The 10 years since the credit crunch and subsequent financial crisis have seen the regulation of investment managers greatly increased. Until now, US regulators have tended to lead the way, with their European counterparts following on.
So what can European asset managers glean from the US experience in terms of what the U.S. industry has already been through? Or, to put it a little differently, what can be learned from the recent past in terms of looking into the future?
To answer that question, it may be useful to take a quick backwards glance at recent developments on both sides of the Atlantic.
In terms of regulation, 2009 saw a shift in terms of the US approach from investor protection to identifying fraud and systemic risk, along with highlighting market inefficiencies. So the asset management industry has had to step back and take a broader view.
Even before the full extent of the crisis became clear, the Bernie Madoff affair was a major prompt for change. Madoff masterminded the biggest fraud in American history, with more than $64bn being embezzled from investors.
Bogus trading statements fooled investors into believing they owned shares in blue-chip companies.
This scandal helped to shift the focus in the US to systemic risk monitoring. To do this effectively, the industry and those who supervised it needed a different sort of data. Furthermore, the net widened, as regulators decided they wanted information on money-market funds, private funds and commodity-market activity.
Now, starting next year, US Securities and Exchange Commission (SEC) is imposing “modernised” reporting and disclosure rules on investment companies, with the aim, in its own words, of enhancing “the quality of information available to investors and…[allowing] the Commission to more effectively collect and use data reported by funds”.
In the European Union, it has usually been a case of following the United States regulators’ lead – with whom they are in constant contact. There are indeed dedicated externally-facing representatives within regulators, whose job is keep a close eye on what other regulators are doing.
The objective of monitoring systemic risk continues to widen. The EU has just implemented money market fund reporting. The next logical step will be Ucits reporting in both the US and EU. That will be the last of the major asset groups to be subjected to this nature of compulsory reporting. It does not really exist for Ucits today.
So what can be learned from the US experience?
There are similarities in terms of the focus on stress testing and liquidity. There needs also to be a similar emphasis on bulk processing of reporting. For example, there are about 35,000 Ucits funds in Europe. How are they going to be reported upon every single month?
So this sheer scale is going to be something of a learning experience for the asset managers. They can begin to prepare for it quite simply by getting their “data house” in order. This can be approached either by leveraging technologies that were built for that purpose or by engaging in partnerships with specialists.
Regulatory changes are unique in that people do not usually have a large budget with which to ready themselves. Asset managers tend to be reactive, not proactive. But the fact is that firms that take a strategic decision to prepare for change in advance are likely to find themselves in a better spot when the change occurs.
A lot of regulation is humdrum. What is the fund’s name? When did it start in business? Who is the compliance officer? But it is also time consuming. To put it mildly, answering all these questions for 35,000 funds within an abbreviated time frame, like ten days, will be difficult.
US asset managers have had to develop this type of bulk handling capability, in which machines can help those in the industry to perform their jobs better. Now, with EU regulators showing every sign of following suit, their European opposite numbers will need to do likewise.
This sort of enhanced disclosure and reporting is likely to form part of the investment-management landscape for the foreseeable future. It is a landscape that can be navigated – with care.
Tom Pfister is vice president of Global Product Strategy at Confluence