Around the world, retail participation in investment products is increasing, and distribution models are adapting to technological changes. IOSCO has reiterated that "protecting retail consumers from misconduct and scams and fraud is a pre-requisite 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 evidence how they are delivering products to their target market and delivering good outcomes for clients. New requirements are being introduced, and long-standing issues are being reviewed with an even closer focus, such as "value for money".

Key questions for firms

  • Are we tracking new regulations regarding investor protection and putting in place robust processes, systems, and controls to meet the new requirements?

  • Do we have appropriate and sufficient management information to monitor and mitigate conduct risk, and evidence good outcomes?

  • Do our product governance and distribution frameworks meet regulators' expectations, particularly in the context of online marketing?

  • Have we considered whether our products offer investors value for money at a granular level — for example, by fund share class?

  • Are we utilizing technology to reduce reliance on manual processes to ensure effective oversight of distribution, portfolio management and fund administration functions?

In more detail

Promoting good investor outcomes

While regulators widen choice for investors (see Chapter 6 here), they are also taking steps to drive up standards and ensure investors are appropriately protected in changing times.

The Central Bank of Ireland's (CBI's) 2022 consumer protection outlook identified five cross-sector risks that it sees as the primary drivers of risks for consumers: poor business practices and weak business processes, ineffective disclosures to consumers, the changing operational landscape, technology-driven risks and the impact of shifting business models. It also set out key conduct risks in securities markets and the actions firms should take to identify, mitigate and manage those risks (including governance, conflicts of interest and misconduct risks). In the Netherlands, the regulator has made retail investor protection a priority in its 2022 agenda. It aims to provide a reasonable level of protection for retail investors against taking excessive risks.

In South Africa, the Conduct of Financial Institutions (COFI) Bill will restructure the regulatory framework (see Chapter 1 in our report here) and lead to the creation of a new customer-focused regulatory approach. Conduct themes will be identified, underpinned by cross-cutting requirements, and supplemented by sector-specific requirements if needed. For asset managers, additional sector-specific conduct standards will be developed for collective investment schemes (enhancing their regulation), alternative funds (delivering a fit-for-purpose framework) and retirement funds.

The UK FCA1 has adopted its new "Consumer Duty" package, which firms must implement by July 2023. Building on its existing approach to consumer protection, the new rules aim to drive cultural change across all sectors and require firms to put retail customers at the center of everything they do. A new principle states that a firm "must act to deliver good outcomes for retail customers". There are also three new cross-cutting rules (acting in good faith, avoiding foreseeable harm, and enabling and supporting consumers to achieve their financial objectives) and four outcomes for firms to deliver (on products and services, price and value, consumer understanding and consumer support).

The CBI plans to gather consumer and industry feedback this year on its consumer protection code, 15 years after it was originally introduced. The regulator will consider how the Irish code has evolved over time and take account of developments in the wider EU consumer protection framework. The CBI will also review whether its approach to consumer protection needs to be adapted in the context of rapid technological change and innovation. In Canada, the securities regulators plan to establish a new "Investor Advisory Panel" to enhance retail investor protection. The panel will advise the regulators on how to ensure retail investors' concerns are at the center of any new rules to improve investor protection.

ESMA2 made recommendations to enable EU investors to get the information they need and to protect them from aggressive marketing techniques. It proposed making disclosure documents machine-readable to create searchable public databases, creating a standard format for the presentation of costs and charges, and allowing regulators to impose risk warnings and address aggressive or misleading marketing communications. Separately the European Commission consulted on enhancing the existing suitability and appropriateness assessment framework as part of its retail investment strategy. Following stakeholder input that called for changes to simplify, improve, automate and standardize the way investors' profiles are assessed, the Commission proposed an enhanced client assessment regime based on the client's investment objectives, risk tolerance and personal constraints. As noted in Chapter 2, ESMA also consulted on updating aspects of the suitability guidelines from a sustainability perspective.

Work continues at national level. In Spain, the regulator produced a technical guide for assessing appropriateness, to increase the transparency of the regulator's role and help firms understand its expectations. The guide emphasized the need to gather information regarding clients' financial literacy and to consider wider factors such as education and prior investment experience. The CBI identified areas for improvement by Irish firms, including the need for a more client-focused approach using tailored suitability assessments, an enhanced assessment of clients, more detailed and personalized suitability reports, and closer oversight where clients wish to proceed with unsuitable transactions based on their own initiative.

Regulators are also considering how to educate investors better and improve market access. In India, SEBI3 has launched a new mobile app in Hindi and English to improve investors' awareness of securities market concepts. SEBI also introduced a new framework for "accredited investors" in the Indian securities market. Third-party entities would issue accreditation certificates to investors in line with procedures that the third parties will publish on their websites. Australia has launched a comprehensive review of financial advice arrangements to consider how regulatory settings support Australians' access to affordable advice. ASIC4 is monitoring marketing by asset managers and distributors of managed funds to identify the use of misleading performance and risk in promotional material. And in Malaysia, there are calls to promote greater financial inclusion.

Delivering value for money

Regulators are renewing their focus on costs, charges and value for money for investors.

Having previously introduced rules that require fund managers to perform an "assessment of value" on each share class and publish an annual report, the UK FCA evaluated how firms had implemented the requirements and found that most fund managers were not meeting its expectations. Shortcomings included assumptions that could not be justified (for example, assuming existing fund charges already reflected economies of scale), not complying with the FCA's seven minimum considerations in the manner expected, and performing the assessment at the level of the fund rather than share class. When considering performance, some fund managers did not consider specifics regarding a fund's investment policy, investment strategy and fees. The FCA expects fund managers to address shortcomings and will perform a follow-up review to assess how firms have reacted to its feedback.

In the EU, ESMA completed its Common Supervisory Assessment on costs and charges, and found room for improvement. ESMA stressed the importance of fund managers having a structured and formalized pricing process and noted divergent market practices around what the industry considers “undue” costs. Further shortcomings were identified around the identification of conflicts of interest, over-reliance on delegate managers, use of efficient portfolio management techniques, and securities lending fixed-fee split arrangements. Some national regulators plan to perform follow-up work, for example in Malta. ESMA also found that ESG funds can provide better returns for investors, and that UCITS5 with an ESG strategy outperformed their non-ESG peers and were cheaper overall. ESMA concluded that retail investors continue to pay higher fees than professional investors.

Other regulators are proposing new rules in this area. In Canada, the securities regulators have proposed enhanced total cost reporting for investment funds and segregated mandates. The changes aim to improve the transparency of fees and charges. In addition, from June 2022, they introduced a ban on the payment of trail commissions by fund managers to dealers, under certain circumstances. In Mainland China, the “buy-side mode” pilot program continues to be rolled out for fund investment advisory services, which clearly distinguishes investment advisory services from fund distribution services (“sell-side mode”) and is causing a shift in the way in which fees are charged.

Performance fees are also an area of focus. In Luxembourg, the regulator sent a questionnaire to fund managers to collect standardized key information regarding performance fees with a view to ensuring compliance with ESMA’s 2020 guidelines.

Disclosure of charges is being reviewed in the UK and the EU. The European Supervisory Authorities (ESAs) identified a range of poor practices in how EU manufacturers of packaged retail investment and insurance products (PRIIPs) — which include investment funds — describe their products. A lack of clarity in disclosures led to the ESAs setting expectations to ensure information is better presented to retail investors. They provided advice to the European Commission on changes to the rules to make PRIIPs disclosures more consumer-friendly. UCITS do not need to produce the PRIIP document until January 2023, but other types of retail funds are already in scope. In the UK, UCITS-equivalents have until December 2026. For other types of retail funds, the FCA has made rule changes that will take effect from 2023, including the removal of future performance scenarios.

In November 2021, the Australian Prudential Regulation Authority (APRA) urged superannuation members to engage more actively with their scheme provider to maximize their retirement savings. A number of "MySuper" products failed APRA's first annual performance assessment. APRA is working with the trustees of those products to improve performance or merge with other funds.

Product governance: the product lifestyle

The product lifecycle

Reviewing product governance arrangements

Regulators are paying specific attention to product governance.

In Australia, new product design and distribution obligations (DDO) came into force in October 2021. Asset managers need to meet investors’ needs and distribute products in a more targeted manner. Manufacturers must notify the regulator where the product is distributed in a manner inconsistent with the product’s target market. In response, asset managers are enhancing the way they document their target market determination to mitigate confusion in the market.

As trailed in last year’s report, new requirements came into force as part of Canada’s Client Focused Reforms (CFR). The conflicts of interest and referral requirements became effective in June 2021, ahead of other changes (including on relationship disclosure information) in December 2021. Following implementation, firms continue to consider how best to comply with their product maintenance and approval processes, to meet supervisory expectations.

ESMA has reviewed the EU product governance guidelines in the context of sustainable finance and its upcoming amendments to the MiFID II6 product governance regime (see Chapter 2). It has also concluded its 2021 “common supervisory action” held with EU regulators. The findings indicate that firms approach identifying the target market as a “formalistic exercise”, which does not always result in a compatible distribution strategy, and the information exchange between manufacturers and distributors needs to be improved.

Saving for retirement

Various changes are underway to change how people save for retirement and to ensure they are adequately protected, which could impact the operations of asset managers and investment funds but also provide opportunities.

In South Africa, following the onset of the Covid-19 pandemic, regulators are focusing on savers who may need to access some of their savings early due to financial hardship. The Treasury has proposed (PDF 1.04 MB) the creation of a “two-pot” system for retirement contributions to create greater flexibility, and avoid existing circumstances where employees may feel the need to resign from their job in order to trigger access to part of their pension. Under the proposals, one account could be accessed at any time and the other account would need to be preserved until retirement and would not be accessible. Separately, there are proposals to introduce an “auto” or mandatory system of retirement saving for employees and self-employed persons. Such a program would address issues for workers who fall outside existing occupational pension schemes.

In the Netherlands, a new pensions system is to be introduced, based on defined contributions instead of defined benefits. The new system will expand the regulator’s supervisory responsibilities and tasks (for example, a new requirement to supervise pension funds against the risk preference of the scheme member population).

Australia has introduced a new “Retirement Income Covenant” requirement on superannuation trustees. In line with regulators’ expectations, the new Covenant encourages trustees to focus on the retirement outcomes of beneficiaries and works in tandem with DDO and member outcome obligations. On a different note, the digital transformation of the pension system in Hong Kong, SAR (China) will streamline existing arrangements and automate administrative processes, with potential benefits to both investors and providers.

Distribution and digital finance

Evolving technological and marketing developments have increased regulators' focus on product distribution.

IOSCO sought feedback to help regulators address emerging conduct issues in the context of increased retail participation in securities markets, the greater influence of social media, increased digitization and escalating fraudulent activity. The final report is awaited. IOSCO also consulted on risks from the digitalization of retail marketing and distribution, and observed that in some jurisdictions, digitalization is accelerating faster than the underlying regulatory framework. IOSCO therefore put forward a toolkit with seven policy measures and five enforcement measures, which focus on online marketing, distribution and onboarding, use of new investigatory techniques, and increased cross-border co-operation and collaboration.

In Brazil, new rules will be introduced to regulate the treatment of distributors (known as Agentes Autonomos de Investimento, or AAIs). The changes will end existing requirements for exclusive distribution arrangements, focus more on the suitability of products, and lead to greater transparency on costs and rebates. In the EU, ESMA produced new guidelines on marketing communications such as advertisements, messages on social media and in other materials.

New regulations for managers

Some jurisdictions are introducing new regulations or significant enhancements to existing regulatory frameworks, which will impact asset, wealth and fund managers.

In the UAE, the Securities and Commodities Authority introduced a new rulebook for asset managers operating outside the Dubai International Financial Centre and the Abu Dhabi Global Market. The rulebook introduced new regulations regarding the classification of clients (retail and institutional), the suitability assessment and other customer protection measures. Meanwhile, Saudi Arabia’s Capital Markets Authority announced amendments to its investment fund regulations, bringing fund governance requirements and standards regarding the termination and liquidation of funds into line with wider international standards, enhancing the role of the fund board of directors, and increasing the level of transparency and disclosure in investment fund reporting.

Authorities in Brazil introduced a comprehensive new regulation for the fund industry, which took effect from July 2022 but with a transition period. Changes include:

  • Giving funds a legal definition and treating them as corporations (with implications in case of bankruptcy)
  • Allowing for the creation of share classes to accommodate different strategies (bringing challenges for local administrators and adapting their systems)
  • Introducing limited liability for investors — removing the need for investors to contribute where funds suffer losses that exceed net assets
  • Introducing limited liability for service providers, including the administrator, manager and custodian
  • Permitting retail investors to invest up to 100 percent of their portfolio offshore

The Cayman Islands have removed a previous exemption from regulation for certain types of family office, bringing them under the scope of regulation if they are conducting certain securities investment business. And Jersey has introduced changes to its law to increase protection for Limited Liability Partnerships (including “safe harbor provisions”), new third-party rights and annual reporting requirements.

The US SEC has proposed to enhance the regulation of private fund advisers and to provide better protection for private fund investors. The new rules aim to increase transparency. Private fund advisers will be:

  • Required to provide investors with quarterly statements with information on fund fees, expenses and performance
  • Prohibited from providing preferential treatment unless disclosed to current and prospective investors
  • Subject to new requirements related to fund audits, books and records, and adviser-led secondary transactions
  • Prohibited from engaging in several activities and from charging certain fees and expenses (such as fees for unperformed services)
  • Required to document the annual review of their compliance policies and procedures in writing

At end-2021, the transition period relating to new Swiss rules aligned with the EU MiFID rules ended. The new Swiss rules seek to strengthen investor protection (while providing for flexibility for professional clients) and aim to link conduct rules and product regulations with the targeted product segment. The rules include organizational requirements, execution procedures and avoiding conflicts of interests. Firms also need to provide clients with disclosures and suitability assessments. The Swiss model is more liberal in some areas than the EU regulations (for example around client classification), which may offer advantages for cross-border transactions and services provided to third countries.

In Malaysia, the Securities Commission published revised guidelines regarding the compliance function for fund management companies, with updates to the requirements on rebates and soft commissions. It also issued revised guidelines on Islamic fund management. The updates ensured consistency with other guidelines on the appointment of Shariah advisers, expanded the roles and responsibilities of the Shariah adviser, set out new requirements for the Islamic fund management company to ensure that employees assist the Shariah adviser, and inserted requirements for the certification of Islamic funds (as well as minor tax amendments).

A focus on fund service providers

Regulators are also considering how to increase their oversight of fund service providers.

Cyprus consulted on bringing fund administrators’ activities into the regulatory perimeter for the first time. The regulation would introduce capital requirements, rules on board composition, specific organizational requirements (including a regulatory compliance officer, AML7 officer, internal auditor and legal adviser), and other requirements regarding the use of software and annual reporting obligations to the regulator.

In Hong Kong (SAR), China, the regulator concluded on its 2019 proposals to enhance the regulation of trustees and custodians of authorized funds, which have not been directly regulated to date. The regulator noted that responses to its consultation generally supported the proposals (agreeing they were in line with other comparable international centers) and published a further consultation to implement the regime.

The CBI proposed changes to the Irish regulations on the protection of client assets. The proposals would extend the scope and application of the client asset requirements and enhance them in some respects (including in relation to wholesale activities – for example, by extending the scope of the regime to banks undertaking investment business).

On the supervisory front, the Maltese regulator plans to review depositaries’ compliance with the rules, and in the UK, the FCA has published its supervisory priorities for depositaries, which include operational resilience, the safety of client assets, oversight of fund managers, safekeeping of high risk investments, and responding to market and regulatory changes.



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1 Financial Conduct Authority
2 European Securities and Markets Authority
3 Securities and Exchange Board of India
4 Australian Securities and Investments Commission
5 Undertakings for collective investment in transferable securities
6 Markets in Financial Instruments Directive
7 Anti-money laundering