Navigating uncertainty

Major changes to regulatory structures and approaches are underway amid an uncertain environment. In a marked step change, IOSCO has published its first dedicated sustainable finance work plan reflecting increased focus on corporate reporting and assurance and in new areas such as carbon markets. 

Regulators are also changing their overall approach to investor protection and adjusting their practices to keep pace with technological advancements and developments. 

Firms will wneed to gear up for changes in the structure and approach of regulators, anticipating the implications and impact of increased use of data and technology.

In 2021, we reported that sustainable finance was the issue most discussed by regulators, industry and investors. Since the 2021 Glasgow COP26 summit, momentum has further increased as evidenced by the number of official statements from around the world on climate change.

Policymakers are pushing ahead with the development of taxonomies and proposals for asset managers to integrate environmental, social and governance (ESG) factors into their investment and risk management processes. Regulators are concerned about “greenwashing” and are prescribing disclosures and product labels to inform investor decisionmaking. Rules on corporate reporting by public companies and financial services firms, and proposals to regulate ESG ratings and data providers, are expanding.

These will enhance information flow to asset managers, some of whom may be caught by the requirements. 

Taxonomies are being developed in Singapore as well. The Green Finance Industry Taskforce of the Monetary Authority of Singapore (MAS) has published detailed thresholds and criteria for economic activities in the energy, transport and real estate sectors. 

Liquidity management in open-ended funds (OEFs) remains high on the regulatory agenda. Analysis of the repercussions of the March 2020 “dash for cash” for OEFs, and money market funds (MMFs) in particular, is concluding at an international level. However, national regulators continue to deliberate on their response. Russia’s invasion of Ukraine has introduced new challenges in capital markets, which has caused regulators to adjust their priorities.

Policymakers are concerned more broadly about stability and transparency in the capital markets, fair treatment of investors and market conduct. Asset managers will be impacted by reforms to trading and clearing arrangements. They will need to ensure appropriate dealing arrangements are in place for their clients.

The MAS set out its reporting requirements in cases of significant redemptions, gating or suspension of funds. Fund managers now need to notify the MAS if aggregate net redemptions exceed 10% of funds under management (FUM) in a calendar week or exceed 5% of FUM in any given dealing day. The MAS also plans to introduce a standardised fund gating and suspension report to ensure consistency of reporting. 

Around the world, retail participation in investment products is increasing and distribution models are adapting to technological changes. The International Organization of Securities Commission (IOSCO) has reiterated that “protecting retail consumers from misconduct and scams and fraud is a prerequisite to maintain trust and confidence in markets”.

Regulators are responding accordingly and raising the bar of expected standards. Asset managers are increasingly being expected to prove how they are delivering products to their target market and delivering good outcomes for clients. New requirements are being introduced, and long-standing issues, such as value for money, are being reviewed with an even closer focus.

Regulators expect asset managers to be well governed and operationally resilient. They are exploring new accountability frameworks to allocate responsibilities more precisely to senior managers. Diversity and inclusion are increasingly important topics for some regulators, who are becoming frustrated with a lack of industry progress. And in several jurisdictions, supervisors are focusing on firms’ arrangements to comply with sanctions and to prevent financial crime.

Closely linked to developments around investor choice, the debate continues on what represents appropriate “substance” in particular legal entities and how delegated portfolio managers are appropriately overseen. Firms need to navigate a difficult and uncertain path between meeting employee demand in remote or hybrid working and ensuring appropriate on-site resources.

Regulators continue to create new fund vehicles to offer more flexibility to fund management companies and investors, and to compete for market share. Authorities are also aiming to bolster private investment in illiquid assets to assist economic recovery. New vehicles and strategies are increasingly being made available to sophisticated and retail investors, enabling them to diversify their portfolios into wider asset classes. Regulators are concurrently keen to mitigate potential conduct risks and prevent harm.

Amid volatile markets, some regulators have been clarifying their expectations of fund managers regarding the inclusion of crypto assets in portfolios. Many regulators remain cautious.