Financial Services Highlights and 2024 Outlook

While regulators are balancing opportunities for retail investors with protection measures, fintech and ESG factors are driving change within the financial services sector. Read more about these insights and stay ahead of the curve in the financial services sector.

Market Trends

Private credit continues to accelerate in deal size and diversity, with the U.S. in the vanguard with 65 percent share of transactions. According to Preqin’s most recent full-year figures, the European market has grown, increasing its share from 20 to 28 percent while the Asian markets remain steady. Retail investors and the traditional institutional investor client base are attracting private credit providers through structures such as business development companies or enroll funds.

In the registered fund segment, there has been a broad shift from active investment in mutual funds to passive investment in exchange-traded funds (ETFs), embracing new ETF products and the conversion of mutual funds into ETFs. Across the financial services industry, fintech is becoming integrated into decision-making processes, with the potential of generative artificial intelligence being explored.

ESG remains in focus in the U.S., Europe and Asia as an important offering to market, whether this means incorporating ESG factors into traditional products or creating tailored ESG-focused products for sustainability-minded investors. The political backlash against ESG in the U.S. marks a contrast in attitudes towards ESG in Europe and Asia, which are largely favorable.

Legislative and Regulatory Developments

In 2023, the Securities and Exchange Commission (SEC) doubled down on its determination to intervene in private fund operations and compliance. Significant developments that affect the private equity, private credit and hedge fund industries include the private funds adviser rule, which requires private funds to issue quarterly fees, issue performance reports and perform annual audits. The rule also requires that funds disclose certain fee structures and bars them from offering investors preferential treatment when it comes to portfolio exposures and the ability to cash out. The private fund adviser rule has also had a knock-on effect on Asian and European fundraising markets.

Finance trade associations have pushed back against the SEC’s intervention with comments and court action arguing that the SEC is overstepping its statutory authority. In the EU, the Corporate Sustainability Reporting Directive, which shifted ESG reporting requirements across Europe from advisory to mandatory, came into force for businesses that meet its size threshold.

Financial services providers have also been watching the legislative progress of the Corporate Sustainability Due Diligence Directive, which will introduce new human rights and environmental due diligence requirements for EU and non-EU companies. In Asia, Hong Kong’s Securities and Futures Commission published a circular to provide guidance on the tokenization of traditional financial instruments, a development explored by fund managers in recent years.

Outlook

The SEC’s industry intervention is likely to continue in 2024. Proposed rules to watch include a requirement for open-ended funds, other than money market funds and ETFs, to use a liquidity management tool called “swing pricing”, which would also require a “hard close” for relevant funds. If enacted, this rule is likely to accelerate the trend away from mutual funds and lead to large inflows into ETFs and bank investment products.

Another proposed rule, which demonstrates the SEC’s desire to get ahead of new technologies before they become common practice, is focused on the potential conflicts of interest associated with broker-dealers and investment advisers’ use of certain AI-related technologies in their interaction with investors. A proposed analytic framework released by the Financial Stability Oversight Council also needs to be monitored by asset managers. The framework would make it easier to designate nonbanks as systematically important financial institutions, subject to regulation by the Federal Reserve.

The year 2024 will also see the introduction of Basel III, the banking regulations designed to mitigate risk within the international banking sector by requiring banks to maintain certain leverage ratios and keep levels of reserve capital available.

The battle for control over the direction of the financial services markets – including ESG, digital assets and cryptocurrency, AI, fintech, cybersecurity and asset management – is likely to intensify in 2024. The regulatory position is, as ever, equivocal – trying to reach a balance between a growing financial market and appropriate controls to protect investors.

Sector Matter Highlights

• AIG's sale of its US$3.6 billion assets under management CLO business to an affiliate of Blackstone Inc. made Blackstone the world's largest CLO manager. Dechert advised AIG in this transformative deal, one of the most high-profile asset management transactions of 2023. This deal is a prime example of driving convergence in the asset management sector, as financial services companies of all kinds diversify amid a fast-changing ecosystem.
• Dechert represented longtime client State Farm Mutual Automobile Insurance Company and its subsidiaries as national lead counsel in its COVID-19 business interruption coverage litigation. Dechert scored numerous victories for State Farm, most recently securing a win in the Fifth Circuit with unanimous affirmation of the dismissal of a Louisiana orthopedic practice’s litigation.
• Dechert represented abrdn Inc., the U.S. subsidiary of global investment company abrdn, in the acquisition of the healthcare fund management capabilities of Tekla Capital Management LLC, which includes four NYSE-listed healthcare and biotech thematic closed-end funds with US$3 billion in assets under management.