2021-06-24-KPMG_Global-Evolving_Asset_Management_Regulation_54页_4mb

Through a new lens

Executive Summary

Regulators and policymakers are shifting focus to climate change, digitalization, and sustainable finance amid economic growth, post-pandemic challenges, and evolving investor demands. The 2020 market stress highlighted the need for better liquidity management, operational resilience, and governance reforms. While innovation is encouraged, concerns about greenwashing, cybersecurity, and cross-border regulatory divergence remain critical. The industry faces a dual challenge of supporting economic recovery while ensuring systemic stability, especially as post-Brexit regulatory frameworks and new fund vehicles continue to evolve.

01. Refocusing Regulatory Agendas

Key Points:

• Climate and Sustainability: Global regulators are pushing for standardized climate disclosures and integrating ESG risks into governance. The EU’s Sustainable Finance Disclosure Regulation (SFDR) classifies funds into sustainability tiers and mandates detailed reporting.
• Digital Finance: Regulators are addressing risks from AI/ML, crypto-assets, and digital identity. Proposals like the EU’s Markets in Crypto-Assets (MiCA) aim to balance innovation with consumer protection.
• Operational Resilience: Cybersecurity, remote working, and third-party risks require robust governance frameworks, especially with firms adopting cloud services and AI tools.

02. Requiring Sustainable Finance

Key Points:

• ESG Integration: Sustainability risks are embedded in corporate reporting standards globally, with the EU leading in asset manager disclosures. TCFD recommendations guide climate stress testing and green taxonomy development.
• Investor Demand: Sustainable funds are growing rapidly, with green bond markets expanding. Regulators emphasize avoiding greenwashing and ensuring transparency in ESG strategies.
• D&I Challenges: Diversity and inclusion policies face scrutiny, particularly regarding gender pay gaps and board representation. Regulatory harmonization is needed to address social risks.

03. Regulating Digital Finance

Key Points:

• Digital Identity & Data: Regulators promote digital IDs to streamline onboarding but grapple with data privacy and bias in AI-driven processes. Open finance initiatives aim to enhance customer control over financial data.
• Crypto-Assets & Leverage: Crypto-asset regulation focuses on market stability, with debates on stablecoins and operational risks. Derivatives use in funds now includes enhanced capital buffers to mitigate systemic risks.
• Technological Tools: RegTech applications help firms ensure compliance, but challenges remain in bridging the tech divide and managing cybersecurity threats.

04. Reassessing Investment and Liquidity Risks

Key Points:

• Liquidity Management: Regulations like swing pricing and notice periods aim to address redemption pressures in stressed markets. Regulators stress the need for accurate asset valuation under market uncertainty.
• Market Stability: Post-2008 financial crises inform reforms, including transition to risk-free rates (RFRs) and improved risk disclosures. Bond funds, ETFs, and real estate funds require updated oversight frameworks.
• Private Capital: Regulators are evaluating long-term asset funds (LTAFs) and ELTIFs to boost private investment, with tax incentives supporting sustainable infrastructure projects.

05. Redefining Firms’ Resilience

Key Points:

• Operational Risks: Firms must ensure robust business continuity plans, particularly for remote operations. Cybersecurity and supply chain risks demand enhanced governance and third-party oversight.
• Financial Stability: Changes in capital requirements for asset managers align with their risk profiles, emphasizing resilience over growth. Post-Brexit divergence requires tailored mitigation strategies.
• Technology-Driven Efficiency: Cloud computing and RegTech are reshaping operational models, but firms must address cybersecurity vulnerabilities and data governance challenges.

06. Reinforcing Good Governance

Key Points:

• Board Accountability: Regulators stress diversity and effective governance structures, especially for asset managers. Fitness and probity frameworks demand stronger oversight of leadership.
• Product Governance: Compliance with MiFID II involves robust product testing, conflicts disclosures, and consumer-centric design to prevent mis-selling.
• Vulnerable Customers: Enhanced protections for retail clients emerge through stricter advertising rules and anti-money laundering measures, particularly in digital distribution channels.

07. Recalibrating Investor Protection

Key Points:

• Retail vs. Professional: Regulators ease requirements for professional clients but tighten protections for retail investors, including clearer fee disclosures and prohibitions on unsuitable investments.
• Pension Reforms: Government schemes allow early withdrawals in crisis-hit economies, potentially increasing fund inflows but risking stability. Defined contribution plans gain prominence amid changing retirement landscapes.
• ESG Marketing: Regulators scrutinize greenwashing and mandate transparent labeling, especially in funds labeled as sustainable.

08. Redrawing Borders and Products

Key Points:

• Fund Structures: Innovations like UCITS LTAFs and Cayman ILPs cater to sustainable and long-term investments, with tax incentives driving adoption.
• Cross-Border Compliance: Brexit’s regulatory friction requires EU-UK financial entities to navigate distinct authorization regimes and equivalence decisions.
• Market Expansion: Global financial centers (e.g., Dubai, IFSC) attract foreign investment via special economic zones, boosting asset management hubs and cross-border fund flows.

Summary Notes:

1. Regulatory Alignment: Harmony across global regulations remains elusive, requiring firms to adopt flexible governance and compliance frameworks.
2. ESG & Sustainability: Climate disclosures will standardize in 2021–2022, but implementation challenges persist in less-regulated regions.
3. Digital Acceleration: AI/ML and DLT transform operations but introduce ethical risks demanding proactive mitigation.
4. Risk Management: Market fragility necessitates holistic liquidity tools and stress-testing regimes to safeguard institutional stability.
5. Hybrid Work Models: Remote operations demand robust cybersecurity and updated governance structures across jurisdictions.