A report from KPMG has outlined the huge potential for the investment industry as regulatory confusion clears.
The Evolving Investment Management Regulation report points out regulatory uncertainty over the last few years has settled down.
KPMG suggests the shrinking of the banking sector is core to this opportunity, as it puts the investment industry at the heart of global capital flows.
Tom Brown, global head of investment management at KPMG described this as the ‘age of asset management’.
He added: ‘The industry has come through the financial crisis well and is now operating in a much more stable regulatory environment with greater clarity and certainty.
‘The next five to ten years hold enormous potential for asset managers and I expect to see players introduce innovative products and adopt new strategies as the industry plays its role in the broader savings debate.’
‘Regulators have followed through on their promise to restrict trading and private funds within banks, which has led to trillions of assets being spun off. As talented traders have less access to bank balance sheets, we will increasingly see them migrate toward the asset management continuum, which is another positive for the industry.’
Over the last 18 months the Financial Conduct Authority (FCA) has put outcomes for consumers at the top of its agenda.
In a series of conduct-focused thematic reviews across a cross-section of the industry, the financial watchdog has examined the management of conflicts of industry, product governance and design and market abuse controls in asset managers.
It is also conducting a three-part thematic review on the implementation of the retail distribution review and probing suitability at wealth management firms, which includes an investigation on the use of in-house funds.
While these remain regulatory burdens, KPMG highlights that a number of other significant pieces of regulation, which have been working its way through the system for years, finally came to fruition in the last 12 months.
These include PRIIPS, Ucits V, the Volcker Rule and Fatca, while others are on the cusp of being finalised.
‘Where proposed new rules once seemed perpetually stuck in the consultation phase, many are now decidedly in the implementation phase,’ KPMG said.
‘Understanding and complying with regulations has been painful and, for many firms, has entailed material cost. But the ending of consultation and the move to implementation has, at last, created clarity around the operating environment.
‘In addition, many regulators around the globe appear to be co-ordinating their efforts as the initial rush of regulation becomes a more thoughtful and streamlined process.’
KPMG stresses that while there is potential an enormous opportunity, the industry is likely to come under more intense scrutiny as asset management and wealth firms are increasingly considered to be systematically important institutions.
‘With so many activities previously housed in banks moving over to asset management it is inconceivable that the industry will not be closely monitored,’ Brown said.
Shadow banking is one of the major challenges for the industry, with politicians, regulators and central banks around the globe starting to view this as the next big battleground.
In May 2014 Federal Reserve head Janet Yellen indicated regulation for asset managers was possible, saying regulators needed ‘to really identify clear ways in which the failure of these firms’ would pose risks to the financial system.
KMPG believes against this backdrop it is essential the investment industry’s report and data communication procedures are water tight.
‘While the industry is operating within a context of greater certainty there are a number of regulatory challenges ahead,’ KPMG investment management regulatory partner Charles Muller said.
‘Shadow banking is viewed as the next big battleground and greater transparency and consumer protection are the key objectives of regulators. There will be increased pressure on data and reporting with both investors and regulators requiring more meaningful communication from businesses.’
Muller also said the industry would have to be more accountable for performance of its products if it is to fully exploit this opportunity.
‘Asset managers should also expect the themes of conduct and culture to remain high on the regulatory agenda,’ Muller said.
‘As we see greater focus on these areas, asset managers will need to take more responsibility over the creation and performance of their products to make sure they don’t fall foul of conduct rules.’