UK investment managers have coped well with the intense regulatory pressures of the past year, but firms cannot afford to be complacent and must prepare for further regulatory change in 2015, according to a KPMG report.
The annual Financial Reporting by Investment Managers 2014 (FRIM) report, due to be published on Wednesday, analyses the latest financial reports of the UK’s largest investment managers and examines the key trends impacting the industry. Trends covered include gender diversity, executive remuneration and industry growth.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
On regulation, the report revealed that the Internal Capital Adequacy Assessment Process (ICAAP), an annual assessment of the risks investment managers face and the capital required to cover those risks, is back high on the board agenda.
In the past year, over 75% of firms surveyed1 reported an increase in regulatory capital requirements. 63% reported capital increases of over 10%, which is particularly significant as this is beyond any expected increases in expenses.
David Yim, investment management partner at KPMG explained, "The capital increase is significant as it reflects the increasing regulatory focus across the sector, with a number of high profile and high value enforcement cases observed in the last 12 months. This increase in the risk profile across the sector and continued FCA focus on governance is pushing capital requirements higher.
"Our experience of recent ICAAP reviews suggest that the regulator will not just be looking at capital requirements, but will also be scrutinising the governance processes imposed by senior management. Management must take action now and not wait to be prompted by the regulator, if they are to avoid further regulatory action or scrutiny."
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataWhen it came to the FCA’s Client Money and Asset Protection rules (CASS), the report found that some firms are worryingly underestimating the impact that the recent FCA’s CASS policy statement, published in June 2014, will have on their businesses as they work towards full compliance with the amended rules by 1 June 2015.
The FCA’s CASS rules concern how firms look after money and assets that they hold on behalf of clients to prevent misuse and allow their return in the event of an insolvency. These rules continue to remain a focus area for the regulator over 5 years on from the issues identified in the winding down of Lehman Brothers and other subsequent failures.
While firms recognised the biggest impact of CASS will be updating their businesses process and controls, many surveyed failed to understand the significant implications the regulation would have on funding arrangements and challenges to the current business models employed by management companies. The impact on funding arrangements means that investment managers may need to raise more capital to meet their liabilities, potentially impacting on shareholder return.
Paul McKechnie, senior manager, investment management at KPMG, said, "While we are almost half a year away from the FCA’s deadline for the changes to the CASS rules, given the timeline needed to design, implement and test new business processes, firms must take a more proactive approach to ensure they are fully compliant in advance of June. There is a heavy reliance on administrators and service providers to get this right, but firms need to engage to understand the full impacts on their business models. "
David Yim concluded, "Upcoming regulatory changes pose a much bigger threat to existing investment management models than management teams realise, and if not proactively addressed, firms risk damaging shareholder value.
"While there may be a lull in new EU financial services legislation being proposed and drafted, there is no room for complacency as there is still a fair way to go to implement the existing directives and regulations such as the proposed reporting requirements for Capital Requirements Directive IV (CRD IV) and the numerous Technical Standards under Markets in Financial Instruments Directive II (MiFID II).
"When it comes to implementation, we are in the first ten minutes of a 90 minute football game. Successful firms will be those who are prepared, are proactive in implementation and are ahead of regulatory deadlines."
