By Sven Kasper, International Head of Regulatory, Industry and Government Affairs at State Street
The volume and complexity of regulation with which asset managers must comply has grown significantly in the past decade.
Along with banking, retirement savings and insurance, the investment industry has faced growing scrutiny of its operations, following the 2008 financial crisis, as governments and regulators seek to prevent future systemic risk and improve investor protection.
Furthermore, asset management is touched by regulation intended for several sectors, as European legislation for occupational pensions (IORP), and broader issues (GDPR), compete with investment fund as well as financial markets and distribution-related rules like Mifid II and PRIIPs for their attention.
In addition, the continued growth of the asset management sector has resulted in increased scrutiny by policymakers and regulators.
This has created pressure on firms’ resources and lead European asset managers in State Street’s 2018 Growth Readiness Study <1> to list investment and liquidity regulation as two of the top three threats to their growth models.
A subsequent survey <2> of approximately 300 asset managers worldwide, including 109 in Europe, found the costs of compliance were having a profound impact on managers’ core business and operations.
Of the European respondents, 15% said they were increasing their compliance expenditure by 10% or more in the coming 12 months. Over the next three years, this figure grew to 38%, while a further 39% were also preparing for a sub-10% increase in this period.
As a result, nearly a quarter of European managers (23%) said the diversion of money and other resources into compliance meant they were likely to exit existing business lines, while a similar proportion (24%) said could prevent them expanding into new ones.
Consumers were also losing out, according to those surveyed, with 28% saying it added to investors’ costs and 24% warning that information they are obliged to pass on to consumers was too complex.
However, asset managers were supportive of effective regulation of their industry and accepted its role in making investments safer for their clients and the global economy.
Respondents to State Street’s research showed more than three quarters (76%) of European managers believed post-2008 regulation had improved investment product transparency; 71% thought it enhanced investor protection; and 69% said regulation has made a future financial crisis less likely.
With this in mind, they are looking for solutions to make their ability to comply with these regulations less burdensome of their core businesses and clients.
And European managers were ahead of the global average for automating processes, with 42% saying they had automated “many processes” for individual regulations, compared to 38% globally.
Many were also investing in technology to improve levels of automation, specifically in document creation (41%) and real time data capture and analysis (38%).
Automating processes across different regulations and jurisdictions remains a challenge (just 5% of managers had achieved this and the substantial majority <71%> of those operated in no more than two regulatory areas, which reduces their compliance burden).
However, technology investment is beginning to pay off for asset managers which commit to it. Of the European respondents who said they were not having to spend more on compliance this year, nearly half (47%) said this was because new technology has made them more efficient.
Therefore those organisations that confront this challenge and make smart investments now, should be well positioned to save money in the future that can go towards improving products and services, as well as reducing costs, for their clients.
<1> State Street engaged Longitude Research to field a global survey of 516 industry executives from 20 countries, during July and August of 2018. Respondents span investment, operations and distribution roles, representing institutional asset owners, asset managers and insurance companies.
<2> In Q1 2019 State Street and Longitude Research surveyed 309 Asset Managers worldwide about their approaches to regulatory compliance.