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Investment management: The regulatory pressure intensifies

Investment managers face a challenging new landscape. The direction of travel toward the implementation of tougher regulatory measures is clear, but the path to implementation is fraught with unanswered questions.

Investment management: The regulatory pressure intensifies
Global regulators continue to develop policy and strategy to implement G20 commitments. As a new KPMG report shows, the current focus is firmly on financial stability, investor protection and transparency of products and markets.

In the EMA region, new regulation consists both of updated existing legislation and new directives and regulations. A number of countries, such as South Africa, face new regulations based on either existing EU or local rules; for example, Treating Customers Fairly (TCF) – based on the UK regulatory structure already in place – and revisions to the Pension Funds Act (Regulation 28).

The global emphasis on increasing market infrastructure and transparency, as well as registration and reporting requirements, has led to key regulations such as the European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Directive (MIFID 2) and Alternative Investment Fund Managers Directive (AIFMD), which will affect capital markets and the financial sector as a whole.

In the Americas, measures to tackle consumer protection and systemic risk reporting have been packed into the Dodd-Frank Act. Dodd-Frank does not just affect firms in the US: It will have far-reaching impacts throughout the Americas and beyond, to Europe and the Asian and Pacific Council (ASPAC). The Dodd-Frank Act also brings a more rigorous and wide-ranging approach to conduct rules. Other countries in the Americas also have stringent local regulatory standards with which to comply. Territories such as Canada are likely to feel the effects not just of Dodd-Frank, but key European legislation such as AIFMD.

Extra-territorial effects will be felt in response to a number of regulations from multiple regulatory centers. The EU AIFMD reforms mean that non-EU based asset managers will only be allowed to market products in the EU that broadly comply with EU rules. Countries outside the EU (such as Switzerland or the Channel Islands) will therefore have to decide whether to reform their own rules.

In ASPAC, the diversity of the region and its rulemaking processes, alongside demographic change and rapid growth, create challenges or pan-regional market participants. There is a broad focus on investor protection, improved transparency and ‘best practice’, with reviews of existing regimes already underway. These include the Financial Advisory Industry Review (FAIR) in Singapore; the Future of Financial Advice (FOFA) in Australia; and additional disclosure requirements in Japan.

Financial stability

The global focus on increased capital requirements will affect asset managers’ returns. We will have to see if the ‘living wills’ debate extends into the investment management sector. Many may think this unnecessary, arguing that the investment management industry lacks the potential to cause systemic damage to the global financial system. But experience shows that regulators will want evidence to support the industry’s view.

Alternative investments are in the spotlight, with increased scrutiny of hedge funds and alternative investment vehicles. The focus of regulation in this area – improved due diligence, compliance and clarity – means firms are reviewing and refining business models and operating structures. The global hedge fund industry is becoming increasingly institutionalized through new institutional capital and the continuous evolution of infrastructure and operational processes.

In Europe and beyond, AIFMD will require: additional capital; improved risk and portfolio management; changes to delegation requirements; and increased reporting and transparency requirements – with important third-country implications.

In the Americas, a large body of opinion believes that systemic risk reporting in the US will lead to greater transparency for institutional investors. New developments from the Commodity Futures Trading Commission (CFTC) are imminent, increasing reporting and regulatory responsibilities. Insider trading remains a cloud over the sector, likely to lead to even further reporting and risk controls. The US institutional marketplace is likely to see diversification and consolidation. In Europe and ASPAC, institutional regulatory focus remains on exchange-traded funds (ETFs).

In ASPAC, investor protection initiatives are rolling out in Hong Kong, Singapore, Australia, India and Taiwan. With the growing marketplace and changing demographics in China, they are working to widen asset classes, aiming to attract greater numbers of external funds and reduce market volatility.

Offshore firms have their own specific set of challenges. Key developments include diversification of investment business across geographies and exploration of niche specialisms. Regulation from Europe (AIFMD) and America (Dodd-Frank, FATCA) will have notable implications for offshore centers.

Pensions are also under increased scrutiny, with new requirements being imposed across the world in order to improve transparency and consumer protection.

Governance, remuneration and taxes

The position of politicians and, to an extent, regulators views, can be summarized as the financial sector should pay for the crisis it created. The results are, increasingly, punitive sanctions, constraints on behavior, and additional taxation to help restore government finances. In Europe, rules on asset manager remuneration have been introduced in AIFMD and Undertaking for Collective Investments in Transferable Securities (UCITS), with harsh sanctions foreseen in UCITS 5 and Packaged Retail Investment Products (PRIPS).

Tax has been particularly prominent where authorities are facing unprecedented deficits. The attempt to limit tax fraud has led to the ominous FATCA regulation in the US, which has potential implications for all global firms. It will be interesting to view which jurisdictions impose their own legislation globally.

Europe will see a revision of the Savings Directive and new exchange of information clauses in a wide range of bilateral double-tax treaties. At the same time, additional taxation of the financial sector is being debated, such as the proposed Financial Transaction Tax in Europe and a new Dividends Tax in South Africa.

The volume, variety and complexity of tax regimes throughout Asia-Pacific continues to prove challenging for firms across the region, with a focus on additional taxation of nonresident investors and companies.

Numerous cross-border challenges

Investment managers today face multiple challenges and regulatory reforms across jurisdictions – in addition to further demands from both local and international regulators. Firms must adapt to survive and thrive in this re-shaped industry. To stay on top of the full regulatory change agenda, firms must ensure that their business models and compliance functions take into consideration the full suite of regulatory requirements and the associated strategic implications, both for their business and the industry as a whole.

Key Industry Challenges
- Cross-border implications of global, regional and national regulatory change
- Increased reporting and accountability to improve transparency
- Consumer conduct – to increase investor protection and industry trust
- Additional risk management requirements

From Frontiers in Finance, July 2012
Frontiers in Finance is a regular publication from KPMG's Financial Services practice.

Lundi 10 Septembre 2012