Charting the Indefatigable Rise of Public Regulation of the Investment Management Industry

Abstract

This chapter provides an overview of a marked development in terms of increased regulatory intensity for the investment management industry. This trend arguably began with policy reviews in the aftermath of the global financial crisis, scrutinising many quarters of the global financial sector in order to detect governance gaps and to regroup the regulatory objectives of finance. From the development of investment stewardship as strong soft law, investment managers and funds are scrutinised in relation to the principal-agent issues vis a vis retail investors and within the investment chain. Such scrutiny has extended more broadly to public interest issues such as how their activities affect financial and market stability. Although regulators have not introduced radical frameworks such as comprehensive product regulation, patchwork regulatory governance for market failures, such as liquidity management, marks increased intensity in the governance of investment management conduct. Crucially, we observe increased regulatory steer over investment product design and allocative directions, particularly in sustainable finance. One eminent investment manager opines, ‘There will be more pressure on compliance and fees coming our way before deregulation sweeps in to restart the party. For now, this all means increased costs – and the only way is up from here – so all of us need to adapt.’ However, more than compliance costs, regulatory governance is aimed at re-embedding the activities of investment management with public interest and social needs, a trend that may galvanise ideological new life and ultimately change the nature of regulatory governance for the asset management industry.

Keywords: asset management, financial regulation, stewardship, liquidity, ESG, sustainability

JEL Classification: K22, K29