The latest compliance news: regulatory developments, punishments, guidance, permissions, new product and service offerings.

KPMG
New regulations can help enhance the local landscape but a diverging approach globally also creates challenges for asset management firms, a new KPMG report finds.

According to the 13th edition of KPMG’s annual report, Managing divergence: Evolving Asset Management Regulation Report 2023, jurisdictions are rolling out new rules and guidance for asset managers in areas including ESG and investor protection.

Preventing “greenwashing” is a common priority among policymakers, but they are seeking to address this concern in diverse ways. More broadly, there are efforts to make firms take account of sustainability risks throughout their business, including investment processes and remuneration policies. Initiatives relating to enhanced reporting aim to capture more firms and products in the capital market ecosystem, and to increase the flow of information from companies to stakeholders, including asset managers.

In 2023, the US is expected to publish its final requirements for funds and advisers to provide more specific disclosures based on the ESG strategies they pursue, it states. In Hong Kong, new rules on climate-related disclosures became effective in November 2022, requiring fund managers to take climate related risks into consideration in their investment and risk management processes and to make appropriate entity level disclosures.

In a similar manner, the UK's Financial Conduct Authority required larger UK asset managers to publish climate-related aligned disclosures at entity- and product-level for the first time by mid-2023, the report adds. Smaller asset managers have an additional year to comply. The FCA is also expanding these disclosures to capture wider aspects of sustainability. Its proposed SDR would introduce pre-contractual and ongoing sustainability entity- and product level reporting requirements for asset managers. Originally due in June 2023, the FCA has delayed publication of its final rules until the last quarter of 2023, given significant feedback from industry.

The EU Sustainable Financial Disclosure Regulation continues to evolve, the report states. It is widely interpreted as a labelling regime, even though the policy intention was for it to be purely a disclosure regime. Some member states would like to pivot towards a labelling regime with minimum standards. The European Commission had previously indicated that it would propose an “Ecolabel” regime for green products (including requiring at least 50 percent of the underlying investments to be taxonomy-aligned), but progress has stalled, the report continues.

The report draws information from over 11,000 publications by regulators across over 30 jurisdictions, and consolidates the insights and knowledge of KPMG specialists around the world on common regulatory themes, challenges, and market opportunities in asset management regulation.

Andrew Weir, global head of asset management at KPMG, said: “Given the cross-border nature of the asset management industry, effective management of regulatory divergence is only going to become more important over time.”

“To respond effectively to these challenges, asset managers need robust and flexible business models, with strong governance, intelligent risk management frameworks, state-of-the art technology, good oversight of service providers and appropriate distribution strategies. Firms need to manage their own costs and ensure that the costs and charges borne by investors are transparent and justifiable,” he added.

There has also been a notable increase in regulatory efforts around the world to protect retail investors, the report adds. Besides traditional themes such as product governance, there is a significant focus on value for money and transparency, reflected in new fair value considerations and disclosure requirements.

In some jurisdictions, funds are required to have licensed depositary entities, which act independently from the fund management company, to better safeguard investors. Regulators around the world also continue to create new fund vehicles or amend existing products, to offer flexibility and compete for market share. Jurisdictions are opening their markets to foreign investors. Authorities are aiming to bolster investment from professional investors, and in infrastructure to assist economic recovery, the report adds.

In addition, integrating ESG risks into the risk management process is of vital importance for all financial undertakings, the report says. Distributed ledger technology - aka blockchain - also underpins cryptoassets but is being put to good use in market infrastructure initiatives, including fund unit tokenization and settlement.