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June 06, 2016 at 11:29 AM
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.
