Deloitte's Centre for Financial Services recently published its 2014 outlook for mutual funds. Mutual funds are developing new products. They do this all the time. What's striking about the latest round of product innovation is just how different these new offerings are from traditional funds.

In the UK, fund managers will develop new offerings to capture the investment that would have previously flowed into annuities. The Chancellor's decision to end compulsory annuity purchases from April 2015 provides a significant opportunity for fund managers to offer alternative solutions.

In the US the hybrid fund is a great example of product innovation. It combines a traditional mutual fund with a hedge fund. The idea is to give investors downside protection using flexible investment strategies.

Investors want more protection. Capital protection has become much more important to them since the financial crisis. Yet the structuring required for such protection brings its own challenges. Think of the changes to fund valuation, investment constraints, tax mandates and compliance oversight. And that's just for hybrids. Surely risk management deserves its own share of innovation.

Where to begin? Right at the start it would seem. Mutual funds are doing more to understand the risk of new products before launching them. This is part of a wider move to embed risk and compliance across more of the fund management value chain. These are busy times for compliance professionals with their newly expanded roles. Risk and compliance leaders need to think about a bewildering range of other issues, including of course regulation, which stands out for three main reasons.

First, the number of rules is increasing. New rules governing money market funds are on the way in the US. Similarly, the EU Commission has proposed new regulation to ensure money market funds can withstand mass redemptions in stressed markets.

Second, regulators are enforcing rules more stringently. SEC chair Mary Jo White has signalled her intention to bring more enforcement cases against those who break rules. In its latest business plan, the FCA said it would continue using enforcement to achieve tough and meaningful action against rule breakers.

And finally, dealing with regulatory agencies is getting more complicated. The US Financial Stability Oversight Council and Department of Labor are increasingly involved in supervision.  

Pressure on risk management staff is clearly increasing. So what are fund managers doing to ease this pressure without spending too much? To date their response has centred on allocating resources more precisely to top priorities. In future funds will need more holistic risk-based resourcing models.

To explore this and other key issues for fund managers, read the report here

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