Asia Toughens Approach to Asset Management Regulation
Asia will remain a key growth market for asset managers, despite challenges arising from diverse legislative, regulatory and taxation requirements across the region, according to a new report by KPMG.
The report, entitled Evolving Investment Management Regulation – A clear path ahead, finds that an evolving regulatory framework being developed for asset managers operating across Asia- particularly with regard to consumer protection and fair dealing – is now catching up with Europe and the US. It outlines the key regulatory challenges facing the global asset management industry and highlights the differences in approach being taken in various regions.
Tom Brown, European head of investment management at KPMG and a partner in the UK firm, commented: “Asia, along with Latin America, is unquestionably the hotspot for growth; however, asset managers would be unwise to expect lighter touch regulation in the region. The fast pace of change in product distribution, disclosure and investor protection that we have witnessed in Europe and the US has transferred across to Asia with enhancements to investor protection and product disclosure a definite priority for a number of regulators across the region. While the change varies between jurisdictions, the direction of travel is crystal clear.”
Said Bonn Liu, head of investment management, Asia Pacific, and a partner in KPMG’s China firm: “While the Asian market is critical to asset managers’ growth agendas, it does not come without significant challenges. Asset managers must not fall into the trap of seeing the Asian region as one homogenous market. It is made up of a number of very different nations, all at different stages of market maturity, customer expectations and regulatory sophistication.”
“In the Americas, regulatory change is well underway but far from over,” said John Schneider, US head of KPMG’s investment management regulatory practice.
“Much of the regulatory change is being directed at increased transparency and consumer protection with a focus on private funds, money market funds and new instruments. While initially this will be painful for many investment managers, change ultimately creates growth opportunities. This change also has the potential to increase investor confidence and result in more funds entering the market.”
KPMG’s report identified the following four key challenges facing the industry; increased reporting and accountability to improve transparency, consumer conduct looking to increase investor protection and industry trust additional risk management requirements.
“The challenge remains how to deal with the plethora of regulation on a practical level. While lots of figures have been bandied around looking at the aggregate implementation costs of regulation, none of these account for the management time spent dealing with regulation,” said Brown. “This cost cannot be underestimated as it is not just the time spent, it is also the fact that management’s attention is being taken away from broader agendas such as their growth strategies.”
In addition, Brown notes, “However, it is worth remembering that with change comes opportunity. Perhaps slowly at first, but inevitably opportunities will emerge – for new business models, new fee structures and product lines and for the consolidation and regrouping that will result in more stable and diversified review streams for many firms. The bottom line is smart managers will be able to find opportunities in this ‘new world’ and many of these will be in Asia.”
The diversity of the Asia Pacific region and its rulemaking processes, alongside demographic change and rapid growth, creates challenges for 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.
EU authorities have undoubtedly shifted their focus toward enhancing investor protection measures including sales practices. Possibly the most controversial of the European regulatory measures is the Alternative Investment Fund Managers Directive (AIFMD).
While the directive seeks to remove some of the barriers to a single EU market for investment products, there is no doubt that, for those it removes, it also puts others in place. While generally thought of as a hedge fund and private equity based Directive, in reality, all non-UCITS funds are in scope.
The underlying message from US regulators is likely to remain, ‘not on my watch’. Consequently firms should expect more rigorous reviews from government agencies.
The most contentious issue for trading professionals is the proposed Volcker Rule issued late last year. KPMG believes it will ultimately be enacted in some form, that financial institutions will be restricted from proprietary trading, and that they will have to monitor their trading activities to prove they are complying.