A ball and chain or an opportunity?

J.P. Morgan's Executive Director of Business Change, Steve Clifford, tells The Gateway about asset management's regulatory environment

Why is the asset management industry regulated?

Asset management firms are an important element of the wider financial services industry, which is subject to a constantly evolving regulatory regime. Independent regulation ensures that the necessary standards and safeguards are in place to protect our clients, as well as targeting potential financial crime, promoting financial stability, and building market confidence.

What are the most important ways in which asset management firms are regulated?

As a firm which operates a business in the UK, J.P. Morgan Asset Management is regulated by the Financial Services Authority (FSA). The extent of global regulation that an asset management firm may be subject to, beyond the oversight of its domestic regulator, will depend on factors such as where it does its business, whether it's part of a wider global group, the type of products that it sells, and where its clients are based. The industry itself is increasingly global in its coverage, and even local regulation reflects the interconnected nature of the industry. For example, the sections of the US Dodd-Frank Act on derivatives reform have had an impact on the asset management business at J.P. Morgan in the UK, and more broadly in the US, Europe and Asia.

Regulation of asset management firms starts at the point when firms provide information about their products to prospective clients, so we have to ensure that we present information clearly and fairly to all which in some circumstances may mean restrictions are placed on who can buy the more complex products offered. Once products have been purchased, a range of regulations come into play; one of the most important of these covers an asset management firm's duty to keep client money and assets separate from their own money to protect them in the event of the asset management firm's insolvency.

What are the key recent developments in asset management regulation?

In the UK, we're currently in the process of implementing the Retail Distribution Review (RDR). This legislation will change the way in which consumers pay fees when they invest their money in a fund, separating fees paid to an advisor for financial advice to those fees paid in relation to the product itself. RDR has the potential to change the shape of the industry in this country because it's expected to have a significant effect on the business models of independent financial advisers and fund managers. It's also likely that, if it proves to be successful, other European countries may wish to apply similar rules in their jurisdictions. So while RDR is largely local to the UK, its effects may be far-reaching over time.

Foreign legislation can also have significant implications for the asset management business in the UK. A good example is the US Foreign Account Tax Compliance Act (FATCA), due to come into force in 2013, which will enforce tax charges on income earned from US investments by non-US entities, and will have global impact.

How has the financial crisis affected asset management regulation?

Since 2008, there has been a step-change on regulatory matters across the finance sector, and further regulation applied to the asset management industry. Regulators are scrutinising asset managers, banks and other financial institutions with greater vigour to prevent further market failure. They've put greater demands on firms to evidence their compliance with regulation and are looking at what we're doing in general more closely. We have to adapt, and quite rightly so, because it's in the interests of consumer and shareholder protection. We're doing a lot of work to address the concerns of regulators. The size and scale of the new regulatory agenda, and what it ultimately means to the asset management business, should not be underestimated. An added challenge is that many of the compliance deadlines are in close proximity to each other and come from several different regulators.

At J.P. Morgan we aim to engage proactively with the regulator and be part of the process, not just react to the consequences of the process. Firms have an opportunity to comment on proposed changes to regulation and we've been lobbying on some of the regulatory changes for some time - for example, we've been very active in talking to the US regulator in Washington about the FATCA legislation. Our voice is often considered by regulators to ensure that proposed new regulation can satisfy its original intention, and the suggested implementation process takes account of all the necessary changes required, which could include alterations to our control systems and operating infrastructure. Where these may be too significant to be completed by the original deadline and hence introduce risk in their own right, we engage directly with the regulators to provide such feedback.

In some ways, the methods of traditional and alternative asset management firms, like hedge funds, have been converging. What does this development mean for regulation?

Mainstream funds will continue to look at new ways of generating return and to turn to the new and increasingly complex structured investments associated with alternative asset management firms.

For example, funds in the UK industry were traditionally domiciled in the UK, or perhaps Luxembourg or Dublin, but now many, particularly in areas such as real estate and private equity, are domiciled in the Cayman Islands, the British Virgin Islands, the Bahamas, or Malta. So as portfolio managers and product builders develop ever more sophisticated ways of investing, regulation will have to be tailored for the new instruments being used.

We at J.P. Morgan will continue to work with regulators and other organisations to help the markets work efficiently and in the best interests of the clients and firms, but we do believe that such products continue to have a place in the industry where correctly marketed.

What's your view on the way in which regulation from Brussels such as UCITS and MiFID is bringing increased standardisation to the industry across Europe?

Standardisation and harmonisation of regulation is a natural way to achieve greater compliance by all firms. Consistent European legislation for all of the EU member states and firms makes commercial sense as going to every single regulator in every single region on every single product offered would be a challenge to firms, and would be unlikely to produce the desired effect for consumers.

What do you see in the future for asset management regulation?

One issue that's very alive in asset management regulation now is the question of what the effect will be of the coming dismantling of the FSA and the creation of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in its place. We now need to navigate through what this process might mean for us. Who are our relationships going to be with going forward? What areas will they be focused on? What are their expectations? We don't know yet. We've met the new regulator's senior people to gain some insights, but we're going to have to wait for a while before we get the full picture.

Operationally, it's very important that we embrace regulatory change and it's key that the operations team work with the rest of the business to ensure compliance with new regulatory requirements.

To speak generally, you can look at regulation in one of two ways: as a ball and chain, or as an opportunity. We at J.P. Morgan tend to look at it as an opportunity where we can, as its intention and purpose is to raise the standards of our industry. We're asking people here to embrace regulation and learn from it - J.P. Morgan will support them with the training they need to do so because we want to make sure that we continue to be among the best at what we do.

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