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EU asset management reforms 'are in industry's best interests', says State Street

Regulation reform | EU asset management reforms 'are in industry's best interests', says State Street Ian Fraser

Europe's asset-management industry is generally unenthusiastic about the torrent of regulatory change emanating from Brussels right now. But according to a report from Boston-based asset-servicing and asset management giant State Street, the changes will be in the industry's best interests.

The State Street Vision Focus report 'The Changing Shape of European Investment Management' published on May 4, said that in pushing for greater transparency and improved safeguards, regulators hope to restore investor confidence in the industry. The report added that this “can only be a good thing for asset managers".

However the report conceded that adapting to the new regulatory universe will be a struggle for the asset management sector, given that it will inevitably "increase complexity in terms of reporting and cost". But it will also cause seismic changes in the industry. The Vision report added:

"Regulation will also create huge upheaval, forcing managers to reconsider many aspects of their model, from how they structure their operations to the type of product they target."

State Street's paper further warned that fund management groups that fail to brace themselves for the oncoming regulatory tsunami will be at risk of being swept away.

The report explains how the regulatory pendulum has swung away from measures designed to boost market efficiency (such as Ucits III and MiFID) that prevailed during the "Great Moderation", since the crisis, swung towards measures designed to prevent further crises and protect investors (including Ucits IV and V, MiFID II and the UK’s retail distribution review).

Mike Karpik, head of EMEA investments and fund products at State Steet Global Advisers, said that asset management firms will no longer design a product, then have a conversation with their in-house compliance team. Instead they will consult regulatory and risk teams first, before considering what to create.

This tallies with earlier predictions from State Street's former chief risk officer, Maureen J. Miskovic, who said risk management roles are increasingly moving from 'back office' to 'front office' in banks and financial institutions (see her viewpoint Risk Management at a Crossroads).

Karpik added that firms will also need to decide which market they are targeting - institutional or retail - rather than manufacturing a product and then post-rationalizing it before flogging it in different ways to different categories of investor. He said:

"... the industry will need to be much more deliberate about target markets from a much earlier stage of product development – because every subsequent stage has a cost attached."

On the institutional side, Karpik said that regulations such as Solvency II will require more frequent reporting and greater transparency.

“If you want to target insurance-industry investors, you have to ensure that you have the operational infrastructure in place to meet those regulatory requirements.”

Karpik pointed out that many institutional clients are already demanding the levels of transparency that will be required of asset managers under the tighter regime.

Contradicting what I said in my recent blog post - 'FairPensions exposes conflicts at heart of pensions management and calls for shake-up' - Kapik denies there is any conflict of interest between institutional investors (including their ultimate beneficiaries such as pensioners) and the fund management industry (quote from FT Adviser):

"Our interests are not misaligned – after all, they are our clients. Our job is to sit with them and understand their perspective and their needs ... and then take that experience to our dialogue with regulators. That way we can shape the way the regulators see the wider industry."

Some of the views in the State Street report are, however, at odds with those of many in the asset management sector. Chris Fletcher, head of retail sales at Edinburgh-based investment house Baillie Gifford, says:

"The increasing granularity of EU rules – they are regulating at a very, very detailed level (AIFMD is now over 200 pages and 56,000 words long) – while also seeking to be all encompassing and future-proofed means that we end up with huge regulatory overload and very inefficient frameworks to do business cost effectively."

Further reading on regulation reform of the asset management sector:

Tags: asset management , EU , regulation , regulators
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