Investments 

Industry grapples with regulatory changes

This article is part of
Winter Investment Monitor - December 2014

Since the wake of the financial crisis in 2008, our industry – driven by the G20 mandate – has been working through a deluge of initiatives and legislative amendments aimed at strengthening a firm’s operations and ensuring that any systemic risks posed by the industry are managed appropriately.

So it was heartening that some of this work was acknowledged by the G20 in its communiqué in September this year and further detailed in the progress report issued by the Financial Stability Board (FSB) at the Brisbane Summit later in November.

However, what is clear is that this process, while thoroughly under way, is not yet finished.

The FSB is highlighting the need to adjust its focus towards “new and constantly evolving risks” and “building trust and co-operation” in the next phase of its activities.

It is the latter phrase that has been the focus for a number of us within the investment industry. There is a growing consciousness of the role the industry plays in an individual’s future plans, and to ensure that the manner in which we manage our business and the risks posed by our operations always keep in mind the underlying trust placed in us by the end consumer.

The importance of trust and increased transparency is also practically embedded in a number of the key regulatory changes proposed by both the FCA and the European regulators, in particular through changes brought in by Markets in Financial Instruments Directive (Mifid) II relating to investor protection.

As firms grapple with the intricacies of the impact of Mifid II rule changes and engage in continual dialogue on issues such as the right level of cost disclosure, it is clear that regulators are constantly reminding those involved in the manufacture or distribution of investment products that each party in the distribution chain must always act in the best interests of the end consumer.

While this is clearly a philosophy that many firms have always had at the heart of their businesses, the regulatory message is more nuanced and is likely to have an impact on the established distribution chains for such products.

Across Europe, it will no longer be sufficient for a manufacturer to develop a product without always having an eye on what an investor actually needs from a product and it will no longer be enough for a distributor to market the product without obtaining regular training.

Some of us in the UK may think this is something we already do. These are concepts that are well embedded in our consciousness due to the implementation of the ‘treating customers fairly’ regime and the guide on the responsibilities of manufacturers and distributors. But for some in Europe, to have these concepts set out explicitly within the regulatory framework will be novel.

Aside from the wider market changes brought about by Mifid II, firms will also need to keep a watch on the developments set out in the follow-up to the Ucits VI consultation paper.

There is clear recognition among regulators and firms alike that the Ucits brand is important and therefore any increase or contraction in the types of eligible assets will need to be well thought through and justified.