For those caught up in the ongoing issues surrounding the implementation of MiFID II and the new product disclosure document (the PRIIP KID), or who are grappling with the new rules for money market funds and data protection requirements, the thought of yet more regulatory change may not make for a happy read. A strategy of “keep our heads down while we implement and look up again only when that's done” is risky, though. This edition of AMRI provides an overview of some of the key things on which to keep a close eye over the next couple of years. As the saying goes, please don't shoot the messenger.
Geo-political risks and developments have always affected the asset management industry. Their influence on economic conditions, stability in the global capital markets, and the attractiveness of existing assets or new investment targets is a perennial factor. But we are now firmly in a period when such risks and developments are directly affecting the direction of travel of regulators, as regards both rules and supervisory priorities. The deregulatory agenda in the US and Brexit increasingly loom large. Moreover, this phase is of unknown length and evolving scope, which adds to regulatory uncertainty for the global industry.
The EU institutions set out their 2018 stalls towards the end of last year. Their agendas are wide-ranging and include:
- Proposals to extend the powers of the European Supervisory Authorities. For ESMA in particular that includes the consideration of the arrangements of any firms that propose to delegate or outsource a material part of their activities or key functions to a third country.
- The removal of barriers to the cross border distribution of funds
- The new pan-European Personal Pension Product (PEPPP)
- Under the systemic risk heading, work on stress testing of funds and the development of a globally-agreed measure or set of measures of leverage
- Examination of the costs and past performance of investment funds, starting with UCITS and moving to alternative investment funds (AIFs)
- More work on “closet tracking” and fund descriptions
- Analysis of the performance of active versus passive funds, with the possibility of further regulatory guidance on benchmark disclosure
- Consideration of the differing national approaches to permissible performance fee structures and scope for supervisory convergence
Other matters not singled out for the regulators' headlines include possible EU rules on loan-originating funds, an assessment of the distribution channels for investment products, the Shareholder Rights Directive, and so on.
And that is just the list of new topics. Every piece of post financial crisis legislation has a review clause. Very many of those reviews are scheduled to take place over the next three years. You can find a summary graphic on page 22 of our last Evolving Investment Management Report. The review of AIFMD has already started. KPMG member firms have been commissioned by the European Commission to undertake a major piece of research into how the AIFMD has been implemented and is working in practice. Has it achieved its objectives? Has it done so effectively, efficiently, relevantly and coherently, and has it provided added-value for the EU?
Your views are welcome. Watch out next week for the online questionnaire via which you can provide your input.
Meanwhile, the many data-related issues and extra-territorial questions thrown up by MIFID II are not simply technical issues. They have left firms unable fully to implement all aspects of the rules by the beginning of January, caused a temporary block to the distribution of some funds and required fund managers to issue figures they believe to be misleading. The way in which these issues are resolved, or not, could have profound effects on the structure of the EU asset management industry and its interaction with clients and counterparts, within the EU and in third countries.
The combination of a heavy implementation programme and a long list of regulatory reviews and new legislative initiatives underlines the need for firms to remain alert throughout 2018 and beyond to the direction of travel for the investment management and funds sector. As we have said before, successful firms will be those which have in place efficient and effective mechanisms for the identification of, planning for and implementation of regulatory change.
Key questions for firms:
- What is our process for identifying, planning for and implementing regulatory change?
- How consistent are we at spotting indirect impacts on our business arising from regulatory proposals targeted at the capital markets, infrastructure, clients or distribution channels?
- How effective are we at analysing that intelligence and factoring it into our business strategy and operational programmes?'
- How efficient are we in implementing regulatory change? Could we do better at adopting a holistic and connected approach, rather than a piecemeal and “just in time” approach?
- What is our strategy regarding the increased supervisory focus on our industry? Do we want to be ahead of the game or caught behind?