Europe's regulatory focus has shifted from market efficiency to investor protection, according to a report from State Street assessing the impact of new rules on competition and investment performance.
Europe’s regulatory focus has shifted from market efficiency to investor protection, according to a report from State Street assessing the impact of new rules on competition and investment performance.
While portfolio losses had prompted some investors to be ahead of even the regulators in demanding transparency and clarity from asset managers, there was a new consensus that a robust and sustainable industry needs to be well regulated.
The asset management industry is evolving with the implementation of initiatives such as the LiFID II review, Ucits V, the European commission’s review of package retail investment products (PRIPS) and the review of the Investor Compensation Scheme directive (ICSD).
Marty Dobbins, managing director of state Street in Luxembourg said the challenge for asset managers will be to stay focused on their core business of building successful investment portfolios, and not be distracted by the volume of emerging regulation.
Asset managers are looking for servicing solutions that are consistent across the region and which work at both a national and cross border level.
“Unfortunately, amid this wealth of emerging regulation, there will be winners and losers, and their identity will determine the future shape of the European investment management industry,” he said.
Mike Karpik, senior managing director for State Street Global advisors in EMEA said regulation is also shaping product development, with closer input from risk and compliance teams to ensure products are “workable and fit for market”.
Asset managers have been working with regulators and trade associations to evolve regulatory structures that achieve their declared goals, but also support a thriving asset management industry.
“We have to be wary of over-reaction, of the needle swinging to the other end of the spectrum,” he explained. “We have our interests but we need a framework for investors, who still need a return.”
Regulatory changes mean that asset companies will have to pay attention not just to investment process and performance but also to support infrastructure and the training and competence of the personnel they employ.
“Regulators and investors also want to see more disclosure. For example they want to see where collateral is held, and how, not just by whom. They need full look-through for products,” Karpik said. Outsourcing or delegation will not be considered a handing on of responsibility, so any firm will have to monitor their third party providers as well.
He noted that although greater regulation is the output from the global financial crisis, the way regulations started out and the way they end up is completely different, due to the input from a range of interested parties, from asset managers to auditors, to technology experts and clients themselves. “What is important is to walk the regulators through practical examples to get them to explain how they want things to work and to iron out some of the issues that arise.