Evolving Investment Management Regulation 2012: A clear path ahead?

FINANCIAL SERVICES Evolving Investment Management Regulation A clear path ahead? June 2012 kpmg.com Lead Editors Charles Muller Partner, Financial Services Regulatory Center of Excellence, EMA region KPMG in Luxembourg James Suglia Head of KPMG’s Investment Management Sector, Global Advisory Bonn Liu Head of Investment Management, KPMG’s ASPAC region Financial Services Regulatory Centers of Excellence Giles Williams Partner, Financial Services Regulatory Center of Excellence, EMA region KPMG in the UK T: +44 20 7311 5354 E: giles.williams@kpmg.co.uk Jim Low Partner, Financial Services Regulatory Center of Excellence, Americas region KPMG in the US T: +1 21 2872 3205 E: jhlow@kpmg.com Simon Topping Principal, Financial Services Regulatory Center of Excellence, ASPAC region KPMG in China T: +852 2826 7283 E: simon.topping@kpmg.com About this report This report was developed by KPMG’s network of regulatory experts. The insights are based on discussion with our firms’ clients, our professionals’ assessment of key regulatory developments and through our links with policy bodies. We would like to thank all members of the editorial and project teams who have helped develop this report. Editorial and project teams Weronika Anasz KPMG in China Aggie Anthimidou KPMG in the UK Tom Brown KPMG in the UK Rachael Kinsella KPMG in the UK Jonathan Lee KPMG in China Meghan Meehan KPMG in the US Zoë Pope KPMG in Canada Heleen Rietdijk KPMG in the UK Dee Ruddy KPMG in Luxembourg Cara Scarpino KPMG in the US John Schneider KPMG in the US Brittany Spriggs KPMG in the US Mireille Voysest KPMG in the UK © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Contents Foreword 2 Executive Summary 4 01 Global overview Global Perspectives: Investment Management faces a regulatory avalanche Perspectives:EMA – 6 Cross-border challenges and opportunities Perspectives: ASPAC – 9 A diverse region with multiple challenges Perspectives:Americas – 11 A time for change 02 Retail products and distribution – Increased transparency and customer protection EMA – Investor protection 14 comes to the fore ASPAC – The fast pace of change 17 US – A seismic shift 19 03 Alternative Investments 21 Global hedge funds – Adapting to change A view from Offshore 24 04 Institutional perspectives EMA – Evolving operations 25 and strategy US – The calm after the storm? 28 ASPAC – Loosening the reins? 30 06 Capital Markets – The impacts of market structure changes EMA – Market transparency 35 and integrity US – Restoring investor 37 confidence ASPAC – Growth without 39 systemic risk 07 Tax goes global – Risk management has to follow... EMAChallenges – 41 FATCA, Financial Transaction Tax and more… ASPACChallenges – 44 Cross-border issues USChallenges – 45 A unique situation 08 Pensions – Increased disclosure and reporting requirements EMA – More than just solvency 47 requirements... ASPAC – Population growth 51 and structural change US – Issues and opportunities 53 09 List of Abbreviations 55 10 Acknowledgements 56 05 Governance and responsibility – More than just compliance... EMA – Compliance also 31 creates opportunities ASPAC – Aligning 33 international standards US – New rulings and regulations 34 © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Foreword A new regulatory order? Jeremy Anderson Global Chairman, KPMG’s Financial Services Practice In response to economic and regulatory change, the investment management industry, like the financial sector as a whole, is evolving and re-shaping. Post-crisis, the banking industry has been at the forefront of the policy debates, with the regulatory agenda focused firmly on the potential lack of capital, the need for more robust liquidity coverage, the opaqueness of the derivatives market, the structural and systemic issues being addressed under the ‘too big to fail’ agenda and the continuing debate on remuneration. The investment management industry also has issues, but the policy response to the crisis remains focused on banks. So this raises the question: why do surveys and other commentary from the investment management industry show that regulatory pressures, challenges and costs are the most significant issues currently facing the industry? Wm. David Seymour Global Head of KPMG’s Investment Management Practice © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Evolving Investment Management Regulation | June 2012 | 3 What are the regulatory challenges for the investment management industry? This publication sets out perspectives from our experts across KPMG’s global network of firms, as to how we believe This conundrum is solved by looking back at the G20 communiqués. There are common themes running through the communiqués from Seoul and Nice, including: • Financial stability • Addressing the inter-connectivity of the financial system • Assessing the policy response to shadow banking • Delivering a fair outcome for consumers. In the melee of the current regulatory reform initiatives across the globe, it is easy to forget that the G20 agenda is still the driving force to fundamentally fix the problem, rather than address the symptoms – and importantly, there is still a public commitment to meeting the G20 requirements within the agreed timelines. For the investment management industry, this means putting the regulatory change in the context of the G20, as opposed to looking at the structural failings that have been well-documented post-financial crisis. It is clear that the industry is an important component of the overall system – after all, considerable amounts of client assets and funds are held and managed by the industry. Equally, these assets are often held by the banks and used to provide liquidity to the market. The investment management industry cannot be viewed in isolation and would certainly feel the impact of any major banking default. In addition to economic and systemic pressures, the investment management industry has its own set of challenges. There has been a lot of talk about the role the industry plays in ‘shadow banking’ – either through stock lending, the repurchase agreement (repo) market or through money market funds. Customers are the lifeblood of the investment management industry – and there is recognition that some players have not dealt with their clients’ assets in a balanced, thoughtful and appropriate manner. At the macro-level, it becomes clear why the pressure from the regulators is so significant. The key challenge is to maintain perspective around the macro-issues and not to be overwhelmed by the day-to-day supervisory approach. Lastly – and in many respects most importantly – the key challenge is now how to deal with this regulation on a practical level. Certain legislation is costing substantial amounts of money to implement where there is little direct value creation – the most notable example is the Foreign Account Tax Compliance Act (FATCA). Other regulations are likely to affect the costs of executing transactions for clients. The proposed structural changes – notably the Volcker provisions in the US Dodd-Frank Act; the revised Markets in Financial Instruments Directive (MiFID 2); and European Market Infrastructure Regulation (EMIR) in Europe – may well impact investment returns. There are also the wider investment protection measures, which are either being implemented, proposed or are due in the major centers of the world. These are designed to improve investor protection and reduce global systemic risk, but they will come with costs – and there is still the question of what the end user will bear or be prepared to pay. these key themes are being addressed; the challenges that we believe will emerge along the way; and what all of this may mean for the industry. Inevitably, some will disagree with our point of view or perceptions, but the policymakers are now addressing the issues and we think it is important that the industry is clear about the long-term implications of such change. Sometimes the day-to-day challenges from individual supervisors within the regulatory bodies across the different jurisdictions create so much work and incur so much cost, that the original intention of the G20 communiqués is overlooked and forgotten. It is important for investment managers to keep this in mind, not only for the day-to-day operations of the business, but in future and strategic planning. The investment management industry cannot be viewed in isolation and would certainly feel the impact of any major banking default. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. ... - tailieumienphi.vn