Only investment firms that capitalise on emerging opportunities will survive, says KPMG
Tom Brown, KPMG’s global head of investment management, and Charles Muller, partner at KPMG in Luxembourg,comment on firm’s optimism that the asset management industry can play its part in a more stable and robust financial system.
Shift of risk and responsibility towards personal investor means increased focus on investor protection globally.
A global pattern of opportunity is emerging in the asset management world, with changing distribution models, new ways of doing business and a new investor-focused structure, according to KPMG’s Evolving Investment Management Regulation report.
The report sets out KPMG’s optimism that the asset management industry can play its part in a more stable and robust financial system, delivering fairer outcomes for investors.
“Government pushes towards savings creates opportunities for investment managers and wealth managers alike, so whilst all this change is difficult, it can be rewarding. Careful planning, bold execution and sufficient client-centricity are key priorities for success,” according to Tom Brown, KPMG’s global head of investment management.
“The investment firms who stay on top will be those who can capitalise on the opportunities that are emerging now – and do not wait until the dust has settled. Those who are not prepared are unlikely to survive in this new world.”
According to the report, a key element of the new investment landscape is the shift of responsibility – and the risk – from state and employer to the personal investor for retirement income/long-term financial security. This direction of travel is particularly clear in pensions markets. But it is vital to get regulation right to enable the industry to best serve society.
“It remains to be seen whether the regulatory change implemented will achieve what it was intended to do – to remove structural failings, ensure financial stability and deliver a fair outcome to consumers,” says Charles Muller, partner, KPMG in Luxembourg.
Charles, who heads up investment management for KPMG’s Financial Services Regulatory Center of Excellence, EMA region adds: “We are seeing various tensions emerge, for example low interest rates alongside inflationary pressure and the search for yield by investors, all in the context of consumer legislation. How do you balance investor security and risk appetite, whilst encouraging economic growth?”
Investors in the developed countries hold over 80% of total financial assets, according to KPMG analysis, with households by far the largest investor class followed by institutional investors. An increased focus on the retail investor is therefore inevitable, and not embracing and capitalising on opportunities to build business through changing distribution channels would be a mistake. The drive towards better long-term savings and financial stability will create opportunities for funds managers, with an influx of funds flowing across the globe in consumers’ efforts to save for retirement and long-term security.
At the same time, KPMG sees a disconnect between government encouragement to save and fear of mis-selling. There is also a lack of global industry regulatory harmonisation, with over 35 different, complex and often contradictory, pieces of regulation impacting the asset management industry.
The report sets out the regulatory changes, challenges and opportunities for fund management firms and investors alike across Europe, markets in Africa and the Middle East, the USA, Canada and Latin America and Asia Pacific. It looks at investor protection and education, as well as the distribution of retail products, tax and pensions issues. It also looks at remuneration around the world, whether it’s in Europe where the AIFMD is being implemented, or Australia where a ban on conflicted remuneration, including commissions, is being introduced.
The report also shows:
• There are significant opportunities in emerging and new markets, for example Africa and the Middle East
• The drive towards better long-term savings and financial stability will create opportunities for fund managers, with an influx of funds flowing across the globe in consumers’ efforts to save for retirement and long-term security
• Regulatory initiatives that have onerous elements for the investment management community offer some opportunities, for example shadow banking proposals that may see investment managers leading the way, where banks can no longer follow
• The drive for better investor protection, improved transparency and ‘best practice’ across the industry is now a key focus for policymakers and standard setters, with regulatory initiatives under way. This has become a much bigger issue in Asia-Pacific, with key developments such as the Financial Advisory Industry Review (FAIR) in Singapore; the Future of Financial Advice (FOFA) in Australia; and additional disclosure requirements in Japan. Further investor protection initiatives are still rolling out in Hong Kong, Singapore, Australia, India and Taiwan.
• In Europe, there is clear regulatory headway in improving the transparency of and information on retail products. Remuneration is under sharp scrutiny (through UCITS, AIFMD and MiFID 2), with regulatory measures and even specific sanctions on the table. Work is being undertaken in an attempt to level the playing field and remove conflict of interest, for example, MiFID 2 in Europe and the RDR in the UK. Fund management fees are under the spotlight for performance, fairness and transparency.
• Throughout the EMA region, updates to existing legislation continue, with a steady stream of new Directives and Regulations. South Africa is still grappling with Treating Customers Fairly (TCF), an initiative already being implemented in the UK.
Tom Brown concludes: “Will the current waves of regulation mean that the investment management industry becomes better at delivering value to the real economy, matching those with capital with those who need capital? Only time will tell.”
Click here to read KPMG’s report Evolving Investment Management Regulation