Regulation Still Funds' Bane of Existence: Decline in U.S. Competitiveness Also a Key Concern
June 4, 2007
Regulation continues to weigh on fund executives' minds as their number-one concern, according to a PricewaterhouseCoopers survey of 400 senior finance executives at a forum last month.
Regulators remain vigilant, said Dennis Gallant, president of Gallant Distribution Consulting of Sher-born, Mass.
Over the next year, 31% of executives said they believe that regulatory costs, risks and compliance will be the biggest challenge.
Following that were concerns of the sub-prime mortgage market and increasing merger and acquisition activity, with 15% and 11% citing them, respectively.
"The good news is that there are clearly less regulations then there have been in the past five years," said Geoff Bobroff, president of Bobroff Consulting in East Greenwich, R.I.
An issue on the horizon that companies should be aware of is greater transparency of the 401(k) industry, he said, adding that mutual funds are substantially influenced and dependent on further growth of this channel.
Currently, regulators are looking to protect the aging consumer base, Gallant agreed.
The Securities and Exchange Commission has also said that 12b-1 fees were going to be assessed this year, as the concern is that the fees have become a substitute for sales loads. "This is an important issue for the industry," Bobroff said.
More firms are being proactive and anticipating where regulation rules might be heading and taking action to put procedures in place to make the rules less burdensome ahead of the deadlines, Gallant noted.
Overall, returns in the market are lower then they've been in past years and increasingly portfolio managers are asked to manage money in riskier ways. There has to be a checks and balances system in place to minimize the potential for risk, Bobroff said.
Asset managers should utilize risk management tools and have a thorough understanding of complex features, he added.
Looking ahead, over the next three years, executives believe that the biggest challenge to the financial services industry will be the decline of U.S. competitiveness in the global marketplace, with 22% of executives surveyed stating this. The concern has increased substantially, as in last year's forum it ranked fifth on the list for future industry worries.
"Despite our strength, there is a concern that the United States may be losing its dominance for reasons that are not necessarily due to our regulatory environment, said Timothy Ryan, chairman of the U.S. Financial Services Industry Practice at PwC.
"It faces new competition that never existed in the global capital markets system. We must work to identify the true root cause of the perceived decline of the U.S. competitiveness and propose solutions that do not undermine confidence in the capital markets," he said.
To remain competitive and take advantage of the international marketplace, U.S. companies might look to expand products overseas. Due to the challenges of expanding business overseas, companies are likely to accomplish this through joint ventures and mergers and acquisitions, Gallant said.
The international landscape is very different than the U.S. and different tactics might need to be applied to gain traction overseas, Bobroff said. Applying a unified approach overseas is difficult and companies need to focus on their distribution models, he said.
Many U.S. companies have made attempts to penetrate the markets overseas, but the right game plan needs to be executed. From an implementation standpoint, companies need financial staying power to retool products should they fail and then bring them back to market, Bobroff noted. Larger companies usually have the wherewithal for this, but it is more complicated for smaller firms, he added.
The process of entering the foreign markets takes time. U.S. companies that have successfully entered the overseas market have crawled before they ran, Bobroff said. Many companies have failed because of regulations, distribution models or people remaining loyal to domestic products of their country, he said.
A lot of foreign firms have not infiltrated the U.S. market, yet, experts said. International firms that decide to expand to the U.S. might put small- and mid-cap companies at a disadvantage, Gallant said.
Accounting standards are another issue that executives see as a challenge. Thirty-two percent of executives believe that simplifying financial reporting is the business performance issue that will have the most impact on the finance team over the next 12 months.
Operationalizing risk management and systems integration were the next areas of concern, cited by 26% and 22%, respectively.
The SEC's decision to eliminate settlement requirements for foreign issuers is the latest in a series of actions to streamline financial reporting through the convergence of International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles.
Thirty-four percent of executives believe the standard should be IFRS, and 44% of respondents suggested keeping two standards for now, but continuing to work towards converging them.
Eighty-eight percent of respondents agreed that a single global set of financial reporting standards should be in place. However, 68% stated they are not prepared to give up control of established U.S. accounting standards.
There is not much optimism in the industry that a single global financial reporting standard will be in place anytime soon. Fifty-five percent expect one standard by 2015, 22% said not until 2020, 6% said by 2010 and 7% believe true convergence will never happen.
"Requiring reconciliation between the two standards has been viewed by some as an enormous burden on foreign issuers," said Raymond Beier, partner and leader of strategic analysis and policy at PwC.
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