Julie Patterson, Head of Investment Management, Regulatory Change at KPMG looks at the impacts of closer regulation at FundForum.
The investment management industry’s relationship with its regulators is intensifying. Regulators around the globe are getting closer to firms and investment funds, seeking to deepen their understanding of how investment management businesses operate, in both the traditional and alternative arenas. This is giving rise to a steady stream of information requests from regulators and policy makers, adding to the operational challenges for firms as they implement the many new post-crisis rules.
Where regulators used to limit themselves to broad, industry-wide issues, we see them becoming more prescriptive, focusing on investment managers’ conduct and behavior. Now, there are signs that many regulators are substantially intensifying their activities, delving ever deeper and involving themselves in the technical operations of investment firms’ activity in order to detect and head off undesirable practice and to improve understanding of potential risks to clients and the capital markets. Firms’ culture is subject to increased challenge and, in a low interest rate environment, costs are under particular scrutiny. But there are also opportunities for the industry to increase assets under management.
The key regulatory themes are:
There remains an intensive focus on culture and conduct issues, which center on acting fairly towards customers in general, and on incentives and remuneration in particular.
Costs and charges have emerged as a standalone global regulatory theme, for both institutional and retail investments. And an increasing number of regulators are now asking whether the level of fund management charges is reasonable. In some cases they are setting caps on charges. Others are encouraging simpler products with reduced costs.
In many of the major fund centers, regulators are taking similar approaches to product governance and disclosure. Regulators are intensifying their investigations and enforcement activity. They have expressed concerns that investment products are mutating and are too complex for retail investors.
Amid the current period of slow global growth, policymakers and regulators are aware of their responsibility for helping to encourage investment. This is leading to new products, new passports and new markets.
Although the investment management industry has been relatively slow to adopt new technology, it is catching up fast. This is positive for the industry but brings challenges, which have not gone unnoticed by regulators. The increasing use of technology and proliferation of data has increased the options and levels of service for clients. Unfortunately, it has also increased the likelihood of their data, or even their assets, being stolen. As a result, cyber security is now a global agenda item for regulators, and is viewed as a key systemic threat, which should be thought of in a much broader context than just another information technology issue.
The wider systemic risk and investment management debate continues. Regulators are now focusing on investment management activities and the way that open-ended investment funds, in particular, are managed. Various international bodies and agencies are contributing to the ongoing policy debate, which seems to remain polarized.
With this broad set of issues facing the industry and increasing in regulatory scope, it is not surprising that investment firms have the distinct sense of someone breathing down their necks. This is uncomfortable and at times frustrating, but firms need to respond constructively to this closer scrutiny.