Global regulatory harmony leading to better investor outcomes
Traditionally standard identifiers have been used by the wealth management industry to improve efficiencies in transaction processing, reporting and information flows. In some jurisdictions such as Australia, identifiers also play an important role in the compliance framework.
Now the globalisation of the financial services world means that increasingly, regulatory developments in one jurisdiction can impact operators in other jurisdictions, even when the overseas development is not a local regulatory requirement.
And whilst this increasing harmonisation of financial services regulations across jurisdictions is seen by many as an increased, and unwanted, compliance burden, it has also facilitated cross border investment, while ensuring that the regulatory framework is robust.
This potentially will result in greater opportunity for Australian wealth managers and quite possibly better investment outcomes for consumers.
This was brought home to a number of Australian financial services entities in late 2017 – including banks, funds, brokers, traders, platform providers and trustees of self-managed superannuation funds – when they faced being unable to transact with European counterparties from 3 January, 2018 if they didn’t have a Legal Entity Identifier (LEI).
The LEI is a mandatory requirement of the new Markets in Financial Instruments Directive (MiFID II) reporting regime that was introduced in Europe. Although the deadline was later extended for six months, this situation serves as a salutary reminder of the implications of financial market globalisation for local jurisdictions, including Australia.
The MiFID II regulations were seven years in the making and aim to to improve the functioning of European financial markets in the wake of the global financial crisis, by shining a light on some of the more opaque aspects of certain financial transactions and, in so doing, strengthen investor protection.
Whilst providing an LEI on these transactions is only an Australian Securities and Investments Commission (ASIC) requirement for some institutional participants, many smaller Australian operators were subsequently impacted by this foreign regulatory stipulation.
Just as the regulatory requirements of MiFID II potentially impact a broad range of financial services firms locally, we can expect more instances of offshore regulation affecting local operations in the future.
Recognising the globalisation of the financial services industry is inevitable for Australia, particularly in the Association of South East Asian Nations (ASEAN) region. Industry and government have been working towards harmonising the investment and funds industries in these counties, to enable a more simplified system of cross border investment.
The rationale behind this initiative is clear. ASEAN’s financial services exports have averaged annual growth rates of almost 18 per cent since 2001. The industry is growing fast and harmonised standards will ensure the market remains efficient and transparent.
The growth in the fund management industry in Asia is driven by three overarching factors – the rising affluence of the investor base, the growth of the sovereign wealth fund industry, and the growth of government mandated savings and retirement schemes.
Australian fund managers have the opportunity to access this fast-growing investor segment, but also provide for Australian investors, and their advisers, to access Asian investment opportunities as well.
Governments across the region appreciate the importance of the fund management industry to their own policy priorities of boosting alternative sources of long-term net finance and providing retirement safety nets.
The facts are that the industry is international and investors are increasingly mobile. Recognising this, governments in the region are looking at various cross-border fund passport frameworks to make it easier for fund managers to offer products across international jurisdictions.
Initiatives such as the ASEAN Collective Investment Schemes (CIS) fund passport and the Asian Region Funds Passport (ARFP) scheme will increase the demand for financial products across the region. This is why policy makers across Asia – including Australia – are putting in place policies to help the wealth management industry continue to grow.
However, for these initiatives to work, common standards, harmonised regulations and operational processes also need to be in place across the region – standards which are robust and reflect international best practice.
To succeed however, financial services needs a strong ecosystem. The cornerstone of that ecosystem is the way the different financial products are categorised in each region – a factor that increases in importance when the prospect of global regulatory harmonisation comes into play.
Strong financial ecosystems depend on internationally recognised identifiers, that are used uniformly in information services and operational strategies. Information services include product offer documents, distribution of market data, creation of the industry corporate memory and reporting services, including to regulators.
Operational strategies include the use of standard identifiers in harmonised identification regimes, reliable reference data for automated transaction and administration systems, and the ability to integrate compliance and governance into market processes for enhanced regulatory oversight and consumer protection.
Without universally recognised identifiers, none of this is possible.
APIR and SPIN codes – which provide the identification standard for Australian managed funds and superannuation funds – together with global identifiers such as International Securities Identification Numbers (ISINs) – and LEIs have a vital role to play in facilitating the continued growth of the Australian wealth management industry and its integration into the global industry and regulatory framework.
The key benefits of standards and their accompanying standard identifiers are that they help ensure that the financial system is transparent, that payment, clearing and settlement systems work efficiently across different markets.
Standards bring transparency to a complex financial ecosystem, making it easier to regulate and making it easier for investors to access information they need to make informed financial decisions. In short, it supports the creation and operation of a competitive and resilient financial market.
In recent years, we have witnessed an evolution in the way coding systems are used in the financial services industry. Once seen as a useful way to categorise and monitor financial products, they are now an integral part of the compliance and risk management systems.
As global regulatory harmony increases, and cross border investing is facilitated, common standards and language need to be in place internationally for the system to work.
Far from creating a burdensome compliance and regulatory framework, harmonised global regulations - along with a common industry language and standard - will result in a financial system that is transparent, functional and easily understood, and investors that are confident and engaged.
Chris Donohoe is the chief executive of APIR Systems.
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