The past few years have seen a rush of new rules in Europe governing the fund management industry, as legislators attempt to protect investors and prevent abuses that could lead to financial crises. It is an unenviable task, but how can the new European Commission help, asks Mario Mantrisi?
Like any marketplace the fund management industry requires a reliable and fair basis of operation, with all participants given the chance to succeed and skill and innovation being encouraged.
But regulation naturally creates both challenges as well as opportunities. The last few years in particular have seen a ‘tsunami’ of new rules, with a number of sets of different regulatory regimes put into place in quick succession to govern asset managers in Europe.
So the focus for regulators should always be on walking the fine line between creating new rules to enforce a level playing field without causing undue strains on individual market participants. This is easier said than done, of course, but there are a number of key considerations that can help ensure that regulation helps create a level playing field.
First, it is vital for regulators in Europe to consider the global nature of the asset management industry. With new rules also being passed in key geographic hubs like the US and Asia, all the different regulatory frameworks need to work together.
Failure to do so can create unfairness and regulatory arbitrage or, at worst, split the industry. This is particularly challenging as some hubs for the industry – particularly the US – are ahead of Europe in the development of their regulatory agenda.
Second, the cost of regulation is typically front of mind for market participants. New regulation can mean new costs, such as building technology, hiring back office staff or diverting existing resources, so it is important for this to be a key consideration for regulators.
However, it is equally important for fund managers to plan for change and to take forward opportunities created by the new regulation.
Third, with so many new regulatory regimes affecting the same businesses in quick succession, the timing of rule changes must be sensibly planned. With enough time it can be possible for fund managers to work through changes and realign their businesses to thrive in what will become a new working environment.
If developments occur too quickly, regulation can quickly turn into a burden that creates consolidation, particularly with smaller fund managers, hampering competition in the industry. The asset management ecosystem is very carefully balanced and too much upheaval can create a multi-tiered market.
Fourth, it is important that regulators and fund managers work together to ensure that the potential for innovation is protected. While restrictions on activity are sometimes necessary, they must be crafted to ensure that new products and services can still be brought to investors.
Similarly, given that the asset management industry is founded on considered, well thought-out risk taking, new rules have to be carefully crafted to ensure that risk taking is not prohibited.
Fifth, a key ingredient in creating a level playing field for investors is to ensure that new rules do not build in too much complexity to what is already a complicated industry. An important part of creating a level playing field in the investment world hinges on improving transparency for investors.
A good example of attempting to maintain simplicity is Europe’s Undertakings for Collective Investment in Transferable Securities (UCITS) regulatory regime. Over decades this directive has evolved numerous times; however, it has always held simplicity and transparency at its heart. While this requires fund managers to produce a great deal of data, the benefits and reasons for doing this are ultimately clear.
Sixth, with technology always changing it can be all too easy for regulators to fall behind with what the industry is doing, particularly as the focus is often on fixing past issues. However, fund managers must work with regulators to ensure that new rules are forward looking and that they are, to an extent, driving the agenda.
Finally, and perhaps most importantly, is the need for regulators and industry participants to work carefully together on all issues and concerns. While Europe’s regulators have always acted with the best intentions, no one knows the potential impact of new rules better than the fund industry itself. The input from practitioners must be considered and incorporated into regulation for a level playing field to be achieved.
Ultimately the regulatory environment for the European fund management industry is extremely complicated, which has brought about a number of challenges and opportunities for market participants. The journey towards a truly level playing field for investors is still ongoing and regulators and fund managers both have a role to play in order to ensure that the fine line between too little and too much change is maintained.
Mario Mantrisi is Chief Strategy and Research officer and Executive Board Member at KNEIP, the leading service provider for the production and disclosure of legal, regulatory and contractual information for the fund industry
