Asset managers & ongoing regulatory change

How asset managers can shoulder the burden of ongoing regulatory change

With the next European Commission starting to set out its own financial regulation agenda, asset managers who are still in the process of adapting to a range of new EU rules must brace themselves to take on a further round of requirements in the coming months and years.

Like other financial groups, asset management businesses draw on the skills of legal and compliance specialists and their staff to ensure they are fully in line with the rules set out by national and EU supervisors. But so demanding and complex are the tasks becoming that firms need to explore ways of reducing pressure on managers and employees without running the risk of infringing the rules.

That’s why regulatory technology – regtech in the jargon – is becoming a key topic of conversation in the fund sector and other parts of the financial services industry. Asset managers are discovering that technological innovation can offer critical relief from the burden of compliance. Both now and in the future, automating compliance procedures may be essential to enable firms to remain focused on their core activities.

Raising standards

The scope of new and impending regulatory requirements is vast, reflecting the initiatives taken in the wake of the global financial crisis to raise standards in areas including measures to curb money-laundering and other financial crime, transparency toward clients and regulators, consumer protection and, looming ever larger, environmental and climate impact.

The fifth Anti-Money Laundering Directive must be adopted into national law by EU member states by January 10, 2020. Some countries are still struggling to implement the fourth directive fully, particularly the creation of public registers of beneficial owners of companies, trusts and other structures – such as the branches of foreign companies and contractual funds (fonds communs de placement or FCPs) in Luxembourg.

Luxembourg’s Register of Beneficial Owners went online at the beginning of March, but 68,000 companies and other entities – more than half of those required to do so – failed to provide the information by the August 31 deadline. Entities now have a three-month deadline extension to the end of November.

Remedying unintended consequences

But more generally, patchy data could make the task of checking the probity of investors and investments harder, particularly as country- or region-specific risks must now be considered for firms’ annual anti-money laundering reports. If these contain errors or omissions, fund managers’ reputations could be at risk, in addition to the possibility of financial penalties.

Meanwhile, EU policymakers and legislators are working to remedy any unintended consequences of previous legislation designed to improve the functioning of markets and ensure Europe’s financial system is more resilient to future shocks. MiFID II requirements have been blamed for mismatched trading data making it hard to spot systemic risks, while EU authorities are reviewing the Packaged Retail Investment and Insurance Product Regulation after complaints that performance projections for structured products were confusing rather than enlightening retail investors. The rollout of the PRIIPs Key Information Document to UCITS and other investment funds has been delayed as a result while the issues are addressed.

A quick review of the European Securities and Markets Authority’s list of current and recent consultations reveals the scale of changes the industry is likely to face in the near future. The consultation on MiFID II’s Article 24 (9) on disclosure of inducements, and on Article 24 (4) regarding cost and charges disclosures, has now closed. But there is still time to respond to the consultation on harmonising the way UCITS performance fees are calculated, their frequency, and disclosure in EU member states.

Climate considerations

The consultation on ESMA’s proposed guidelines on compliance functions under MiFID II should also be monitored closely by investment firms, intermediaries, and providers or distributors of structured products and alternative investment funds. As ESMA points out, compliance functions face initial and ongoing costs to comply with the revised rules as they update procedures and organisational functions, and upgrade IT systems to cope with the changes.

Meanwhile, the insurance world will be drawing on timely and accurate data from investment firms for the newly-introduced stress tests to be conducted by the European Insurance and Occupational Pensions Authority, which will include environmental, social and governance criteria. These also lie ahead for fund managers, although initially sustainability obligations are set to be limited to regulatory and investor transparency. Nevertheless, calculating, reporting and mitigating climate change risk is set to be a permanent issue for the industry.

Indeed, asset managers should consider that sustainability is already a factor that needs to be taken into consideration when it comes to the offices they occupy. Last year’s revision to the EU’s Energy Performance of Buildings Directive will require certification that private-sector business premises are close to energy-neutral by January 2021. The industry’s investment products are unlikely to be far behind.

All these developments mean that the need to find solutions to ease firms’ compliance and reporting burden is becoming critical. Obtaining access to technology that can reduce the need for human involvement in these complex, painstaking and time-consuming processes is fast rising to the top of asset managers’ priority list.

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