Buy-side brace for further regulatory scrutiny

Regulators are set to shift focus from large banks to asset managers, according to a recent report.

Asset managers globally will face ‘rigorous regulatory scrutiny’ with emerging proposals from regulators including MiFID II, UCITS and AIFMD.

A report from the Boston Consulting Group explained historically the regulatory focus has been on large banks following the financial crisis in 2007-2008, but this is shifting towards buy-side firms.

Regulators will increase their scrutiny of asset management activities and products that might pose systemic risk, the report said.

“We believe that it is a matter of when - not whether - asset management activities will face rigorous regulatory scrutiny.”

The Boston Consulting Group added the most effective and proactive buy-side firms are beginning to prepare for regulatory changes and they should leverage the experience of banks that have implemented regulations in the wake of the financial crisis.

Stress-test concepts in risk management, for example, would improve an asset management firm’s resilience in times of market stress regardless of regulation.

“Consequently, the best-in-class firms will invest to accommodate the emerging trends in asset management that affect investors well before regulators take action,” the report concluded.

In November, the Financial Conduct Authority (FCA) in the UK slammed buy-side firms for enjoying high profits as investors pay high charges that are often not justified by returns.

The FCA found limited price competition for actively managed funds meaning investors are forced to pay higher charges. Fund objectives are also not always clear and performance not always reported against an appropriate benchmark.

The regulator proposed a ‘package of remedies’ to improve competition and protect those less able to engage actively with their asset manager.

The buy-side now face greater responsibility to act in the best interest of investors, increased transparency, standardisation of costs and pressure to clearly communicate fund charges.