The ‘Big Five’ Regulations That Will Impact Most on the Buy Side
Out of all the upcoming business problems, institutional investors most fear the gamut of regulations that are set to come into play in the next year or so and how they are going to comply with the new rules.
The five regulatory activities that are set to cause the most concern for big buy-side institutions are the Alternative Investment Fund Managers Directive, the European Union’s first real attempt at regulating the hedge fund and private equity spheres, and the U.S. Dodd-Frank Act, which promises sweeping reforms to Wall Street, according to a new study by Investit, a buy-side consultancy, who surveyed 24 global investment management firms.
The other three pieces of legislation to cause most trouble are the U.S. Foreign Account Tax Compliance Act that targets U.S. tax dodgers using foreign accounts, the EU’s Solvency II directive, which are capital adequacy and risk management rules aimed at reducing the risk of insolvency, and the U.K.’s Retail Distribution Review, which aims to drive structural change throughout the retail investments industry.
“We are facing a period of regulatory crush,” said Sarah-Jane Dennis, a consultant at Investit. “The regulators are struggling to turn the politicians’ promises into formal regulation, but in a number of cases the dates for compliance are not moving. Managers need to be able to respond in a more agile way to become compliant in shorter timeframes.”
All five of the regulations mentioned above have either started to, or will become, law in the next 14 months in their jurisdictions. And there are others on the distant horizon, such as the EU’s Markets in Financial Instruments Directive, more commonly known as MiFID II, that are set to inflict as much pain again for the buy side in the coming years.
“Our industry is facing an unprecedented overhaul driven by regulatory initiatives and changing market structures,” said Andreas Preuss, chairman of the World Federation of Exchanges, a Paris-based group that lobbies on behalf of bourses.
Institutional investment firms across the globe are feeling the heat to comply to the many regulatory deadlines while, at the same time, trying to focus on developing an efficient and profitable business.
Investit suggests that focusing on one set of rules at a time is “very inefficient and can result in overlapping changes”, and recommends alternative ways of preparing in advance for the regulations—some of which may remain unclear for some time yet.
Either working from a departmental level so that you can prioritize the departments which will be most affected, such as compliance or regulatory reporting, or from a thematic level where you sort out the requirements of each regulation into thematic buckets, such as transparency, systemic risk and capital adequacy, may prove to be the best approach in the long run, according to Investit.
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.