Andrew Haldane, a director at the Bank of England, referred to the “age of asset management” in a speech he gave in London in April. His point was that although asset managers do not carry many of the risks – for example, credit, market and liquidity – faced by banks, the regulators are attuned to the risks posed to the financial system by non-banks, including asset managers, following the shrinking of the banking sector.
This has thrust asset management to the heart of global capital flows. Assets under management are estimated at US$60 trillion to $70tn and growing across the countries in the Organisation for Economic Cooperation and Development (OECD), and could grow bigger yet globally as incomes and wealth increase across thinly penetrated developing economies.
According to last year’s KPMG Investment Management Industry Outlook Survey, the world’s biggest investment management firms overwhelmingly believe that political and regulatory uncertainty pose the biggest threat to their business models. Understanding and complying with regulations has been painful and, for many firms, has entailed material cost. The regulatory focus on asset management firms brings additional costs of compliance at a time when margins are under pressure because of greater competition from new channels and products. This is causing firms to reorganise themselves with combined compliance and data management programmes while keeping costs competitive through the outsourcing of selected back office functions and direct marketing to consumers.
Where there was once disparity between regulatory initiatives, pan-regional organisations such as the International Organisation of Securities Commissions, the Financial Stability Board and the OECD have started to close the gaps in rule-making in an attempt to create coherence. In time, this should make it easier for the asset management industry to operate globally.
The growing clarity and coherence of regulation are not the only positives for investment managers this year. Much of the substance of regulatory reform is also beneficial. This substance includes greater investor protection, systemic protection and the opportunity to distribute regulated products to a wider client base.
Consistent with what has been witnessed across the GCC region, there has been increased activity on the regulatory agenda in the UAE over recent years. In 2012, the Investment Funds Regulation (IFR) was transposed into UAE law and regulatory responsibilities for the licensing and marketing of investment funds and a number of related activities were transferred from the Central Bank of the UAE to the Securities and Commodities Authority (SCA).
It is understood that the UAE is considering implementing a “twin peaks” model of financial services regulation and supervision, and the IFR represents the first move in this direction. Under this model, the Central Bank will be responsible for systemic stability and prudential oversight, while the SCA will be responsible for the conduct of business matters, including markets oversight and consumer protection.
A key aspect of the IFR is that investment funds, which are established within UAE free zones, will be considered foreign. This has been a surprise to the market, in view of the direct impact that these regulations could have on the Dubai International Financial Centre (DIFC) and its own regulations, which have attracted a significant number of international financial firms.
The main concern is that by classifying DIFC-based investment funds as foreign, the cost of running a DIFC fund will increase and the benefits decrease. The DIFC has traditionally been seen as the gateway to the Middle East, so by not offering concessions to DIFC-based investment funds the regulation could affect the attractiveness of the UAE as a place to operate investment funds.
The new investment management regulations released by the SCA this year provide greater protection for investors in UAE investment funds.
With the shift of regulation of investment and fund-management activities to the SCA, all existing entities carrying on such activities in the UAE (including banks and investment companies) will be required to obtain a new licence from the SCA by February 28 next year.
The recent amendments create a prudent balance between maintaining retail investor protection, and promoting the UAE as an attractive financial hub for fund sponsors and managers seeking to attract investors. International fund sponsors and managers that operate from, and funds domiciled in, the DIFC are treated as a foreign jurisdiction under the investment management regulations and will benefit from the recent amendments. In particular, the access to the exempt class of investors in the UAE underpins DIFC’s unique selling point as a gateway to the wider UAE.
Ian Gomes is a partner and the head of advisory and markets at KPMG Lower Gulf