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Regulatory arbitrage a major threat in 2010, survey finds

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Current attempts to tighten the regulation of financial services could lead to regulatory arbitrage among countries, according to a survey by advisory firm Kinetic Partners.

The survey, which was carried out by Kinetic Partners at an industry event held last week, found that this may weaken, rather than strengthen, supervision of the industry unless measures are applied globally.
 
The vast majority of respondents (87 per cent) believe that current attempts to regulate the financial services industry could result in regulator arbitrage among countries if not applied globally.
 
Sixty one per cent of survey respondents thought Ucits funds would grow faster than unregulated funds in 2010.

Close to 40 per cent of respondents thought that reporting requirements would change significantly in 2010, with 29 per cent believing that there will be a greater requirement for demonstrating a “culture of compliance”. Other forecasted changes include tighter regulation of over-the-counter derivatives, the need for more stringent due diligence (13 per cent) and guidelines for qualified investors.

When asked which risks should be managed, the broad consensus was that all need focus. Managing operational risk was seen as the greatest priority by 39 per cent of the survey base with market risk chosen by 26 per cent. In addition, counterparty (16 per cent), liquidity (16 per cent) and valuation risk (10 per cent) were also cited.
 
Julian Korek, one of the founding members of Kinetic Partners, says: “Our survey of senior executives in the global asset management industry gives excellent insights into some of the key trends for 2010. It points out very clearly the risk of regulatory arbitrage if countries do not co-ordinate their supervisory approach. That Ucits funds are forecast to grow faster than unregulated funds might surprise some commentators, suggesting that perhaps investors still believe that markets will remain challenging and relatively risk averse.
 
“In terms of their own structures and processes, respondents were clear that risks in all their forms were a key focus for 2010. Our clients have been talking about market and liquidity risk over the past few months.”

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