Asset Management Industry

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Nov 18, 2013 (3 years and 10 months ago)

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©
2013
Dechert LLP



Government, Political and
Regulatory Drivers and
Challenges affecting the
Asset Management Industry

and their Funds


Michelle Moran


April 18, 2013



Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


Contents


What

does

the

fund

industry

look

like

in

Europe

today?


What

is

wrong?


The

main

offences


Punishment

and

rehabilitation?


2


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


What does the fund industry look like in
Europe today?

3


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


What does the fund industry look like in
Europe today
?


UCITS

continued

to

attract

strong

net

inflows

in

February

of

EUR

44

billion,

marking

a

slight

reduction

from

the

EUR

49

billion

recorded

in

January
.

All

fund

categories

registered

net

inflows

in

February
.



Long
-
term

UCITS

(UCITS

excluding

money

market

funds)

registered

large

net

inflows

amounting

to

EUR

41

billion,

a

modest

decrease

from

January’s

record

net

inflows

of

EUR

53

billion
.

Net

sales

of

equity

funds

registered

EUR

14

billion,

compared

to

EUR

21

billion

in

January
.

Bond

funds

also

recorded

reduced

net

sales

of

EUR

13

billion,

down

from

EUR

20

billion

in

January
.

Balanced

fund

net

sales

remained

flat

in

February

at

EUR

11

billion
.



Money

market

funds

experienced

a

turnaround

in

net

sales

in

February

to

register

net

inflows

of

EUR

4

billion,

compared

to

net

outflows

of

EUR

5

billion

recorded

in

January
.



4


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


What does the fund industry look like in
Europe today


Total

non
-
UCITS

recorded

net

sales

of

EUR

12

billion,

down

from

EUR

17

billion

in

January
.

Special

funds

(funds

reserved

to

institutional

investors)

recorded

reduced

net

inflows

amounting

to

EUR

9

billion,

compared

to

EUR

15

billion

in

the

previous

month
.


Total

assets

of

UCITS

stood

at

EUR

6
,
547

billion

at

end

February

2013
,

representing

a

2
.
4
%

increase

since

end

January

2013
.

Total

assets

of

non
-
UCITS

enjoyed

an

increase

of

1
.
5

percent

in

January

to

stand

at

EUR

2
,
595

billion

at

month

end
.

Overall,

total

net

assets

of

the

European

investment

fund

industry

stood

at

EUR

9
,
142

billion

at

end

February

2013
.




This

has

pushed

net

assets

of

European

investment

funds

above

EUR

9

trillion

mark

for

the

first

time
.


5


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


What is wrong?


Investors

around

the

world

lost

a

lot

of

money

which

might

have

been

understandable

if

this

was

due

only

to

markets
.

But

controls

had

been

found

wanting
.


When

examined,

products

were

being

run

in

ways

contrary

to

investor

expectations
.


When

the

bonnet

of

the

car

was

lifted

to

determine

cause



so

much

was

wrong

that

the

car

itself

needed

to

be

taken

apart
.


Governments

around

the

world

have

been

mandated

to

do

just

that

by

investors
.


Investor

confidence

needed

to

be

restored

and

fast



given

the

deficit

in

long

term

savings

and

pension

provisions
.


6


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


The main offences


Lack

of

protection

of

client

assets

-

Madoff
/Lehman
.


Lack

of

transparency

in

investor

materials

-

investors

do

not

understand

what

they

are

buying
.


Excessive

costs

-

funds

cost

too

much
.


Lack

of

adequate

supervision

of

funds,

managers,

depositaries

and

other

service

providers
.


Current

remuneration

structures

encouraged

too

much

short

term

risk

taking

when

long

term

return

was

the

predominant

aim
.


Too

much

uncertainty

on

the

application

of

rules

and

regulations

to

fund

products

due

to

divergent

approaches

by

member

states
.


Funds

and

related

service

providers

grow

internationally

but

die

nationally
.

7


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


Punishment and rehabilitation?



Lack

of

client

asset

protection


Depositary

liability



AIFMD

and

UCITS

V


Client

Asset

Protection

Rules



Lack

of

transparency


Key

Investor

Information

Document



Quiet

revolution


Spread

to

non
-
UCITS

products

(e
.
g
.

The

Netherlands)


Model

for

PRIPs


Excessive

costs


Management

company

passport

-

push

to

minimise

duplication

of

management

companies

across

Europe



Cross

border

merger

under

UCITS

IV

and

Master

Feeder

structures



encourage

reduction

in

number

of

small

funds

with

higher

TER




8


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


Punishment and rehabilitation?


Lack

of

adequate

supervision


Additional

management

supervisory

requirements

introduced

under

AIFMD

and

UCITS

IV

and

V

for

managers

and

depositaries


Detailed

rules

on

delegation

in

AIFMD

and

UCITS

V


Aligning

remuneration

with

long

term

returns


Remuneration

guidelines

in

AIFMD

and

now

current

UCITS

V

proposals



Bonus

caps

under

AIFMD

and

UCITS

V?


Uncertainty

on

rule

application


Increased

ESMA

powers

of

enforcement

under

UCITS

V


International

growth,

national

death


Greater

uniformity

on

rules

relating

to

marketing

across

Europe

and

relationships

with

supervision

of

management

e
.
g
.

AIFMD


Restrictions

on

private

placement





9


Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


Attorney Profile


Dublin

10

Dublin






Michelle Moran

Partner

Financial Services

Dublin

+353 1 436 8511

+44 20 7184 7453


michelle.moran@dechert.com



Government,
Political and
Regulatory
Drivers and
Challenges
affecting the
Asset
Management
Industry and
their Funds


April 18, 2013


Definitive advice

Practical guidance

Powerful advocacy

Dechert LLP

dechert.com

Almaty

• Austin • Beijing • Boston • Brussels • Charlotte • Chicago • Dubai • Dublin • Frankfurt • Hartford

Hong Kong • London • Los Angeles • Luxembourg • Moscow • Munich • New York • Orange County • Paris
Philadelphia • Princeton • San Francisco • Silicon Valley • Tbilisi • Washington, D.C.



Dechert practices as a limited liability partnership or limited liability company other than in Almaty, Dublin, Hong Kong and

Lu
xembourg.


12

Product Drivers


Changes in the environment and product design

Jeremy Soutter

April 2013

14

Changes in client Demands & needs

The economic background within which we operate has changed significantly and
V
olatility
will persist due to continuing turbulence in the global economy


Investors can no longer rely on long term equity growth to meet their needs (do they know
that?)


Beta
is
becoming a
commodity, investors will pay only for sustainable alpha


The value chain will fit into three categories:



End investor selecting own products whether through platform or FA (probably

only 15% of market)



Financial Planning and total solutions from intermediaries for end investor



Manufactured products
-

European small cap as component part





-

GARS as total solution





-

Institutional propositions






15

Getting Product right




“The
first rule of investment is don‘t lose.


And the
second rule of investment is don‘t forget the first
rule.


And
that‘s all the rules there
are.’’




Warren
Buffet





16

Building Products to meet demand

New Product Themes



Absolute Return


The opportunity for liquid alternative funds is huge and is

p
erhaps now becoming the most popular asset class



Most of these will be in the fixed income space as the tool

box is bigger, bets are often Macro and not at company

level



Diversified Strategy/Multi Asset Funds




Fund of Funds are changing


Ranging from the transition of the Traditional Balanced

Fund to hedge fund of funds





17

Building Products to meet demand

New Product Themes


Top managers from the big brand houses


Still strong demand particularly in equity income, globally and EM



Aberdeen GEMs



Axa Fram
-

George Luckcraft



Richard Buxton


Alternative asset classes


Real Estate still a diversifier particularly with institutions




Private Equity and infrastructure may become

available to retail investors

through new regulation of long term investment funds being discussed by


the Commission



We may see a resurgence of hedge funds as UCITS


restrictions are tightened further and
AIFMpassport



kicks in



In addition to the long list of acronyms:



ESMA

Squeezing of investment restrictions further may take best opportunities away from retail
investors








RDR

New share classes for UK, additional possible demand from taxation of rebates


UK Product Intervention

Naming convention

Asset class risk


AIFM v UCITS

Particular issue for Fund of Fund managers where NURS offers greater flexibility


-
10
0
10
20
30
40
50
60
Aviva Inv G7 Fixed Income
Aviva Inv G7 Fixed
Income USD (HF) %
Growth TR Def LC
LIBOR USD 1 Month
(IN) % Growth TR Def
LC
LGIM Global Macro
(HF) % Growth TR Def
LC
18

Demands on Managers

19

Barriers to Offshore Distribution





Changes in PP regime


Navigating the Transition from PP to AIFM passport


MIFID changes in Europe


New classes for European Distribution
-

Ban or disclosure



Does
this kill open architecture and move us to
bancassurance
?


Substance requirements and demands from Switzerland and Asia


Passport of
Manco

may no longer be most viable position to take


One domicile cannot meet all distribution demands


Position has been deteriorating for years


Regulatory arbitrage still exists


In Europe we need this to be sorted out once and for all




20

Panel Discussion





21

PwC



Pat Wall

International Tax Update


Post Crisis Tax Reform


Anti Evasion


Anti Avoidance


US, EU and OECD


Slide
22

PwC

Portfolio Investing


The Tax Minefield

23

















Fund

Investments

Compliance with
special funds regime
Monitoring fund
residence
Investment Manager
Exemption monitoring
Permanent
establishment risk
management
Fund tax compliance
Investor tax reporting
EU Savings Directive
FATCA
Withholding tax
management
Transactional taxes
Non-resident capital gains tax
Fund indirect taxes
PwC




US
FATCA


Ireland Update





Ireland
-

Model I Intergovernmental Agreement with the US.



Irish laws & regulations
will govern FATCA:


1.
Annual reporting to Irish Revenue;

2.
No 30% FATCA withholding tax on US income/gross proceeds;

4.
No withholding 30% FATCA withholding recalcitrant accounts;

5.
New account opening procedures required from 1 January 2014.




Deemed Compliant Status for Irish Funds


Slide
24

PwC

EU
-

Financial Transaction Tax (FTT)


“New” draft proposal by 11 Countries



Original proposal released in September 2011; already rejected!



Would impact both EU ( all 27!) and non
-
EU financial institutions.



11 countries who have formally joined the Enhanced Cooperation on FTT



7 other countries already operate some form of FTT = Stamp Duty



Financial institutions need to be lobbying!



Multi layered nature of tax discriminates against investment via Funds!



Slide
25

PwC

EU
-

Alternative Investment Fund Managers
Directive (AIFMD)


Tax related Aspects


Operating conditions (conflicts of
interest, treatment of inducements
and fair treatment of investors)


The role of the risk management
function


Delegation


Reporting requirements and
frequency



PE Risk


Transfer Pricing


VAT

February 2013

PwC

Cannes, 11 & 12 October 2012

27


OECD Trace Project


What on Portfolio Investors

Existing Systems
-


“Traditional”




Residence country:

-
investor reporting implicit in
requirement to obtain cert (tax
treaty)

-

exchange on request


Source Country:

local
paying
agent can apply TRS


Weakness: layers of
intermediation, paying agent
may not have sufficient
information to apply TRS

(TRS = tax relief at source)




Investor
Residence
Country
C
B
A
Tax Authority
Source Country
Paying Agent
Source Country
Repayment
claims and
residence
certificates
TAX
Payments
PwC

Cannes, 11 & 12 October 2012

28


Proposed New System
-

OECD TRACE



TRACE = Treaty Relief and
Compliance Enhancement


QI system plus Investor
Reporting


Investor reporting to
Source/Residence Country


Contractual arrangements &
procedures drafted


To be finalised later this year


Similar to EU Commission
recommendation (“Simplified
withholding tax relief
procedures”)



Investor
Residence
Country
C
B
A
Non qualified
/
Authorised
Intermediary
Country C
Qualified
/
Authorised
Intermediary
Country A
Qualified
/
Authorised
Intermediary
/
Paying
Agent
Source country
paying agent
Tax Authority
Source
Country
Investor
information
Investor
information
Investor
information
Pooled rate
information
Pooled rate
information
TAX
Investor
Reporting
PwC



OECD
-

Report on Base Erosion and Profit


Shifting



Key pressure areas

-
hybrid mismatch arrangements

-
the tax treatment of related party debt
-
financing,
captive insurance and other intra
-
group financial
transactions;

-
transfer pricing

-
effectiveness of anti avoidance measures (GAAR,
CFC rules, thin cap)

-
availability of harmful preferential regimes







Slide
29

PwC

Post Crisis Tax Reform

Investors to pay a price.........




Impact on after tax profits..BEPS



Transactions taxes....FTT



Withholding Taxes...Dividends & Gains



Reporting....FATCA and cousins




Increased Cost and Risk


Slide
30

February 2012

Emerging Trends in Real Estate Europe
2012

Slide
31

A Quiet Revolution
-

Distribution of mutual funds in 2013

Simon Ellis, Principal
-

Strategies in Asset Management

Carne
Fund Congress
April 2013

The World as we knew it


Providers, as “factors”, control the value chain


Distribution highly fractured, except integrated banks


Ltd ‘professional’ buyers
-

‘ignorance’ is bliss, for some


Push factors dominate sales and marketing


Fund management companies as ‘the good guys’


AND THEN…

Credit Crunch

Extended poor returns

Regulatory scrutiny

RDR


World as we are coming to know it


Industrialisation of advice


Dominance of platforms


Transparency and fees


Digital & Direct


Whatever next?


?

35

The Industrialisation of advice



Fees remove the role of fund manager as “factor”


The
Distribution Firm determines the proposition



Use of platforms, portfolio planning tools and
professional research



Advisers becoming CRM’s
-

not allowed to go “off
piste




Development of adviser
brands


Use of
DFM’s




Concentration of asset flows to the biggest and/or the
best

Rise of platforms


Pre RDR= 50% of flows, month 1
-

75%!


Why? Adviser charging!


Dominant players emerging
-

Top 20 are 82% of
aua


Costs of disintermediation for
FM’s


Another cost in the value chain, and controlling access to mass
distribution


Technology driving decision
-
making




Transparency and fees


The most immediate focus of attention


Expect more demand
-
side pressure AND regulatory
attention






Are there any practices that could be considered unfair,
unreasonable or unclear?


Who’s winning the debate over costs vs. value?





Digital and Direct



Who do customers trust?


“I’m online…are you?”


Technology is the disrupting force


Transparency, are you worth it?

“It’s not the future, it’s the
here and now!”

A Quiet Revolution…but it’s making a
Big Bang!