The European investment management industry continues to face a challenging regulatory environment, with a series of long-running initiatives and new proposals on the horizon, some giving rise to new opportunities. To be successful in such interesting times, firms need to navigate a challenging course.
Firms need to address new and sometimes conflicting conduct regulation, which is causing significant upward pressure on costs. Operationally, investment managers are impacted not only by new rules directed at them but also by new requirements imposed on their clients and market counterparties. Firms are increasingly finding that essential systems developments to comply with new regulation are drowning out work on business initiatives.
At the same time, some of the new rules give rise to strategic issues. For example, the all-embracing MiFID II is prompting reviews of distribution strategies and requiring front offices to consider how they are going to achieve best execution for clients in a changing wholesale market place.
Investment managers have largely been unaffected by the post-crisis changes to prudential regulation imposed on banks and insurers. However, this seems set to change, with calls for greater stress testing by investment managers. The global debate on systemic risk rumbles on and is no longer targeted only at the largest firms or funds. Global policy makers are continuing their deep dives into liquidity risk in bond funds and the use of leverage.
Increasingly, regulators are asking whether the level of fund management charges is reasonable and matches the profile of the product. ESMA’s recent report on potential closet index tracking funds is the latest example. The industry needs to respond to these questions and firms need to demonstrate that they are acting unambiguously in the interests of investors. Ignoring such questions could quickly create a ‘trust agenda’ issue.