Time for a Regulatory Rethink?

Time_for_a_regulatory_rethink.pngTowards the end of last November I was very fortunate to be the Chair of Osney Media’s Client Reporting and Communications Conference. It was a well-attended event, covering a number of very important subjects. The speakers and panellists were all senior and experienced people from investment managers, major institutional investors, and key industry bodies.

I came away from the two-day conference with a strong sense that the world of client reporting and communications is a world in transition. But it is not a straightforward transition. There is a lack of clarity and consensus on where we are heading, and there are hidden obstacles in the road ahead that are going to make it a very bumpy journey.

Over the next two weeks I want to share some of my key takeaways from the conference. This week’s post will look at the implications arising from the continuing introduction of a long stream of new regulations. Next week’s post will look at the growing disconnect between investment managers and their clients.

The cost of new regulation is a long-term issue

The impact of regulation was one of the recurring themes that ran though the two days of the conference. But it was given particular focus in one of the panel discussions that I chaired. On the panel were regulatory and compliance specialists from investment management firms and from The Investment Association.

The cost of implementing new regulations has been a severe drain on change-the-firm budgets since the 2008 Global Financial Crisis (GFC). But one of the main concerns expressed by the panel, and echoed by the audience, was the growing impact on operating costs. The cost of becoming compliant is an implementation cost, a one-off project cost. Project costs may be substantial but they are transient. Once the project has been completed, the cost goes away. But the cost of remaining compliant is an ongoing cost that hits an organization’s bottom line, year after year.

But is there really a serious issue here or are asset management organizations just concerned about their profit margins?

Well, I’m sure that there is an element of the latter but the panel session that I chaired convinced me that a serious issue is developing. No reasonable person can argue with the need for effective regulation in asset management. Investors and markets need protection from the unscrupulous and the incompetent. But the scale of the regulatory footprint seems to be approaching a point at which it will become untenable.

The scale of the regulatory footprint is massive

Enterprise-wide Range. Regulations apply across every aspect of an asset management organization’s operations: how products are marketed, how clients are treated and serviced, how trades are executed, how the business is run.

Multiple Jurisdictions. There are multiple regulatory bodies operating in different countries and regions, and they don’t co-ordinate with one another. The result is overlapping regulations and coinciding timelines.

Unbounded Scope. The scope of regulations is not restricted by geographical boundaries. Asset management organizations based in one country often have to comply with regulations introduced in other jurisdictions. FATCA is a case in point – if they have US citizens living outside the US as clients, asset management organizations have to comply with FATCA even if they do not do any business in the US.

High Degree of Connectedness. Asset management is one sector of the financial services industry. The GFC affected all of the financial services industry, and the regulatory impact is being felt across the whole industry. Where asset management organizations are connected to other areas of financial services, they fall within the scope of regulations that may not actually be focused on asset management. Solvency II is a case in point here – this regulation is designed to ensure that insurance companies within the EU maintain sufficient levels of capital to reduce the risk of insolvency. Investment managers that are not part of an insurance company have to comply with some aspects of Solvency II if they manage funds on behalf of insurance companies.

When one looks at individual regulations in isolation, each looks reasonable and pertinent. But when one looks across financial services as a whole, taking into account the four points above, the regulatory footprint for individual organizations looks massive. And I can completely understand why organizations are becoming increasingly concerned about the operational impact.

One of the key takeaways for me from the conference was that some form of automation in regulatory compliance is essential. It will just not be possible for organizations to comply with all of the different regulations when it comes to keeping records of what was communicated to whom, when, how, where and why.

But is there more to worry about than costs?

I am far from convinced that the regulators themselves are coping that well.

The conference took place at the end of November 2015 and Solvency II reporting received repeated attention in roundtable discussions and panel sessions. The problem being that Solvency II was due to come into effect on 1 January 2016 but with just one month to go there was much confusion about what reporting would be required. The main reason for this was that the regulators had shifted to a principles-based approach and away from a prescriptive approach, and so investment managers were unsure what the report templates should actually look like.

It appears that the shift to principles-based regulation is happening across the board, not just for Solvency II. And if that is the case then I predict that the situation will get worse for asset management organizations as they incur even more costs to obtain independent assurance that their interpretation and application of principles-based regulation is acceptable.

Call me an old cynic but is it possible that the move towards principles-based regulation is happening because the regulators cannot meet their own deadlines for providing prescriptive guidelines? Even if this is not the case, it feels like a move back towards light-touch regulation, which is widely regarded as one of the contributing factors to the GFC. And that brings to mind something that Albert Einstein once said: “We cannot solve our problems with the same thinking we used when we created them.”

Forum_Disscussion.jpgTo our readers, if your firm is currently adjusting to regulatory requirements, we invite you to use this forum to share your own experiences, discuss best practices with your peers, and pose questions to BI-SAM’s global community of industry experts.


Other Posts written by Peter Ellis: http://blog.bi-sam.com/author/peter-ellis

Topics: Market Trends

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