct, culture and remuneration.
This is the age of asset management. Why do we say this? Well, many regulatory proposals that have been working their way through the system for years have finally came to fruition in the last year. Think PRIIPs, UCITS V, the Volcker rule and FATCA. Others still are on the cusp of being finalized. Where proposed new rules once seemed perpetually stuck in the consultation phase, many are now decidedly in the implementation phase. In this year’s report, we focus on key areas where regulation, combined with other pressures, is forcing asset managers to make significant changes. These are structural market change; data and reporting; risk governance; and conduct culture and remuneration.
Actual change as a result of regulation is now upon us and is altering the way the investment industry and its participants operate. Regulation is also placing pressure on the viability of pension plans, particularly smaller schemes with reduced access to advice and resources. The new requirements for risk controls, reporting and governance is leading a number of smaller schemes (and some larger ones too) to consolidate.
The whole of the shadow banking sector – principally investment firms – is being asked to improve its transparency. The European Commission, for instance, aims to improve financial stability by increasing the transparency of shadow-banking transactions, mainly focusing on securities lending and repos. Meanwhile, in the US pension fund sector, two material accounting regulatory changes – GASB 67 and GASB 68 – have been made that, from early 2014, require substantial cleansing and analyzing of data on the part of pension plans. The challenge for the investment industry is to be able to report meaningfully both internally and externally. That is, to be able to report to investors and regulators while also being able to adapt the data in-house to create a competitive advantage.
As regulatory complexity proliferates, so the distance lengthens between those developing and using risk systems and those making strategic business and investment decisions. The essence of effective risk governance is about connecting the dots within the organization so that functions responsible for data and analysis effectively communicate to management. In turn, management must be prepared to ask sufficient questions of their risk and compliance executives that they fully understand the implications of the analysis.
Just as they seek to influence key processes within investment firms, regulators are also seeking to improve and standardize conduct and culture. They are aware that regulation cannot cover every activity in every part of the investment industry. So regulation is – to some extent – aimed at changing mindsets and the ethos of the industry.
The signs are that regulation is slowly becoming more harmonized and this may ease the pressure on firms. A striking feature of the current regulatory landscape is the apparent desire of different jurisdictions and regulators to start working in tandem. Groups of regulators are starting, for instance, to oversee and harmonize the huge changes taking place in retail distribution. That regulators are talking and starting to act in concert can only by positive for the investment industry.
Americas – In the aftermath of the financial crisis, regulators through the Americas have attempted to balance the economic benefits of private investment with the need to contain systemic risk inherent in the market’s ‘animal spirits’. There is also rising concern about income inequality and whether the tax system should be more progressive. FATCA represents a step in this direction.
Asia Pacific – Funds passporting has been a key area of focus for many regulators, governments and key industry players in this region. In 2013, three separate fund passport initiatives were announced. We assess the implications of each initiative for the asset management industry in the region in turn.
Europe - With the transition period to the AIFMD regime ending on 22 July 2014, the task of implementing the new regulations and working on license applications has been considerable for both regulators and the asset management industry across the European Union over the past year. New laws and regulations transposing the directive have been enacted and regulators are busy processing a flurry of license applications, with some issuing very welcome and useful guidance on entities falling under scope of the AIFMD and the application of the remuneration provisions. The first regulatory reporting dates for AIFMs are looming and asset managers are spending a lot of time to ensure the regulators receive the high data quality expected.
Middle East - Although still in its infancy by global standards, the Middle East is increasingly an important region for asset management firms around the world and offers a compelling market opportunity. Strong economic growth and financial liquidity resulting from buoyant oil and gas prices should ensure that the asset management industry in the region is presented with many exciting opportunities.