I love deadlines. I like the whooshing sound they make as they pass.
-The Hitchhikers’ Guide to the Galaxy
It is hard to believe we are just a couple weeks away from the dawning of a new decade. Time flies when you’re having fun. While navigating global regulatory change was not always “fun,” we certainly had plenty of kicks along the way. Before OnTheRegs turns the page on (another) decade of regulatory change, we thought we’d tip our hats to some of the most impactful global regulations in the last decade. Without further ado, and in no particular order, we present the regulations that left an indelible mark on asset management.
The one that changed the European alternative landscape forever
The Alternative Investment Fund Managers Directive (AIFMD) is often referred to as Europe’s policy response to the Bernie Madoff Ponzi scheme scandal. And like the US response to the notorious Ponzi scheme, AIFMD shook the European alts industry to its core. AIFMD was implemented in July 2011 and imposed greater oversight on the managers of alternative funds such as hedge funds, private equity funds, and real estate funds sold in the EU.
AIFMD set new standards for a wide spectrum of areas including marketing, remuneration, delegation, asset valuation and safekeeping, as well as regulatory reporting. It also had significant extra territorial impact as it made it more difficult for non-EU managers to market and sell their funds to EU institutional investors. The regulation held the promise of granting managers located in non-EU countries a non-EU AIFMD passport so they could market their non-EU funds to European investors. This promise, however, has not yet been delivered and for a multitude of reasons may never come to fruition. It seems that the EU alternative fund landscape will remain a closed-circuit system for the foreseeable future.
The one that reshaped America’s capital market
In twenty years, if you were to look up “US response to the financial crisis” in an encyclopedia (who are we kidding — in a Google search) surely you’d find The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) as a top result. Passed in the US in July 2010, Dodd-Frank introduced over 400 new distinct areas of rulemaking and was said to include more than 22,000 pages of regulatory text. It created 16 new councils, bureaus, and agencies in the US regulatory system. Rather solemnly, Paul Volker, the chief architect of section 619 of Dodd-Frank, more commonly referred to as the Volker Rule, passed away recently at the age of 92. Among other things, the Volker Rule prohibited US banks from conducting certain activities on a proprietary basis and limited their dealings in hedge funds and private equity funds.
Dodd-Frank’s primary aim was to increase financial stability, accountability, and transparency across the entire US financial system. It created new regulatory bodies such as the Consumer Financial Protection Bureau (CFPB), previously unheard-of regulatory concepts such as “too big to fail,” and had expansive oversight across the US financial system, covering everything from investment banks and mortgage lenders to credit rating agencies and asset managers. Like any mega regulation, Dodd-Frank has continued to go through revisions since its inception and in 2018 a new law repealed parts of the rules exempting many banks from the legislation. When we look back on one of the most challenging eras of financial history, Dodd-Frank certainly stands out as the legislation that defined the era.
The one that impacted nearly every asset management professional in Europe (and beyond)
The Markets in Financial Instruments Directive, more commonly known as MiFID II, was implemented primarily to increase transparency and improve investor protection across the entire investment chain following the financial crisis. MiFID II was one of the most impactful regulations in terms of extra territorial impacts, particularly as it includes what proved to be thorny “Research Unbundling” requirements. In the US, the SEC thankfully granted temporary relief from the MiFID II research unbundling and inducements regulation, which it recently extended by three more years to July 3, 2023. While the European Commission voted on the rules in 2012, MiFID II wasn’t rolled out until 2018 due to the nature, level of debate, and scrutiny the ruleset went through before being enacted. For asset managers, the primary affects included onerous transaction reporting, the unbundling of research costs from other costs, greater identification of targeted client base, and disclosure of the costs and charges of their products. Its impacts have been plentiful and certain voices have recently become more vocal with regards to rolling back some of the measures which may have had unintended consequences, so we may hear more talk of “MiFID III” in 2020.
The ones that aimed to stop bad guys
Combatting money laundering continues to represent a significant global challenge (and expense) to the financial services world. It is one of the highest priorities not just of global regulators but governments all over the world. It is, as you can imagine, difficult to ascertain how much money is illegally laundered each year. An (oldish) United Nations study estimated that the amount of money illegally laundered globally in any given year is between two and five percent of global GDP or roughly $800 billion – $2 trillion. That’s an eye watering number even at the lower end of the scale.
The past decade saw a sea change in regulation and sanctions which aimed to make money laundering more difficult. Globally, the Financial Action Task Force (FATF), the inter-governmental standard setting body, continually raised the bar in this area. In Europe, regulators imposed anti-money laundering directives two, three, four, and five (AMLD) all since 2001, highlighting the evolving nature of the issue. In the US, the Foreign Account Tax Compliance Act (FATCA) of 2010 introduced a global information sharing regime in which it was agreed to exchange financial account information between any entity with US indicia regardless of where the entity resided.
The ones that opened up China to the world
The last decade saw a wide range of regulatory policies in the Greater China region, each of which gave new investment opportunities to asset managers. The Chinese government has worked to totally reform its pension system, capital markets, and its investment management industry. As part of this reform project, foreign asset managers have been afforded greater opportunity to play a central role in the transition to a more outwardly focused Chinese financial market. The scale of the opportunity is unprecedented: Deloitte’s recent China report estimates the country’s total addressable retail financial wealth market to be in the region of $23 trillion by 2023.
The spectrum of Greater China investment opportunities for asset managers now ranges from investment in China A-Shares and Mainland bonds, currency, setting up of wholly owned foreign entities (WOFE), sale of funds through a series of mutual fund recognition programs, Asia Region Funds Passport (ARFP), and Hong Kong Stock and Bond Connect. Many of these new Chinese opportunities seemed relatively inconceivable at the start of the decade but the internationalization of the China capital markets seems set to continue for the foreseeable future. The next great adventure for foreign asset managers in China could be its nascent second (employer DC plans) and third (employee retirement accounts) pillar pension system. China is in the process of framing a three-pillar pension scheme and it represents an unprecedented level of new opportunity for asset managers who can successfully build market share in this area.
While it’s appropriate to reminisce about the major regulations that shaped the past ten years in asset management, what remains true is that the pace and scale of regulation is nothing if not persistent. We look ahead to the future knowing there’s a lot happening. On the 2020 regulatory agenda we have: Shareholder Rights Directive II (SRD II), Central Securities Depository Regulation (CSDR), the UK’s Senior Manager and Certification Regime (SMCR), and the upcoming transition away from LIBOR. We also see laws and regulations relating to technology, increased market access, and distribution opportunities in the shape of China and ETFs. You can read the thoughts of our BBH subject matter experts on each of these topics in our forthcoming Regulatory Field Guide in early 2020.