In a report issued earlier this month, Boston Consulting Group sounded a warning bell to the buy-side. Following the financial crisis of 2008, regulatory measures to reform financial markets mostly targeted banks. As Boston Consulting Group explains, however, this focus has shifted to the buy-side, with asset managers now facing a future characterized by ‘rigorous regulatory scrutiny’. Boston Consulting Group cites MiFID II, UCITS and AIFMD as examples of emerging regulations that will scrutinize asset management activities like never before, and recommends asset managers prepare for them as soon as possible.
RIMES’ experience is that the regulatory pressure that asset managers are coming under is not limited to their core activities and products. Indeed, some of the most impactful emerging regulations target ‘back-office’ functions such as reporting and compliance.
An example of one such emerging regulation is the Markets Abuse Regulation (MAR), which has been drafted to increase trading transparency and crack down on insider trading and market manipulation. The Regulation stipulates that asset managers must for the first time detect and report suspected market abuse, a task which in the past they could rely on their brokers to carry out on their behalf.
In its report, Boston Consulting Group proposes that as asset managers respond to greater regulatory scrutiny, they should take inspiration from how banks reacted to increased regulation following the financial crisis. It’s an approach that RIMES agrees with wholeheartedly. In fact, we believe the experience of the wider sell-side has important lessons for buy-side firms.
Just as the sell-side did in the past, asset managers need to place compliance monitoring at the center of their operations. This includes reviewing their compliance systems and processes to ensure they are capable of handling an increased volume of reporting requirements, as well as handling the new stipulations around market monitoring and surveillance.
From RIMES’ perspective, the new regulatory environment demands a transformational approach to regulatory compliance. In-house systems and processes will no longer be adequate to the task without significant capital investments requiring large-scale disruption to get online. Instead, asset managers should consider using managed compliance solutions. The benefits of doing so are clear: economies of scale are immediately achieved through a shared, cloud-based platform; while implementation of the service requires no capital upgrades or expensive increases in in-house compliance personnel.
All buy-side firms are going to have to accept change as a part of doing business in today’s regulatory environment. RIMES’ message is that this change does not need to be hard. The managed service approach to compliance is low-cost, future-proof, and easy to integrate into existing systems and processes. In short, it frees asset managers of the challenges of compliance and allows them to focus on their core activities.