Looking at the year ahead, we’ve identified some of the key FinReg issues for asset managers in 2017.
2017 is shaping up to be another busy year on the FinReg front. So, we’re doing our Amazing Kreskin impersonation and identify what we think the top 10 issues the asset management industry will face over the next twelve months.
All MiFID, All the Time
Nearly a decade in the making, the EU’s MiFID 2 (Markets in Financial Instruments Directive) finally enters the homestretch. Going live in January 2018, MiFID 2 is the biggest piece of regulation facing global asset managers this year. There is a lot for asset managers to tackle in the next 12 months, including new transaction reporting requirements, increased oversight of product distributors, unbundling of research costs, and the elimination of commission payments to independent advisors.
To deal with all this, asset managers have to fight a multi-front battle that will require a tremendous resource commitment. Between now and the end of the year there is sure to be many a fraught moment and even calls for further delays. However, EU policymakers remain committed to completing MiFID 2 this year; asset managers will just have to keep their noses to the grindstone.
With the Trump victory in November, there has been a lot of speculation about what will happen to US financial regulation. While we don’t think there’s likely to be a bonfire of regulation, the GOP- controlled Congress is surely going to attempt to alter elements of the US regulatory framework.
One item in the GOP’s crosshairs is the Volcker Rule. Named after former Fed Chair Paul Volcker, the rule prohibits US banks (and their affiliates) from engaging in certain proprietary trading. The Volcker Rule also restricts the ability to sponsor private equity or hedge funds. Critics of the rule argue that it unnecessarily restricts banks’ ability to trade and is a drag on economic growth. If the Volcker Rule is repealed, there will be few tears shed by the asset management industry, in particular outside of the US; where many have been ensnared by Volcker because of tangential connections to US banks.
Will the Ongoing PRIIP’s Saga End?
Initially slated to go live this year, the EU’s PRIIPs (Packaged Retail and Insurance-Based Investment Products) ran into some choppy waters in 2016, that forcing the implementation to be pushed out to 2018. The goal of PRIIPs is to help EU retail investors to easily compare investment products offered by banking, insurance or asset management firms. While the principle behind PRIIPs is widely supported by the asset management industry, there has been significant disagreement over the details of the rule. After being rebuffed by the EU Parliament last autumn, the EU Commission is currently working on a revised proposal. There is likely to be further heated debate on what is the best form of disclosure to help investors make informed decisions. Nevertheless, a final compromise is expected by summer and asset managers will have six months to get their ducks in a row.
Fiduciary Rule Finished?
In April, the implementation of the US DoL (Department of Labor) Fiduciary Rule is scheduled to begin. The rule expands the definition of “fiduciary investment advice” to all financial professionals who work with retirement plans or provide retirement advice. The proposed rule has proved to be fairly controversial and there have already been rumblings from Trump’s advisors that they want to repeal the rule. What’s interesting is that, unlike a lot of US FinReg, it does not require Congressional action to repeal the DoL Fiduciary Rule. Once Trump’s newly appointed Secretary of Labor is confirmed by Congress, he or she can simply propose a new set of rules that could repeal the original proposals.
A repeal is by no means a slam dunk. Most firms have already started their implementation work and would loathe to have to reverse course. Furthermore, it’s politically tricky to repeal a rule that is painted as increasing investor protection. While it could happen, a delay seems far more likely than an outright repeal.
What’s Going on With the FTT?
The proposed EU FTT (Financial Transaction Tax) enters its fourth year, with no end in sight. Last year the countries seeking to implement the FTT missed not one, not two, but three self-imposed deadlines to reach an agreement. The FTT coalition is set to meet again this month to see if they can broker a compromise and agree on a final proposal. If history is a guide, this probably won’t happen. It is unlikely the FTT will be completely abandoned with the upcoming presidential elections in France and Germany (two staunch supporters of the FTT). For the asset management industry, this means another year with the FTT’s Sword of Damocles hanging over it.
Brexit, Brexit, Brexit
Seven months since the UK voted to upend the status quo and we’re really none the wiser to what Brexit will actually look like. The UK is tentatively scheduled to pull the trigger on Article 50 in March, which will formally kick off the process of negotiating its withdrawal from the EU. For asset managers, the potential impact of the Brexit is fairly clear. What remains to be seen is where on the spectrum from soft to hard Brexit will end up. The biggest concern for cross-border asset managers is whether reciprocal access for EU and UK domiciled funds into each other’s markets will continue. Hopefully by year’s end, we will have more clarity on what the age of Brexit will look like.
What About the SEC’s Grand Plans?
Over the last couple of years, the US SEC has undertaken an ambitious five part plan to overhaul the regulation of US funds. The high level plan is to:
- Modernize data reporting
- Strengthen the management of fund liquidity
- Address risks related to funds’ use of derivatives
- Plan for the transition of client assets
- Stress test funds and advisers
This year, the first two elements of the five point plan will start to go live. Still, three points remain outstanding. Given the shift in the prevailing regulatory winds in Washington, some have questioned whether the remaining points will be abandoned. A lot will depend on who replaces the outgoing SEC chair Mary Jo White. At least in the short-term, a slowdown in the SEC’s work seems likely.
Asian Cross-border Fund Passport Fever
Over the last few years, spurred on by the global success of the EU’s UCITS framework, there has been a push by Asian policymakers to create cross-border fund passports. These cross-border fund passports allow funds from participating jurisdictions to be sold freely in each other’s markets. The end of this year will see a major milestone in the drive for an Asian cross-border fund passport. By 31 December, Japan, Korea, Australia, New Zealand, and Thailand are due to have rules in place to launch the Asia Region Funds Passport.
Hong Kong’s desire to become a global fund hub is no secret. Last year, Hong Kong and Switzerland created the first ever cross-border passport between an Asian and European jurisdiction. It seems likely this will be a template for future deals between Hong Kong and other jurisdictions. There are even rumors of negotiations between the Securities and Exchange Board of India and other (unnamed) Asian regulators to establish a cross-border fund passport. In the long run, this all means that asset managers will have more options when looking to distribute funds in Asia. In the short run, it means a spike in new rule making as regulators try to get their cross-border fund passports up and running.
The Regulatory Pendulum Swings Back
The eight years of grueling regulatory change have taken their toll on the industry and policymakers alike. Much of the policy debate in 2017 will be framed around the possibility that some recent regulation may have unintended consequences. The EU’s ongoing CMU (Capital Markets Union) and US Congressmen Jeb Hensarling’s Financial CHOICE Act are prime examples of policymakers seeking to rollback or modify some aspects of recent regulatory change. Although there is growing consensus that the regulatory pendulum may have swung too far, many in the industry view these efforts with a wary eye. On one hand, there are certainly regulations they would like to see changed. On the other hand, there is no desire to go through another round of wholesale changes. Nothing puts a chill in the spine of the industry more than the thought of dealing with AFIMD 2, UCITS 6, or Dodd Frank 2. Overall, there is clearly a movement for less regulation; the question is whether that will lead to more work for the industry.
Is This the End of Internationalism?
One of the defining features of the financial regulation over the last eight years has been the explicit attempt to have more global coordination in rule making. From the coordination on OTC clearing rules to the creation of the FSB (Financial Stability Board), there has been a concerted effort to ensure there is greater harmonization in FinReg globally. However, there are signs that the harmonization train may be running out of steam. For example, there is an ongoing battle between the US and EU over the so-called Basel 4 bank capital rules, which threatens to see divergent regulatory approaches taken in each region. In the US, there’s a move afoot to restrict the US Treasury and Fed’s ability to participate in international negotiations on insurance regulation.
If this trend continues, we could find ourselves sliding back to a world of more nationally focused regulation. This could lead to conflicts between various rule sets as well as the possibility for regulatory arbitrage to reemerge.