Charles Owen founder at digital investment platform CoInvestor comments on the regulatory outlook for the new year.
If we were to take our crystal ball and look forward to what next year holds for the alternative asset industry, the dominating trend would be compliance with some very hefty pieces of regulation.
Right off the mark in January 2018, both MiFID II and the PRIIPs regulations will require alternate asset fund managers to disclose additional information on products to enable investors to better understand risk, performance and costs when comparing investment products for the benefit of advisers and their clients.
Following on in May, GDPR is set to reinforce data protection rights of individuals, increase competitive data mobility within the EU Digital Single Market, and reduce the administrative burden.
These recent European regulations all help to reinforce the ongoing regulatory journey towards protecting investors, as well as ensuring the financial services industry is transparent and behaves well. The regulatory reforms mean that alternative asset firms will have to introduce much more stringent compliance strategies than they have hitherto been used to. Overall, this is expected to translate into a pronounced shift towards the institutionalisation of the alternative asset investment sector.
The three major EU regulations being introduced – MiFID II, PRIIPs and GDPR – represent the first time all parts of the funds industry, including the smaller players, will have to step up with regards to data management. For example, it will be completely insufficient for adviser firms to continue to hold their clients’ alternative asset performance data on error-prone spreadsheets, or to provide reports derived from infrequent, paper-based valuations from product providers. All firms will need to increase transparency and will have to establish a culture of monitoring, reviewing and assessing data processing procedures.
The key for those advisers and smaller managers to staying on top of these compliance challenges is digitisation. For example:
- MiFID II: In a bid for a more transparent marketplace, fund managers will be required to disclose the required costs and charges by using a European MiFID Template (EMT), jointly designed by asset managers and distributors. The EMT includes the target market definition, distribution strategy and costs and charges for ex-ante and ex-post. The EMT data, whilst ensuring that advisers can fulfil their own obligations for client reporting under MiFID II, will additionally assist advisers who can use it for more effective product comparison and ongoing disclosure requirements.
Likewise, fund managers will need to identify target markets for the fund with regards to the new categorisation of investor (basic; informed and advanced investors). An audit trail will need to be provided in order to evidence the fact that distributors are only ‘selling’ the relevant product to the defined target market and that their financial promotion has only reached the intended audience. By definition, this will require advisers to ensure their clients are correctly classified. Data files will need to be managed accordingly, and maintained in pristine fashion.
- PRIIPs: Packaged retail investment and insurance products (PRIIPs) remain the core of the retail investment market, but are often considered complex and lacking in transparency. In order to tackle these shortcomings, the new regulation obliges those who produce or sell investment products to provide investors with key information documents (KIDs). A “live” document, KIDS will need to be updated by the fund manager as and when necessary, and communicated to the investors. For smaller alternative asset fund managers, these new data management processes will start to mirror the behaviour that the larger asset managers have been having to comply with for quite a while now. Advisers will also gain major benefits, however, in terms of easier identification and recommendation of products most appropriate for each client.
- GDPR: Designed to harmonise data privacy laws across Europe, protect and empower all EU citizens’ data privacy, and reshape the way organisations approach data privacy, firms are expected to be impacted by GDPR on four levels: legal framework (compliance with data privacy requirements), business model, technology (selection of the right tools) and embedment of data privacy in the company from the start (at all levels).
The key changes proposed by the new provisions include fines of up to 4% of annual worldwide turnover, affecting any data controller and processor targeting any EEA residents, and the appointment of a data protection officer when an organisation conducts large scale systematic monitoring or processing of sensitive personal data. Alternative asset advisers will need to focus on data protection compliance with laser-like precision given the stringent requirements of the GDPR and potential fines.
Financial advisers cannot continue to track client information simply by using paper-based trails, neither will it be sustainable to continue reporting assets back to clients via simple spreadsheets. The regulatory compliance developments from MiFID II, PRIIPs and GDPR ultimately mean that financial advisers will have to digitise their processes if they have not done so already. Such a move towards digitisation would effectively bring about the institutionalisation of the entire funds processing system, incorporating even the traditionally niche area of alternative assets and bringing it into the mainstream. The digitisation process does not exclusively deal with compliance, however, but has the added benefits of delivering better, more up-to-date and useful data leading to an overall improvement in client services – a maturation the alternative asset industry should look forward to growing into.