The regulatory agenda for asset managers and investment funds is now set against the most challenging economic and operational backdrop in living memory, the COVID-19 pandemic. KPMG International’s latest Evolving Asset Management Regulation report – now in its 10th year – finds that regulators have returned to their pre-pandemic agendas, but with new priorities and perspectives.
Regulators are seeking to encourage recovery and growth but are also demanding that firms take greater care of customers. Strong governance and good conduct have long been regulatory imperatives, but as we look ahead, firms’ duty of care is being reshaped and brought to the fore. Meanwhile, continued volatility in the capital markets has brought efforts to manage liquidity and leverage risk into sharp relief. It has also re-ignited debates about whether certain trading practices or fund types contribute to “systemic risk”.
Asset managers and regulators need to embrace the evolving new reality of an increasingly digital society, demands for sustainable finance and greater awareness of global interconnectedness. The use of technology has accelerated, enabling large-scale remote working and improving the efficiency of firms’ processes. Regulators are concerned that technology should be used to make things easier and cheaper for investors, while managing the increased risks of cybercrime.
The pandemic has also highlighted that all business sectors are deeply interconnected across borders, that societies of all types and wealth levels are vulnerable, and that the planet and environment are under increasing strain. Regulators are responding with new rules and changing supervisory expectations, on both environmental and social issues, including diversity.
Andrew Weir, Global Head of Asset Management, KPMG, said: “Asset managers and investment funds have largely remained resilient. The industry is now being called upon to help the recovery as we ease out of lockdown. Regulators are considering what lessons should be learnt by the industry from this crisis and firms will have to demonstrate that they have done so. Given asset values remain volatile, it may take some time for firms to regain their financial positions. Combined with changing investor demands and the need for technological transformation, this could lead to mergers, a re-focusing of businesses and changes to outsourcing practices.”
Julie Patterson, Head of Asset Management, Regulatory Change, KPMG in the UK, added: “The pandemic has accentuated demands for climate-aware investing and the ethical treatment of individuals. Sustainable finance needs to be embraced across every aspect of firms’ business models, operations and communications.”
Antonis Rouvas, Board Member and Head of Asset Management at KPMG in Cyprus said: “The pandemic has served as an accelerator into the trends we have seen over in the last few years, including the digital transformation, customer experience and ESG themes. Cyprus funds have a key role to play in not only the recovery but in the emergence of the new global economy which will be more connected, more digital and with a focus on environmental, social and governance themes.”
The report also looks at the opportunities and challenges ahead for the sector in the form of new fund vehicles, a loosening of rules on underlying assets and increased opportunities in the retirement savings market. Regulations that prevent cross-border business or impact firms in other jurisdictions are being addressed. Conversely, regulatory and fiscal demands for firms to have “substance” in a jurisdiction have increased, and the UK’s departure from the EU has created new borders that the industry must navigate.