Close Close

Technology > Investment Platforms

Regulators Worldwide Zero In on Investment Management

Your article was successfully shared with the contacts you provided.

Regulators around the globe are increasing their supervisory and monitoring resources, both generally and specifically in relation to investment management, KPMG said in a new report.

Since the financial crisis, regulators have become more prescriptive, focusing on investment managers’ conduct and behavior.

Now, according to the report, many regulators appear to be substantially intensifying their activities, probing deeper and involving themselves in the technical operations of investment firms’ activity in order to detect and prevent undesirable practice and improve understanding of potential systemic risks.

“Investment services are in great demand, but finding a way to capitalize on that while navigating compounding regulatory, security and economic pressures, along with rapidly evolving consumer demands, means the next decade will be a transformative one,” KPMG director Julie Patterson said in a statement.

Patterson said increased information sharing is deepening regulators’ knowledge and enabling them to fine tune and intensify product investigations and enforcement.

“If the investment management sector is to gain from the opportunities at hand, it needs to make significant investments in technology and reform the way it builds and distributes products.”

Culture and Conduct

According to the report, regulators continue to be intensively focused on culture and conduct issues, which center on acting fairly toward customers in general, and on incentives and remuneration in particular.

In recent months, the Financial Industry Regulatory Authority has investigated broker-dealers’ culture of compliance, and CEO Richard Ketchum warned that he sees a “direct line between culture and the probability or severity of an enforcement action.”

On Monday, the state of Massachusetts announced it was investigating more than 200 BDs that have an above-average share of brokers with histories of misconduct.

Globally, regulatory priorities include how firms govern their business operations and conduct their relations with clients, suppliers, intermediaries and the companies in which they invest their clients’ portfolios. Firms’ anti-money laundering procedures and their governance of outsourcing arrangements are examples.

The report says environmental issues are a new consideration on the good conduct scene. Carbon disclosure regulations for investment firms are set to follow a legally binding treaty on climate action.

Harmful conduct is a prominent risk to investor protection, and the strong fee-driven culture of the financial industry is under particular scrutiny.

The regulatory response is a global crackdown on commissions paid to distributors. The approach differs across jurisdictions, with some banning or limiting payments between product providers and distributors, and others requiring greater disclosure.

The most recent example, according to KPMG, is the U.S. Department of Labor’s new fiduciary rule.

Costs and Charges

The report said costs and charges have become a standalone global regulatory theme, for both institutional and retail investments. There is an increasingly granular approach to disclosure and an international focus on the calculation and management of fees and other costs.

And more regulators are asking whether the level of fund management charges is reasonable. In some cases, they are setting caps on charges, and in others are encouraging simpler products with reduced costs.

KPMG said the debate has widened to a value-for-money question: Are investors are getting a fair deal?

In Europe, for example, “closet index tracking,” whereby funds charge high fees for strategies that simply track indexes, is a hot topic, and the current investigations could have significant reputational repercussions for the fund industry, the report says.

Products and Governance

In many of the major fund centers, regulators are taking similar approaches to product governance and disclosure. As their knowledge and capabilities deepen, they are intensifying their investigations and enforcement activity.

Across the world, policymakers have worried that investment products are mutating and are too complex for retail investors, who are often unable to understand their risk-reward profile. Amid the current period of slow global growth, policymakers and regulators are aware of their responsibility for helping to encourage investment.

In the U.S. — by far the largest crowdfunding market, according to the report, — the SEC has adopted final rules to permit companies to offer and sell securities through crowdfunding.


As robo, or automated, advice enters the mainstream within developed markets’ retail and wealth segments, regulators are considering whether they need to extend or clarify the regulatory perimeter to cover new digital distribution channels and, if so, how.

The report said U.S. regulators have been relatively relaxed about robo-advice to date, with the Securities and Exchange Commission and FINRA using caveat emptor rather than trying to restrict or regulate it. But this started to change a year ago, when they warned investors against systems that promised good performance. They also said that robo-advice may make wrong assumptions. The SEC highlighted that robo-advice might offer only proprietary products and advised investors to protect their identities.

The report quoted SEC Commissioner Kara Stein: “Do we need certain tweaks and revisions? Do investors appreciate that… robo-advisors will not be on the phone providing counsel if there is a market crash?”

The KPMG report noted that fintech is also becoming a major driver for innovation in the investment industry worldwide. It said some regulators have seen this as an opportunity for businesses in their jurisdictions and have promoted the industry locally.

In the U.S., for example, the Department of Financial Services in New York and the Department of Business Oversight in California have introduced regulatory initiatives specifically aimed at engagement with and support of fintech firms.

Although greater use of technology and proliferation of data has increased the options and levels of service for clients, it has also raised the likelihood of their data, or even their assets, being stolen.

As a result, cybersecurity is now a global agenda item for regulators, and cyberattacks are viewed as a key systemic threat.

KPMG said the U.S. is possibly the most active on cybersecurity, and the SEC is substantially toughening its approach to the issue, letting investment firms know they must get their cyber defenses in order.

Systemic Risk and Investment Management

The report said regulators are now focusing on investment management activities and how open-ended investment funds, in particular, are managed. Various international bodies and agencies are contributing to the ongoing policy debate. Meanwhile, however, the industry is seeing an increased number of ad hoc data and information requests, especially in relation to investment funds.

Policymakers are paying close attention to leverage and liquidity. Demands are also arising for greater stress testing of funds, and investment managers are required to play their full part in ensuring the integrity, transparency and stability of capital markets.

In the U.S., there is no requirement to make disclosures about liquidity, although the SEC said last year it was considering imposing such a rule. The SEC is also becoming more prescriptive about liquidity.

According to the report, the agency’s consultation paper, issued in September, suggested that U.S. investment managers should boost liquidity buffers in mutual funds and ETFs via pools of cash and assets that can be liquidated within three days, and it proposes that illiquid assets should be limited to 15% of a fund.

— Check out Cybersecurity Is SEC’s Top Enforcement Focus, Officials Say on ThinkAdvisor.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.