In our Evolving Asset Management Regulation report of September 2022, we noted that changes to regulatory structures and regulators' operating models were being introduced, and that regulatory priorities were under review. We highlighted five broad regulatory themes that were common around the globe. These themes will continue to be at the forefront of regulatory agendas for 2023, but the approach being taken by national regulators to each of these themes is increasingly divergent. 

Wealth, fund, and asset managers should use the new year as an opportunity to take stock of their approach to regulatory change and to identify any areas that require greater attention and focus. Across all sectors, we will continue to track the impact of European regulatory developments in our Barometer.

Five common regulatory themes:

  • Sustainable finance

  • Systemic risk, market risk and liquidity risk

  • Governance, resilience and substance of firms

  • Enhancing investor protection

  • Widening investor choice

The themes underline the overarching message for wealth, asset and fund managers of all types: the way in which the industry operates is under continued and deepening regulatory scrutiny, across all aspects of the business. Meanwhile, as economic conditions remain challenging and the geopolitical landscape unsettled, firms must seek to navigate uncertainty in the capital markets, for themselves and their investors. Firms must also keep informed of regulatory proposals and evolving supervisory priorities, manage diverging rule sets and respond promptly to evolving expectations. 

Sustainable finance

Diverging approaches to common regulatory themes is especially pronounced in the area of sustainable finance. As the work of the International Sustainability Standards Board progresses, many jurisdictions are introducing mandatory reporting by listed corporates in relation to climate change risks, but to different timeframes, and with different sizes and types of corporates impacted. Without alignment, it will remain challenging for managers to gather the data and information they need regarding their investments for the purposes of their own disclosures (see below).

Amid frequently expressed concerns about “greenwashing”, the EU, UK and US regulators will continue to lead the way on rules for asset managers, wealth managers and investment funds, with an emphasis on disclosures. However, there are still no common definitions of what is and is not sustainable, and the breadth and depth of disclosures are not consistent. Over 2023, firms can expect further developments regarding US proposals to amend the “fund names rule” and to introduce enhanced disclosure requirements, further evolution of the EU Sustainable Finance Disclosure Regulation, and finalisation of the UK's Sustainability Disclosure Requirements.

In addition to disclosure requirements, the EU was the first out of the blocks with work on a sustainability label for investment products, but it has delayed issuing a formal proposal. Given this delay, the German regulator issued its own proposals in 2022, but is taking time to consider its position. The UK regulator is now in the lead. In November 2022, the FCA consulted on further proposals for three labels, which it intends to introduce from mid-2024. The labels and their definitions are different to those initially considered by the EU and Germany, and the detailed rules could cause significant challenges for cross-border firms — including fund managers that manufacture products and wealth managers that include funds in their portfolios.

Across jurisdictions there is a common regulatory focus on rules about managers' processes for naming their funds and forbidding the use of certain terms — this will likely require significant work for fund managers to review existing products and their documentation. Wealth managers will need to closely monitor the output of this work and consider how it will impact their own approach to fund selection, the suitability assessment, and client communications.

More generally, regulatory proposals in the area of sustainable finance cover an increasingly broad range of topics and are adding more detail to existing frameworks (see our “ESG Regulatory Essentials” publication for the latest cross-sector developments). Asset managers and funds need to implement a complex range of new requirements, while meeting their clients' and distributors' evolving expectations. The concept of considering investors' sustainability preferences is now firmly embedded in the EU, and the FCA will consult on how UK advisers should take sustainability matters into account in their investment advice.

Systemic risk, market risk, liquidity risk

Regulatory initiatives in response to Russia's invasion of Ukraine, and consequent market and valuation issues, are now in place (for example, allowing for side-pockets). Throughout 2023, policymakers are likely to be concerned more broadly about stability and transparency in the capital markets, clearing arrangements, market conduct and fair treatment of investors.

Reviews of recommendations issued by the Financial Stability Board (FSB) in 2017 and IOSCO in 2018 regarding liquidity risk management in open-ended funds (OEFs) have now been completed. IOSCO's findings were broadly positive. In contrast, the granular nature of the FSB's proposed framework to reduce structural liquidity mismatch, including the use of thresholds relating to the liquidity of assets and corresponding liquidity management tools, may go further than some had expected. The difference in tone between the two sets of findings indicates that the views of global policy makers are still not fully aligned.

Follow-up work this year will focus on revising the FSB's 2017 recommendations, establishing guidance on liquidity management tools, and progressing work to close data gaps and to promote stress testing. Meanwhile, regional and national regulators have pushed ahead with their own differing initiatives.

The FSB's review forms part of a wider package of reforms in the non-bank sector, focusing on OEFs, money market funds (MMFs), margining practices, bond markets and US dollar funding in emerging markets. During 2023, asset managers can expect the FSB and IOSCO to refocus on MMF reforms and take stock of policy measures adopted by FSB member jurisdictions to date. The FSB will also turn to leverage as its next key area of focus in the non-bank sector.

Governance, resilience, substance

The governance of regulated firms will remain an area of regulatory focus throughout 2023. Some jurisdictions are seeking to implement enhanced accountability arrangements, while others are driving forward requirements to ensure that wealth and asset managers have diverse and inclusive cultures. Regulators require wealth and asset managers to be resilient from an operational and cyber perspective, and are focused on firms' capability to counter financial crime and comply with sanctions. 

Regulators in some countries will continue to refine their expectations about the resources, capabilities and expertise that firms must have to run their day-to-day activities  — their “substance”. The debate is especially relevant to cross-border activities originating from the EU and its relationship with “third countries”, and more widely in a world of hybrid working. More broadly than questions around the delegation of fund management, reverse solicitation remains an area of focus.

Enhancing investor protection

Jurisdictions are at different stages of developing and updating their investor protection frameworks and requirements, but a common theme is the increasingly digital nature of distribution, which is posing both opportunities and challenges. Policymakers will continue to raise their expectations of wealth, fund, and asset managers.

Regulatory initiatives include an increased focus on value for money, product governance arrangements (including target market and distribution strategy), and new regulations for managers, administrators and depositaries. It is likely there will be a continued focus on the outcomes being generated for retail customers and how these can be evidenced. The UK continues to push ahead with its “Consumer Duty” — see our latest specific summary for asset managers here, along with more general insights in our Consumer Duty hub.

Widening investor choice

On the other hand, jurisdictions will continue to compete for market share as asset management and fund domiciles. They are seeking to boost economic recovery from the pandemic and widen choice for investors, especially those considered to be “sophisticated” or “semi-professional”. Therefore, as pandemic restrictions were lifted, regulators were encouraged to introduce new vehicles and allow the distribution of existing funds to a broader universe of investors. This will create new opportunities but additional complexity for wealth managers. 

A few months on, the balance between widening investor choice and ensuring investor protection (especially for the mass retail market) may now be shifting, as the regulatory initiatives described above take effect. Our latest article provides more detail.

Key questions for firms to consider in 2023

  • Do we have sufficient technology capabilities to keep pace with regulatory developments?

  • Are we fully briefed on all the new sustainable finance rules that are coming into force and what they may mean for our business and our clients'/funds' portfolios?

  • Are our current liquidity risk management policy and process in line with latest regulatory expectations?

  • Are we able to effectively monitor and evidence good outcomes for our investors?

  • Are we utilising the full range of emerging products and fund structures to deliver sound investment strategies to investors?

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