A Safer, Stricter Regime

Risk regulation compliance is playing an increasingly important role in the asset management universe, especially with a slew of regulations implemented in recent years that significantly affect the operations and practices of asset managers globally.

Changes in risk compliance in areas such as cross-border fund access and financial technology (fintech) mean Asian asset managers and financial institutions need to review and beef up their governance structures and risk control capabilities more frequently to comply with fast-changing regulatory requirements.

Jeff Plein, chief operating officer of Singapore-based Fullerton Fund Management, says there has been an increasing number of regulatory guidelines that relate to or embed requirements to institute risk management practices.

“For example, in Singapore, the risk management concepts are embedded in various areas, including technology risk management, outsourcing, and anti-money laundering. The Investment Management Association of Singapore (IMAS) has also been a key driver in raising risk awareness in the Singapore asset management industry by issuing best practice guidelines,” he explains.

This includes the Guiding Principles for Investment Risk & Performance Analysis Functions, which seek to address inconsistencies amongst Singapore’s investment management firms in their investment risk and per-formance functions. This came into force in 2015.

“As a result of the initiatives from the regulators and industry bodies, there has been a positive shift towards asset managers instituting more robust risk management practices and great risk awareness within organisations,” Mr. Plein says.

He cites a risk management survey from Deloitte Touche Tohmatsu Limited (DTTL) to highlight the fact that an increasing number of global financial institutions are devoting more time to risk oversight.

The survey of 77 global financial institutions in 2016 found that respondents adopting enterprise risk management (ERM) programmes more than doubled from 35% in 2006 to 73% in 2016. Also, 93% of respondents said their board of directors’ review and approve the overall risk management policy or ERM framework, up from 81% in 2012.

Florence Chan, head of compliance, Asia Pacific (ex-Japan) of Natixis Global Asset Management, says there has been greater risk awareness among asset managers, particularly due to higher transparency requirements and the recent strong focus on individual accountability of senior managements at companies.

She says financial institutions are taking this opportunity to revisit their governance structures and the support required to meet local regulatory requirements, which may enhance their risk control capabilities in general.

Mr. Plein points out that investor protection and transparency have been key themes underpinning the plethora of global regulations that are driving changes in the distribution and fundraising landscape.

“While these regulatory changes provide investors with greater protection, the regulatory cost-benefits to product manufacturers and distributors may not be so apparent. Generally, these changes could be perceived as impeding business initiatives where time-to-market is essential, and attrition of business margins due to rising regulatory costs and burdens,” he says. “However, rising regulatory standards have helped to increase awareness and raise competency standards amongst industry players to ensure that there is a level playing field. Regulators are also increasingly supportive of mutual recognition schemes as this helps promote the harmonisation of rules across various jurisdictions.”

On cross-border fund schemes that were launched in recent years, such as the Mutual Recognition of Funds, Ms. Chan says the asset management industry generally welcomes these fund passporting initiatives to offer more fund choices to investors.

However, each mutual fund recognition or passporting programme has different operational requirements which will further complicate the compliance and risk monitoring process.

“Generally, these programmes encourage firms setting up local domiciled funds, instead of riding on the European Undertakings for the Collective Investment of Transferable Securities, which require firms to set up local risk/monitoring processes to support these local funds,” Ms. Chan says. “In particular to Hong Kong, how the mutual fund recognition schemes, including the recently-launched Hong Kong and Swiss fund mutual recognition programme, and the long-existing recognised schemes interplay is still something that the industry would like to understand more from the SFC [Securities and Futures Commission].”

The Hong Kong and Swiss fund mutual recognition programme, which became effective in December 2016, allows eligible Swiss and Hong Kong public funds to be distributed in each other’s markets through a streamlined vetting process.

Technological risk

The rise of fintech has led the industry to become more aware of technology risk. Mr. Plein points out that a key driver in strengthening compliance and risk mitigation is ongoing collaborative and consultative approach between regulators and asset managers. “As of November 2016, a total of nine financial authorities, including the Monetary Authority of Singapore, in collaboration with financial institutions, have launched regulatory sandboxes, creating a safe environment to take risks.”

The regulatory sandboxes enable financial institutions and fintech players to experiment with innovative financial products or services in the production environment, but within a well-defined space and duration. They also include appropriate safeguards to contain the consequences of failure and maintain the overall safety and soundness of the financial system.

Mr. Plein notes that a harmonisation of guidelines on regulatory sandboxes across various jurisdictions can help enhance robust risk management practices while creating a conducive environment for interaction amongst key stakeholders, including regulators, financial institutions, and industry professionals.

As fintech solutions are evolving rapidly, some asset managers may consider integrating or partnering with providers to achieve scalability and efficiencies. This involves taking a holistic approach in assessing the risk-reward of taking on such initiatives while ensuring that they comply fully with regulatory requirements, Mr. Plein adds.

According to Ms. Chan, the diverse range of local regulatory developments in Asia is the major challenge faced by asset managers and financial institutions. International initiatives will also pose high implementation costs for the industry, she points out.

Mr. Plein says the frequency and extent of global and local regulatory changes present a challenge for key stakeholders and compliance teams to keep abreast and ensure that their firms remain compliant.

“Developing innovative products and services which appeal to the new generation of tech-savvy investors amidst global regulatory changes is critical to the success of financial institutions. To cope with rapid in regulations, there continues to be an increasing demand for risk and compliance specialists due to a small talent pool,” he says. “In addition, while financial institutions strive to achieve a higher level of automation, increasing resources and costs will need to be spent to ensure that the systems remain at the forefront of the regulatory changes.”

Source: AAM