Asset managers must prepare for ‘fundamental changes’ to fund distribution in the face of greater regulatory scrutiny than ever, according to a report from Big Four auditor KPMG.
The group’s annual Evolving Investment Management Regulation (EIMR) report found obstacles to passporting, including Brexit and a changing regulatory agenda could reshape the way funds are sold across borders.
It said costs and charges are now at the top of the reform agenda, with MiFID II to bring the next major changes to commission practices in the industry.
Disclosure of portfolio manager remuneration, culture and conduct within firms, and more granular scrutiny of different types of fund are also important to the regulator. In particular, some are requiring funds to be clearer about the investors they wish to target.
Other big questions for the industry remain around the impact of Brexit, the need for better defences against cyberattacks and money laundering to fund terrorism, and pressure from disruptive technologies.
They are also under pressure to show they do not pose a systemic risk to the financial system, says KMPG.
Asset managers are subject to policy recommendations from the Financial Stability Board which will see them focus more on managing liquidity in open-ended funds and, in future, more data will be needed on their use of derivatives, leverage, and how they build portfolios.
Coupled with the changing geopolitical context, firms are facing unprecedented uncertainty, said Julie Patterson, head of regulatory change in asset management at KPMG and author of the report.
“The industry is being challenged about its business model. Its commercial relationships, remuneration practices and management charges are all under scrutiny. Some regulators are more focussed on disclosures, while others are introducing bans and restrictions. Wherever they are based, asset management firms must prepare for fundamental changes to fund distribution and the provision of services across borders.”
The group notes regulation has marched relentlessly forward over the last decade, and there are no signs of it slowing for the asset management sector.
“Reviews of post-financial crisis rules – some of which have yet to bed down fully – and political events are causing nervousness about the direction of travel. We are likely to see continued convergence of regulatory approach on some issues, but greater fragmentation on others.”
KPMG’s key questions for CEO
• Are our culture and conduct good across all levels and all departments?
• Are we challenging our approach to costs and charges, and their disclosure
• Are we prepared for fundamental changes to current cross-border distribution models?
• Are we prepared for increased demands from regulators for data?
• Are we keeping pace with new technologies and operational risks?
• What is our process for identifying, planning for and implementing regulatory change?
