The way in which firms are governed is a constant priority for regulators, with current concerns including firms' culture, diversity and inclusion, and the probity/integrity of senior management. Outsourcing of key functions, such as portfolio and investment risk management, concerns around substance in the delegating firm and its ability to oversee the third parties to which it delegates are also core themes. 

Controls to deter financial crime are being strengthened due to global regulatory pressure. And as part of firms' investment processes, many regulators are emphasizing the need for good conduct in wholesale markets, and proper due diligence and stewardship of investments.

See below for more detail on the key themes

Firms recognize the need continuously to review and challenge their operating model, to enable them to navigate uncertainties, respond to new market opportunities, comply with existing and evolving rules, and protect investors' assets. Cost rationalization and optimization are front of mind, but also widening product offerings to cater for changing investor preferences (including sustainability) and new markets. 

These factors call for business models to be flexible and robust, and for firms to adopt appropriate growth and resilience strategies. A survey by KPMG in Luxembourg of fund management companies found 97 percent of firms surveyed were in the process of operation model transformation, with product innovation at the core. For example, many firms are expanding their existing licenses to cover alternative assets, and are increasing their footprints vis-à-vis their groups by establishing EMEA product and distribution hubs. In relation to sustainable investments, though, operational models are widely disparate.

Pension reform often creates opportunities for asset managers, but can also lead to increased regulatory scrutiny and adverse impacts. In the Netherlands, a new pension act entered into force in July 2023, with a focus on protection of pension scheme members. The transition to a new pension system in the coming years is expected to have a substantial impact on the sector (UK reforms in 2015, for example, continue to have an impact). Asset managers will play a key role in this system change, and the regulator is devoting extra attention to whether firms' business operations are sound and well-controlled during the transition phase.

Meanwhile, in Australia, structural changes around superannuation funds are leading them to consider internalizing investment management. At the same time, the funds are facing margin pressure due to amendments related to super funds' obligations under the “Your Future, Your Super” performance benchmarking regulatory requirements. Fund trustees need to look to the best financial interest of their members, including reviewing their costs and comparing them with prescribed benchmarks (see more in Chapter 6).

The UK FCA1 expects senior leaders to develop and nurture healthy cultures in the firms they lead. It describes cultures that are “purposeful” where:

  • Sound controls and good governance are in place.
  • Employees feel psychologically safe to speak up and challenge.
  • Remuneration does not encourage irresponsible behavior that can ultimately damage the business, and harm investors and wider markets.

The FCA notes that the new Consumer Duty will encourage firms to analyze their culture and how that affects their conduct (see Chapter 6). The regulator has also conducted surveys on firms' whistleblowing arrangements and set out actions it will take, including improving the use of whistleblowers' information across the FCA.

In March 2023, ASIC2 published a report to help Australian firms improve their arrangements for handling whistle-blower disclosures, and ensure they are effective and encourage people to speak up. It found that firms received useful reports and tip-offs about issues in the workplace where the firms' whistleblowing programs were thoughtful and where arrangements for protecting whistle-blowers were well-publicised within the firms. As a result, those entities had greater opportunity to identify and address these concerns and issues at an early stage.

The CBI noted that, given diversity is interconnected with risk, resilience, and financial performance, it will continue to highlight to Irish firms that this as an area of great importance.

The South African regulator has published its final strategy for promoting transformation in financial services, including asset managers. The goal is to promote the development of an innovative, inclusive, and sustainable financial sector to address the legacy of apartheid.

The UK regulators plan to consult jointly on improving diversity and inclusion in regulated firms, including asset managers. The FCA has cautioned that firms that do not embrace diversity of thought will struggle to serve the needs of a diverse customer base and manage risks effectively. It also published findings of a review and encouraged further action by industry.

In Europe, the regulatory spotlight is on both “self-managed” funds — where one corporate entity is both the investment company (the fund) and the fund management company (FMC) — and “host” FMCs (companies which offer to act as the FMCs for funds initiated by third-party portfolio managers). 

The Central Bank of Ireland (CBI) published a “Dear Chair” letter in December 2022 with observations on a survey conducted in June of 2022 on the organization of FMCs. The survey noted a decrease of 90 percent in the total number of self-managed funds and a significant increase in host FMCs. The CBI also noted an increased number of FMCs with a dedicated CEO, increased board diversity, the near doubling of directors' time commitments to fulfill their duties, and more robust organizational structures with greater numbers of designated persons and support staff. The CBI concluded that much progress had been made but that there was still work to be done by firms, including maintaining regulatory compliance as the operations of FMCs grow.

CySEC3 has enhanced its scrutiny of host FMCs in Cyprus due to concerns that they may not have sufficient control over the investment activities for which they are responsible. The regulator has observed that the promoters/directors of some funds are, despite the appointment of the FMC, overly involved in the day-to-day operations of the fund. 

The EU's review of the AIFMD4 framework and parallel UCITS5 rules has resulted in a requirement for all UCITS FMCs, and any AIF managers that market AIFs to retail investors, to appoint at least one non-executive directive to their governing bodies. Also, remuneration policies will have to be consistent with long-term risks, including sustainability. The review of the future regulation of the UK asset management industry includes proposals to clarify the regulator's expectations of portfolio managers in the context of host FMCs, but also to adjust the threshold and exemption for small AIF managers, taking some outside the full scope of UK AIFMD.

A working group was established by the Indian regulator, SEBI6 in 2022 to review the role and eligibility of sponsors of mutual funds, with the aim of facilitating growth and innovation. In March 2023, SEBI announced that private equity funds can now sponsor mutual fund management companies and that, if they comply with certain conditions, FMCs can be self-sponsoring.

Framework Chart

Some regulators are reviewing and enhancing their requirements on senior individuals in firms.

Ireland is expanding existing regimes. Following enhanced enforcement powers granted to the CBI in March 2022, the regulator consulted on new regulations and guidance to implement the Individual Accountability Framework (IAF), which includes the following key elements:

    • The Senior Executive Accountability Regime (SEAR) will require in-scope firms to set out clearly and fully where responsibility and decision-making lie within the firm's senior management.

    • Common (basic) conduct standards will apply to all individuals in regulated firms. Senior executives will have additional conduct standards related to running the part of the business for which they are responsible.

    • Enhancements to the current Fitness & Probity Regime will include clarifying firms' obligations to certify proactively that individuals carrying out certain specified functions are fit and proper.

    • Amendments to the Administrative Sanctions Procedure include the CBI's ability to take enforcement action directly against individuals for breaches of their obligations, rather than only for their participation in breaches committed by a firm.

Asset managers and FMCs must comply with the new conduct rules and the enhanced Fitness & Probity Regime from end 2023. SEAR is not initially targeted at asset managers, but it will apply if they are part of banking groups.

With an eye on international competitiveness, the UK authorities are undertaking a fundamental review of the Senior Managers and Certification Regime, which has applied to asset managers since 2019. The high-level questions in the call for evidence were:

    • Whether there are areas of the regime that are perceived as a deterrent to firms or individuals locating in the UK.

    • Whether the regime is delivering against its original aims.

    • Whether there are areas of the regime that are perceived as a deterrent to firms or individuals locating in the UK.

    • The impact of the regime on UK competitiveness and how it compares with regimes in other countries.

    • Specific aspects of the regime and how any concerns could be addressed (for example, regarding the process and time taken to authorize senior managers).

    • Whether the scope of the regime is correct, and whether low-risk activities or firms could be removed from scope.

In Australia, a law is before its parliament to implement the Financial Accountability Regime (FAR) which extends and strengthens the BEAR regime (Banking Executive Accountability Regime) imposed on APRA7-related entities such as banks. FAR will extend to other non-APRA related entities and to directors and senior executives of those entities, to strengthen and increase individual and entity level accountability across financial services, including in relation to non-financial conduct risk. APRA has issued draft rules for consultation in anticipation of the Bill.

Some jurisdictions have already amended their rules. New guidelines from the Monetary Authority of Singapore (MAS) require firms to perform adequate due diligence to assess the fitness and propriety of their representatives and employees, which should include reference checks with previous employers to verify the individual's credentials, work experience and any disciplinary record. The guidelines also require the CEO, senior management and directors responsible for oversight of an FMC's investment activities collectively to have relevant experience in all the asset classes, markets and investment strategies that the FMC will invest in, and be able to manage properly the associated risks.

New rules for the private fund management industry in China include strengthened requirements on the company's legal representatives and senior management personnel in charge of investment management, including track record. And Saudi Arabia has approved new qualifications based on international practices. The aim is to enable regulated firms to meet investors' expectations, raise the quality of securities businesses, develop the performance of various activities and expand the types of national professionals.

In addition to good governance, regulators are concerned that firms should have sufficient substance, adequate resources, and good controls, but the drivers of these concerns differ between jurisdictions. 

Under the EU's AIFMD review (and parallel UCITS rules), a key issue of debate was what rules should apply to the delegation of investment management functions, which comprise portfolio management and management of investment risk. Opinion was split over how much information firms should have to provide on their delegation arrangements and what role ESMA8 should play in reviewing them. The final rules require fund managers to report the amount and percentage of delegated assets under management. 

Meanwhile, European national regulators are emphasizing the need for firms to have substance. The Netherlands was one of the jurisdictions that benefitted from interest in investment firms establishing there as part of their Brexit relocation strategies. The regulator is therefore focused on substance requirements in the new Dutch entities, especially where they delegate key functions to entities in other jurisdictions. 

In the light of practices that CySEC has observed that are not always aligned with AIFMD key principles, the regulator has reminded FMCs in Cyprus that each AIF must have a single management company (AIFM), and of the principles governing the delegation of functions and the “letter box entity” concept. As noted above, it has directed some comments at host AIFMs, including that they should review their internal practices in line with ESMA guidelines and enhance their control frameworks to oversee properly the activities of the funds under management.

Outsourcing rules in Ireland came into effect at the start of 2023, along with a regulatory register. Intragroup outsourcing is treated the same as third-party outsourcing, and the rules do not differentiate between outsourcing and delegation of key functions.

The Japanese regulator has encouraged asset management companies to enhance their in-house investment management capabilities — for example, by hiring necessary expertise to manage global assets. Also, for funds invested in third-party funds or in-house funds of funds, there have been cases where the investment manager has been found to have conducted insufficient due diligence of the investee funds' characteristics, and has failed to manage and administer the investments appropriately. 

Elsewhere, there is a supervisory focus on the managers of private funds. The US SEC9 Division of Examination is focusing on compliance and controls of registered investment advisers to private funds, across a range of areas. It is especially focusing on private funds with specific risk characteristics, such as funds that are highly leveraged or hold hard to value assets.

In March 2023, following a series of inspections during 2022, the MAS issued its observations and expectations of licensed venture capital FMCs (VCFMCs) in Singapore, some of which also apply to other types of FMCs. The MAS reminded VCFMCs to ensure that their core business remains focused on managing venture capital funds, and where incidental activities are carried out, that all potential conflicts of interest are fully mitigated. For smaller FMCs, where employees may have responsibilities that span across multiple functions, necessary processes to ensure mitigation of conflicts should be implemented. 

The MAS also reminded firms to complete customer due diligence prior to onboarding, to maintain documentation evidencing investors satisfied the definition of “accredited investor”, and to make the requisite disclosures that the firm is not subject to certain requirements. Although VCFMCs are not subject to the conduct of business requirements applicable to other types of FMCs, the regulator encouraged all firms to consider formalizing policies and procedures in key areas of their operations, and to review them periodically to mitigate operational risk.

Concerns about substance in the context of anti-money laundering (AML) and countering terrorist financing (CTF) are a priority for several jurisdictions. As noted in last year's report, FATF10 reviews and being placed under increased monitoring (the “grey” list) continue to be a driver for regulatory enhancements in some jurisdictions (see also Chapter 8). 

Various jurisdictions are strengthening their general AML/CTF laws — such as Japan and Switzerland. The latter is currently working on a new law concerning the transparency of legal entities and the identification of beneficial owners. Depending on its final design, its implementation could result in far-reaching obligations for firms. Other countries are considering the specificities of investment funds. The Luxembourg regulator conducts an annual AML survey and holds regular conferences to enable firms to be fully up-to-speed with their obligations.

From end January 2023, the scope of activities and operations subject to Jersey's legislation were aligned more closely to the FATF standards. All previous scope and registration exemptions were removed. While most Jersey funds were already in scope, or administered by a regulated service provider within scope, funds may now need to register under the new law. 

German AML/CTF requirements are increasing. Coupled with the speed at which technologies are evolving, this is creating further challenges for both regulated entities and the regulator, BaFin11, which has significantly boosted its resources in this area. AML/CTF functions are often outsourced, as is the role of AML officers. BaFin observes that these functions may not be as effective when outsourced. It expects closer monitoring of external service providers and prevention systems to keep up with business developments.

The MAS set out key observations from an industry-wide survey of Singapore variable capital companies (VCCs) and a series of thematic reviews of how selected firms implemented AML/CFT controls for VCCs. The MAS said the adverse findings should be considered by other types of business, not only in the context of VCCs:

  • Insufficient oversight by VCCs of appointed providers.
  • Inadequate customer AML/CTF risk assessment frameworks and processes.
  • Failure to implement enhanced customer due diligence measures for higher risk customers.

Rules on conduct of business in the wholesale markets have generally been in place for several years. Regulators in some jurisdictions are now reviewing certain aspects of those rules to ensure they remain fit for purpose. For instance, the Canadian regulators sought comments on the current regulatory framework for short selling, and the UK regulatory authorities reviewed the criminal market abuse regime and identified areas that require updating (at the time of writing, rule amendments were awaited). 

Other regulators are issuing good practice guidance and checking compliance by firms with specific rules. Examples include:

  • In Australia, ASIC issued two reports on better and poorer practices in wholesale markets — one covered the monitoring of key conduct risks in fixed income markets and the other covered management of conflicts of interest.
  • ESMA has issued clarity to EU market participants on best execution reporting.
  • In 2022, following the findings of an earlier peer review by ESMA, the Luxembourg regulator launched a thematic review of the compliance of UCITS managers and AIFMs with obligations under the EU Market Abuse Regulation. The regulator emphasized that all firms should properly identify and manage all market abuse risks, be alert to market abuse risks among investors as well as staff, and have a regular audit and internal review of controls.
  • In the Netherlands, the regulator asked investment firms to pay closer attention to transaction monitoring.

In addition to the emphasis on good stewardship as part of the drive towards sustainable investment (see Chapter 2), some regulators are undertaking reviews of stewardship requirements more generally and proposing more user-friendly disclosures.

The Canadian securities regulators have proposed changes to corporate governance disclosure practices and guidelines, relating to the director nomination process, board renewal and diversity (beyond the representation of women). The main objectives are to provide guidance to issuers on corporate governance practices on those three matters, to increase transparency about diversity, and to provide investors with decision-useful information that enables them to better understand how diversity ties into an issuer's strategic decisions.

ESMA gathered information on the implementation of the EU Shareholders Rights Directive to obtain a comprehensive overview of existing practice. This included how stakeholders perceive the appropriateness of the scope and the effectiveness of the provisions on the identification of shareholders, transmission of information and facilitation of the exercise of shareholder rights, and on transparency of proxy advisors. Subsequent policy recommendations included standardizing the definition of a “shareholder” throughout the EU and clarifying which securities are captured by the regime.

In Japan, the well-established Stewardship and Corporate Governance Codes, which have been subject to regular reviews and enhancements, are now reinforced by a new action program to accelerate corporate governance reform. Specific areas for action relate to:

  • Encouraging management to promote initiatives relating to sustainability, including investment in human capital.
  • The effectiveness of independent directors, such as improving the effectiveness of the board, the nomination committee, and the remuneration committee, and improving the quality of independent directors.
  • Dialogues between companies and investors, such as enhancement of information disclosure, and dealing with legal and market environment issues.

Included in the last point are concerns that asset managers disclose results in the form of PDF files, making it difficult for investors and other stakeholders to compare and analyze data of multiple asset managers. To facilitate evaluation of the effectiveness of stewardship activities and to promote further dialogue with corporates, asset managers are encouraged to promote data disclosure.

In a similar vein, the US SEC has adopted rules to enhance proxy voting disclosure by registered investment funds and to require disclosure of “say-on-pay” votes for institutional investment managers. The amendments to fund disclosures are intended to make proxy voting records more usable and easier to analyze, thereby improving investors' ability to monitor how their funds vote and to compare different funds' voting records. The rule for institutional investment managers fulfills one of the remaining rulemaking mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Finally, the UK FCA is reviewing asset managers' voting policies and considering whether regulatory intervention could drive wider adoption of tools to allow greater investor engagement, such as “pass-through” voting instructions from investors in funds. In response, industry has proposed a voluntary, standardized template for asset managers to communicate to asset owners on voting activity, building on the US SEC's Form NP-X (required since 2003) and other frameworks. 

Actions for firms:

  • Ensure the compliance function keeps pace with growth in the business and that the three lines of defense remain appropriately organized.

  • Promote a “speak up” culture and establish an effective whistleblowing procedure.

  • Review the composition of the board to check whether individuals can dedicate sufficient time to their role, and whether there is sufficient knowledge, expertise and independent challenge.

  • Check the mapping of senior managers' and staff roles and responsibilities against new or changing accountability regimes.

  • Review whether there are sufficient resources and expertise at all levels in the business to be able to evidence “substance” and effectively to oversee outsourced functions.

  • Review policies and procedures to determine whether appropriate AML due diligence arrangements are in place for higher risk customers.

  • Assess capabilities to identify and manage market abuse risks effectively.

  • Enhance formalized voting policies and capabilities to disclose voting activity in easy to analyze format.

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1Financial Conduct Authority 

2Australian Securities and Investments Commission

3Cyprus Securities and Exchange Commission

4EU Alternative Investment Fund Managers Directive 

5Undertaking for collective investment in transferable securities

6Securities and Exchange Board of India 

7Australian Prudential Regulation Authority

8European Securities and Markets Authority 

9Securities and Exchange Commission 

10Financial Action Task Force 

11Bundesanstalt für Finanzdienstleistungsaufsicht