Adrian Whelan: After a decade of new regulations, it seems like we’re entering a period of refinement and improvement. Do you feel the regulatory framework now works as intended?
Gareth Murphy: It’s fair to say that there was a huge volume of new regulations produced at quite a fast pace over the last decade or so. Major regulations such as the European Market Infrastructure Regulation (EMIR), the Alternative Investment Fund Managers Directive (AIFMD), the second Markets in Financial Instruments Directive (MIFID II), the fourth Capital Markets Directive and Regulation (CRD IV), and the review of the European Supervisory Authorities (ESAs) means that there is now some tidying up to be done of these regulations. We are in a period where it is appropriate to revisit and refine those rules.
The implementation and embedding of these regulations have created challenges for all stakeholders. The ESAs and national regulators have substantial remits but have limited resources. Asset managers have had to allocate significant resources on implementing complex rule books and ensuring compliance with them. One particular point that warrants mention is the collection of regulatory data across the vast body of financial regulation which is not well joined up and, in my opinion, may be a major source of operational and compliance risk for financial services firms.
Christine Brentani: The amendments to ESMA’s founding regulations will have an impact on its governance, organizational structure, and mission from 2020. ESMA will take on increased responsibilities in terms of direct supervision, investor protection, and other goals which will impact its governance, organizational structure, and mission and we will have to see what this means for impacts on firms.
When regulators implement regulations differently in different jurisdictions, it can pose challenges for firms running global business models. Firms would generally prefer a level playing field approach by regulators in terms of implementation of the same regulations across the globe. This allows for less costly implementation and managing of regulations across the business. It would be beneficial for firms if regulators could better align rules globally as they review, assess, and tweak the rules which have already been implemented.
What do you think will be the biggest regulatory issue for asset managers in 2020?
GM: Interesting question! But I would say there is more than one big regulatory issue for this year such as the implications of Brexit for financial services, the development of more demanding requirements around operational resilience, and the setting of higher standards of senior executive accountability. On the third point, the UK is well down this path and other European countries are following in their own ways.
CB: Two other regulatory initiatives that asset managers will be working on include roll-out of the EU (and domestic) sustainability agendas and LIBOR transition.
Do you think we’ll at any point see a period of deregulation?
GM: Not in this life – maybe the next!
Actually, I see three things happening in parallel. First, old rules will be tidied up — but slowly. Second, new rules will come in, but I am not sure whether they will be written better than the old rules. And third, supervisory approaches will become more demanding.
CB: It will also be interesting to see how regulators use new technology (regtech and fintech) solutions for the analysis of the vast amounts of regulatory data they are currently collecting. What effect will this have on their current approach to supervision? Will they be able to do more with less? Beyond their own use of new technology, regulators, now more than ever, must be knowledgeable about nascent technology as they are often tasked with deciding whether to regulate it or not.
We have also recently seen the genesis of regulatory sandboxes globally. These allow firms to test products and services in a controlled environment. Again, it is not just industry participants that are evolving to take into account new complex technological dynamics; regulators are too.
There was a global focus on fund liquidity in 2019. Where does this debate go in 2020?
GM: It continues. It is instructive to look back at the much-publicized ESMA Liquidity Stress Testing Guidelines from 2019. Embedded within the guidelines are expectations of how “open” certain funds should be and how liquidity should be managed and reported. These expectations remain at the forefront of the debate.
An increase in market volatility leading to reduced liquidity or difficulty in pricing, similar to what happened in 2008-2009, could expose weaknesses in some funds and may even stress the authorized participant model (AP) that supports exchange traded funds (ETFs). Should pronounced volatility reappear this year we can anticipate liquidity will be front and center once again.
CB: I’ll add that the UK has also issued new rules recently for illiquid assets in open-ended funds which ensures the focus on liquidity will continue throughout 2020.
ESMA always has a robust regulatory change agenda. What are the key issues to look out for in 2020?
GM: The approach to assessing the UK as equivalent across regulations such as MiFID II, EMIR, and AIFMD will be critical. Another key issue will be the impact of Brexit on third-country (non-UK) relationships, especially in the area of delegation. Also, as I mentioned, we should expect to see further initiatives in relation to supervisory convergence achieved through ESMA using its newly minted powers more fully.
CB: ESMA has already published its 2020 annual work plan stating that its key priorities are supervisory convergence, risk assessment, single rulebook, and direct supervision.
Beyond ESMA, sustainable investing and the integration of environmental, social, and governance (ESG) considerations into investment decision-making, the MiFID advice process, and firms’ operating models will continue to be significant areas for policymakers. The development of a regulatory framework by EU policy makers to support ESG has posed some challenges. Lack of relevant ESG data remains a fundamental concern for asset managers when it comes to the implementation of recently adopted regulation on disclosure and the EU taxonomy to determine whether an economic activity can be deemed sustainable. In addition, some of the detailed requirements on sustainability-related disclosure and changes to the operating models of UCITS Mancos, AIFMs, or the MiFID advice process still need to be finalized by EU legislators. Asset managers, in turn, will need to have sight of the expected rules sooner rather than later to manage the challenge of a rather tight timeline for application.
The EU Commission must consider issues to do with the taxonomy definitions, time periods for implementation, and consistency of approach across all regulations (e.g.: MiFID II, UCITS, AIFMD). Firms will be poised to see how they can implement these new rules as an opportunity for their clients. The challenges of implementation apart, the new rules should provide an important mechanism to bring more transparency into the ESG market and ensure clients are better informed about the sustainability-related risks of their investments, as well the actual impact of products marketed as sustainable.