Regulatory system holds up under coronavirus pandemic

Regulatory system holds up under coronavirus pandemic

The market turbulence caused by Covid-19 in recent weeks has stress-tested the rules governing investment products

A degree of confidence that they will stand up to the tests gives investors one less thing to worry about.

That they have is not surprising, based on the findings of the latest edition of our Global Investor Experience study, which explores the policy and taxation characteristics that encourage people to invest, and the regulatory environment that governs the products that enable them to do so.

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Overall, the global market has strong measures in place with robust regulation that generally protects mutual fund investors, provides reasonable disclosure and establishes safeguards.

Strength of UK regulation

The UK is particularly strong when compared with the main investment regions globally, given the success of pensions auto-enrolment; the range of incentives for ordinary people to invest through tax-wrapped accounts; high standards of disclosure; and strong management of conflicts of interest all contributing factors in creating a positive experience for investors.

In recent years the UK investment market has upped its regulatory game even further.

Key Points:

  • The UK has particularly strong measures compared with the main investment regions globally
  • Costs are a focal area of most regulators
  • Strong regulation does not mean investors will not lose money

Some of the provisions of Mifid II have played a part in raising the UK’s standards over the past few years, as they have in every European country.

However, the UK stands out in a number of areas where the regulator and industry have gone further, such as with the outcomes of the Financial Conduct Authority’s Asset Management Market Study.

In particular, the requirement that fund company boards comprise at least 25 per cent independent directors (and a minimum of two) counterbalances executive management.

And the specific board responsibilities around assessing the value that each of their funds provide to investors is a market-leading development.

Money matters

Costs are a focal area for most regulators. In the past few weeks alone, the European supervisory authorities have published their annual reviews of costs and performance, and the European Securities and Markets Authority submitted its technical advice to the European Commission about both Mifid cost disclosures and inducements.

The UK assessments of value impose practical actions that strike at the heart of both subjects, empowering them to tell their investors annually how they measured up against the objectives they set themselves and whether the service they provided represented good value for the fees they charged – in essence, compelling fund directors to wear the hat of their investors when conducting their assessment.

Assessments of value are the next step in the progress the Retail Distribution Review made.

The RDR put the UK on a strong footing regarding inducements, and the value assessments are in some ways finishing the job that RDR started.

A sizeable number of long-term fund investors have remained in expensive legacy share classes, and the new requirements to explain why some investors might not have been moved to a lower cost class with substantially similar terms have helped put a renewed focus on them.