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Top 12 actions for better risk management - Risk 8: Consider regulatory convergence when compiling SRRIs - EY - Global

Top 12 actions for better risk management

Risk 8: Consider regulatory convergence when compiling SRRIs

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An ever-growing number of regulatory measures and revisions need to be anticipated, understood and managed, otherwise the potential effects of “getting it wrong” are reputationally significant.

8. Firms should complete preparations of KIID/SID documents under UCITS IV and tighten their risk framework arrangements around their SRRIs, while remaining vigilant on developments with the Alternatives Directive (AIFMD).

Most firms offering UCITS products are relatively advanced in their preparations in issuing their two-page key investor information documents (KIIDs). However, several large firms reported serious concerns about how to compile their SRRIs, perhaps mindful of the need to avoid the risk of mis-selling at all costs.

ESMA, the body overseeing the technical standards for UCITS, will require seven levels of risk rating and calculation of the standard deviation of the fund returns to be evidenced to clients and regulators alike.

The current proposals under AIFMD meanwhile have softened since the heady days of 2009–10, but there are depository liability and third-country restrictions that could still be game-changing for some hedge funds, prime brokers and fund administrators.

Traditional asset managers should not be complacent, as some of AIFMD’s provisions will be used to back-fill the forthcoming UCITS V regulations. The measures could also result in fewer intended consequences for traditional firms managing real estate and investment trusts.

Given the wide variety of other prudential and financial conduct measures being applied at a national, regional and global/G20 level, asset managers should also consider whether there is merit in "digging up the road" as little as possible — in other words, manage changes to business, finance, operations/IT systems and processes with "regulatory convergence"1 in mind.

1Given that there are important commonalities and areas of overlap between some local, regional and global regulatory measures. EY has developed a Regulatory Convergence Tool to help firms make the most out of scarce resources and time by managing the impacts and supporting those firms who seek opportunities in capitalizing on the measures applied in concert.

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