Regulation, among other things, is adding to asset managers’ operating costs. To keep overhead under control, managers are increasingly outsourcing more middle- and back-office roles. Broadridge attended FundForum in Monaco, where the issue of regulation was discussed extensively.

Complying With Regulation Continues to Get More Complex

Regulation is becoming increasingly complicated, and this is putting pressure on investment firms’ operations at a time when margins and revenues are thinning.

ESG (environmental, social, governance) regulation is a good example here. As more capital flows into ESG funds, regulators are introducing ESG frameworks to facilitate greater transparency and ensure that investors are protected against mis-selling or mis-labeling. Although regulation of ESG is necessary, the way it is being implemented has been disjointed, according to some speakers at FundForum.

Take the E.U. and U.K.’s approaches to ESG, for instance. Although the E.U.’s Sustainable Finance Disclosure Regulation (SFDR) and U.K.’s Sustainability Disclosure Requirements (SDR) have broadly similar objectives, they are far from aligned. Unlike SFDR, which is a disclosure regime, regulators in the U.K. are keen to stress that SDR is more about labeling.

This lack of regulatory harmonization globally is a problem that impacts funds across a number of major markets.

Often, regulations across different markets are introduced in a fragmented fashion, adding to firms’ operational complexities. In order to keep their operations as simple as possible, we are seeing firms delegate more of their back and middle office activities — including regulatory reporting and regulatory support — to third parties.

Expanding Product Choice and the Push Towards Outsourcing

The growing hybridization sweeping through asset management is well-documented, as more managers launch private market strategies to better diversify their return streams and underlying investor bases, amid growing macro volatility. However, the shift towards illiquid assets is also being driven by regulators, including those in the E.U. and U.K.

While the first iteration of the E.U.’s European Long Term Investment Fund (ELTIF) generated limited interest among investors, regulators are hopeful that the new, better, revised ELTIF rules will be more successful in driving capital into long-term infrastructure projects, SME businesses, and real estate.

In the U.K., the Financial Conduct Authority (FCA) is also trying to channel more retail capital into longer-term, less liquid assets (e.g., infrastructure, private debt, private equity, real estate, etc.) through the Long Term Asset Fund (LTAF), a form of open ended fund.

The move towards private markets by long only managers is a trend which Broadridge has observed for a number of years now. In order to execute such a strategy effectively, firms need to ensure their operations can handle illiquid assets and the associated challenges which come with them.

This can be enabled by leveraging the services of providers with extensive expertise in illiquid assets.

Outsourcing is Key to Navigating Regulatory Challenges

Regulation is creating all sorts of operational headaches for asset managers, but it is also paving the way for the emergence of new fund products. If firms are to deal with regulation effectively, outsourcing certain operational activities to high-quality service providers will be essential.