There’s little argument in the global investment community that the raft of new regulatory reforms designed to address systemic risk, investor protection and governance are complex, overlapping and may have unintended consequences for the industry. The key to success will be leveraging them for advantage, according a new report from KPMG International.
The report, Evolving Investment Management Regulation - Meeting the Challenge, advises investment managers to begin now to navigate the varied pace and levels of regulation around the globe with new business models that can transform regulatory imperatives into catalysts for competitive opportunity and constructive outcomes.
At issue for the global investment management community is the set of multiple regulatory initiatives in various states of play across three key regions of the world – Europe, Asia Pacific and the Americas – reforms that impact retail distribution, product development, governance, alternative investments, capital markets and pensions. At the heart of the global reform is having the proper framework in place for risk and liquidity management and greater transparency, to ultimately regain investor confidence.
“The global investment management industry faces a period of unprecedented regulatory upheaval,” said Tom Brown, European head of investment management at KPMG in the UK. “There are an overwhelming number of overlapping, and even contradictory regulatory initiatives, at various stages of development globally. Investment managers are left to make sense of the patchwork of regulations which will inevitably lead to regulatory arbitrage with the telltale signs pointing strongly toward Asia, as Europe and the US become less competitive.”
“While the industry recognizes the need for regulation, some of which is undoubtedly beneficial for the industry, the volume of regulation can be viewed as over-the-top as numerous unintended consequences have emerged,” added Mr. Brown. “The challenge is achieving the right environment for restoring investors’ trust while striking the correct balance between investor protection and commercial viability. It is undoubtedly a balancing act that can only be achieved if regulators engage in open and honest dialogue with the industry but there will inevitably be trade-offs.”
“Understanding the totality of regulatory requirements and the strategic implications for a business is the key to put one ahead in the race,” Mr. Brown said. “With the UCITS (Undertakings for Collective Investments in Transferable Securities) IV effective July 1 in Europe for example, we expect and hope that fund managers will take advantage of the opportunities that the optional requirements present under this reform.”
The report examines the many overlapping regulatory initiatives facing the global investment management industry including PRIPS, UCITS IV, FATCA and AIFMD and offers regional perspectives from Europe, the US and Asia Pacific.
Europe
UCITS IV is the major focus for all European fund managers. As the implementation deadline approaches, fund groups are focusing on the mandatory elements rather than the optional changes which fund managers should be taking advantage of in order to generate further efficiencies. Tax is the primary obstacle blocking the path to creating a single European market through UCITS with further work required to ensure cross-border funds are successful and competitive.
Apart from UCITS, attention is focused on raising the bar on governance and the overall risk and control framework for investment managers as they navigate their way through the new regulatory environment.
The Americas
The report shows that almost a year after its enactment, the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act will result in the most comprehensive overhaul of regulation of financial markets since the Great Depression.
“Technology and greater transparency have caused the investment management industry to become more global in terms of strategies and distribution,” said John Schneider, Advisory Partner and head of Investment Management’s regulatory practice at KPMG LLP in the US.
“Although this global business approach has led to opportunity and growth, it remains uncertain whether global regulatory coordination will continue to lag and potentially impede access to certain regions or countries due to the competitive disadvantages created by increased regulation,” Schneider said.
During the financial crisis, the United States and other regulatory regimes continually voiced that regulatory reform must be a sustained and coordinated global effort. The rationale behind this goal, in part, was to ensure that regulation did not create a competitive disadvantage for one region versus another. With limited success in coordinating globally, the US and Europe at least appear to have enacted similar regulatory changes. At this point it remains unclear whether other regions and countries will follow suit.
Asia Pacific
Investment management regulation remains fragmented in Asia, with regulators in the region taking widely different approaches in areas such as funds distribution and product regulation. Some regulators are focused on maintaining the stability of their domestic investment management industries, whereas others have placed more emphasis on attracting overseas investment managers. This results in a mixed outlook for investment management regulation in the region.
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