European asset managers buckle up for a bumpy compliance ride

June 12, 2024

Key Takeaways

  • Firms expect ESG-workloads to continue rising in Europe
  • Asset managers must monitor EU-UK regulatory divergence
  • Leveraging tech helps manage data-heavy compliance burden

Asset management in Europe, like in North America and Asia, has been shaped by the aftermath of the Global Financial Crisis in 2008 and a wave of new requirements. Keeping a handle on compliance, data, and risk management is more complex than ever and requires more resources.

According to an ION/S&P survey of executives from alternative asset managers across North America, Europe, and Asia Pacific, 47% dedicated between one and five full-time equivalent (FTE) employees to regulatory compliance work in 2023, while 42% employed five to ten FTEs; 11% had even larger teams of staff to oversee these functions.

Respondents expect the need for regulatory compliance to change the way they conduct business. One of the biggest developments was the US Securities and Exchange Commission’s (SEC) introduction of new Private Fund Advisers (PFA) rules last year, as discussed in our recent NBFI crackdown blog and podcast. In Europe, environmental, social, and governance (ESG) compliance is foremost in practitioners’ minds.

Let’s examine the broad strokes of the most significant developments in European asset management and explain why scalable technology that simplifies compliance provides the answers to the questions asked by more regulatory oversight.

ESG and data oversight in Europe

In Europe, 70% of respondents in the survey employed only one to five FTEs on compliance work last year. Nevertheless, the burden of ESG-related legislative initiatives is widely considered to be higher than in other regions and is likely to grow.

‘With regulators increasingly vocal about the need for reform in private markets – and the continued roll-out of new initiatives – there is every prospect of workloads continuing to mount,’ according to the report. ‘Respondents highlight the shift to more frequent reporting deadlines as posing the heaviest compliance burden.’

Major recent developments in the EU include:

  • The Corporate Sustainability Reporting Directive (CSRD), which came into force on 5 January 2023. The first set of companies with businesses in the EU will have to report results in mid-2026.
  • The Sustainability Disclosure Requirements (SDR), which aim to enhance transparency in how asset managers integrate ESG risks into their decision-making processes and offer investors clear information on sustainability within their portfolios.
  • The Undertakings for the Collective Investment in Transferable Securities (UCITS), which are under reform to manage risks and protect investors by aligning the requirements of UCITS more closely with those of the Alternative Investment Fund Managers Directive (AIFMD).

Such is the policy momentum that many experts reckon that European companies that fail to take emergent ESG rules seriously might find it more difficult to access capital in the months and years ahead, according to a Mergermarket analysis – European ESG laggards will suffer from decreasing access to capital.

UK rules and divergence

Another major theme asset managers must consider is the potential regulatory gap between regions.

UK financial regulation is undergoing its most significant overhaul since the 2008 crisis and promises to keep professionals in the country’s GBP 8 trillion asset management sector busy in 2024. The decision to leave the EU in 2020 allowed the government to replace and refine many laws.

The Financial Services and Markets Act 2023 (FSMA 2023) entered the statute book last summer, introducing changes that will impact asset management practitioners. The inclusion of ESG data consistency, laws around artificial intelligence (AI), and proper regulation of cryptocurrencies was front and center of the industry’s wish list.

The UK government can now repeal EU laws ‘onshored’ into UK legislation, allowing financial authorities like the PRA and FCA to establish revised industry regulations.

Introduced by FSMA 2023, the Designated Activities Regime (DAR) enables the FCA to regulate ‘designated activities’ that were previously unregulated, affecting the asset management sector.

Additionally, through investment management sector reforms, the financial watchdog aims to promote proportional regulation and innovation, including adjustments to the AIFMD and simplification of rules for non-UCITS funds.

Overall, these reforms are poised to reshape the country’s financial services landscape, emphasizing innovation, competitiveness, and alignment with global standards. Nevertheless, the European Parliament’s adoption of MiFIR and MiFID II revisions and progress towards integrated capital markets in the EU means UK market participants must monitor for regulatory divergence.

Data and tech

As regulators spin an intricate web of rules, asset managers need to ensure they have systems and processes in place to police their compliance parameters across regions while reining in costs.

Data underlies it all. Regulators, realizing that it can help them identify systemic risks more effectively, have launched multiple data-collection initiatives. Complying with this data reporting adds to the cost pressures on financial firms and can be time-consuming.

Yet, with the right systems and processes in place, data is also the key for asset managers to achieve better decision-making and efficiency.

AI, in combination with the cloud and APIs, plays an increasingly important role in this area for professionals who are pressed for time. It offers a toolkit that can analyze vast amounts of data, continuously monitor portfolios, and identify potential risks in real time. Critically, it can automate time-consuming tasks such as data analysis, report generation, and compliance checks, thereby freeing up portfolio managers to focus on strategic decision-making and client relationships.

The bottom line for asset managers is that to handle the wave of regulatory changes and future-proof their business, they must have a carefully considered digital and integrated transformation plan. Manual interventions and legacy systems can only go so far.

ION Markets

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