Responding to this regulatory pressure represents an enormous task for the £7.7trn UK asset management industry*, but is one it must tackle given trust and integrity underpin the sector.
Banks have already had to cope with these regulatory demands, utilising tools such as transaction and trader surveillance.
While larger asset managers are building their own trade surveillance solutions, asset managers will not be able to simply copy what banks with bigger balance sheets have done.
Jacqui Hughes, head of wealth and asset management regulation, KPMG UK, comments on the challenges: “Taking measures to detect and prevent bad conduct is becoming ever more crucial for the asset management industry, especially with incoming regulations such as SMCR. Creating strong risk and compliance measures is critical, and many senior managers will be scrutinising their existing procedures.
“While asset managers understand what they have to do to meet regulatory demands over individual accountability, there are a number of implementation challenges.
“Unfortunately it won’t be as easy as just copying what the banks have done. Technology-led trade surveillance solutions are being built by many larger asset managers, but there have been teething problems. For example, poorly coded automated monitoring has delivered false positives that then required significant manual intervention, adding a further strain on resources. Firms are building first line of defence dedicated trade surveillance teams in response to this, highlighting the need for investment now rather than later.
“From my experience with clients, good practice may also likely entail appointing individuals removed from the portfolio management side to act as the sell-side point of contact to support the management of wall crossing. But perfecting this is still very much a work in progress, with some portfolio managers finding these measures inadvertently making them insiders, which stops them trading for clients.
“Investment in these areas now is crucial as the cost of not having it could be potentially massive fines down the line. We’ve already seen a number of headlines this year about conduct issues in the industry, and frankly, our sector can’t afford more of the same, neither reputationally nor financially. Firms should look to prioritise embedding effective solutions now.”
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