Managing divergence

There are many external challenges facing the asset management industry, including demands for sustainable finance, volatility in capital markets, technological innovation, and cyber threats. Firms must also navigate further rafts of new rules, increasing regulatory divergence and greater supervisory scrutiny. Firms need to adopt resilient and dynamic business models if they are to be successful.

Regulators around the world are focusing on common themes in a fast-changing world. However, a lack of global standards and national nuances mean that they are implementing detailed rules and guidance in different ways. Increasing regulatory divergence is causing complexity and challenges for cross-border asset managers in terms of how they manage and market their products.

In Saudi Arabia, ahead of regulatory activity in this area, the approach of the Public Investment Fund (PIF) is influencing the way in which asset managers are addressing sustainability risks. Around the world, asset managers are taking a wide range of approaches to ESG governance in practice. Typically, firms have created dedicated internal ESG forums – split between corporate sustainability and sustainable investing – and updated terms of reference for some existing forums.

In Saudi Arabia, the Capital Markets Authority (CMA) issued instructions in 2022 around direct financing investment funds, which set out specific conditions for establishing such funds, investment limitations and additional duties, particularly around credit sanctioning and monitoring. Further, CMA held a forum in December 2022 to discuss digital transformation in the industry and its role in bringing increased foreign investment to the domestic capital markets. The CMA’s FinTech lab is in its sixth year, and there is a push to encourage greater innovation in the fund management industry.

Saudi Arabia continues to open its capital markets to foreign investors. In March 2023, CMA issued rules for foreign investment in securities listed in the local main market, debt instruments and investment funds. The rules define eligible foreign investors, required qualifications, investment restrictions, and other terms and conditions. The rules intend to facilitate foreign investment into the country, particularly to attract large global asset managers. It is also notable that Vision 2023 and its Financial Sector Development Program (FSDP) is creating a conducive environment for start-ups and venture capital funds, leading to an uptick in the use of convertible instruments.