This is the fourth in a series of blogs on the drivers of change in asset management in 2015 – in this blog we look at regulation and how it is shaping the industry in which we work.
The demand for regulatory transparency at firm and fund level is reaching a point that many firms never thought was possible. For example, the world of alternative funds has been introduced to Form PF in the US and the AIFMD in the EU, bringing a level of transparency to a world which was once very opaque and certainly unfamiliar with the regulatory stick.
The growth of regulation being experienced by asset managers is having a direct impact on their distribution strategy, since the regulatory inertia that firms must overcome in order to distribute efficiently in certain locales is working its way into the strategic decision making process on the where-to-next question.
If asset managers only had to worry about regulations they were subject to directly, that in itself would be a serious burden to carry. The issue for many firms is that they are also exposed to indirect regulation via their institutional client base that are subject to regulation which in turn has a direct impact on their asset management partners. For example consider the impact of Basel III (CRV IV / CRR) which originated in the banking industry, and Solvency II which originated in the insurance industry – both of these regulations have an impact on the asset management industry that is placing demands for timely transparency and reporting which was heretofore unheard of.
The problems being created by the waves of regulation are myriad – consider the following:
- Exponential growth in custom reporting: in a lot of cases firms are building a mesh of overlapping custom reports for many of their clients to support client driven regulations. Each new client requires a whole set of new reports to support that mandate.
- Lack of co-operation – standards: there is not enough cross-border communication and activity to drive some level of uniformity in response. A notable exception would be the Tripartite data standard response to Solvency II, whilst yet to be tested with vigour in the market, is a great example of how the industry needs to plan and prepare.
- Lack of co-operation – utilities: new regulations have also exposed gaps at market infrastructure level. The vendor community have certainly recognized the gaps and have responded with vendor driven utility response. Coherence and singularity of response is important to creating a robust scalable response to the changes afoot.
- Look-through: a lot of the newer regulations have strict internal and external look-through requirements for portfolio holding based reports which in turn is driving firms into the uncomfortable scenario where the only route forward appears to be exchange of data that is in many cases highly sensitive and considered to be strategic intellectual property – e.g. holdings. Thankfully some utilities have emerged that facilitate external look-through, without firms having to share data with each other, rather only with the end client.
- Timeliness and frequency: some of the newer regulations have timeliness demands that are stretching the realms of possibility in terms of reporting signed off data. Take Solvency II as an example – in order for asset management firms to satisfy the needs of their insurer clients they have to supply data around the BD 3-5 period – which for many firms is highly problematic as they often do not have accounting reconciled and signed off data by that point.
- New data and analytics: new regulations bring new data requirements – both data that is required from external vendors, as well as data that have to be derived or calculated internally. For example consider the risk weights and exposure classes that CRR brings, the look-through views that Solvency II brings and the myriad of AUM and RAUM (Regulatory AUM) views that are reported or used as triggers for response to other regulations.
So where does this leave firms today? Well some are heading for the door and running away from the challenge where the cost of overcoming the inertia created by regulation is too high, while others are heading for the regulatory runway and building out a strategic response to regulation that positions them to take a firm hold of the opportunity that the regulatory tumult is churning up.
Those that see the regulatory churn as an opportunity are tuned into the adopt-and-adapt mode that is necessary to succeed and seeking out vendor partners who are aligned with their view of the journey ahead.
While the demands of various industry regulators are starting to correlate with, and in many cases now exceed, those of the most demanding institutional investor. The next installment in this blog series will look at the specific challenges being posed to the industry by the ever increasing burden of investor demands for more information, analytics and transparency, and how in particular this is driving change…
Filed under: asset management, Regulation Tagged: AIFMD, asset management, asset manager, Asset Managers, Basel III, compliance, CRD IV, data governance, Data Quality, distribution, Form N-MFP, FTK Inv. Statements, GroMiKV, Regulation, reporting, Solvency II, SolvV, VAG
