2013 Dechert LLP Government, Political and Regulatory Drivers
and Challenges affecting the Asset Management Industry and their
Funds Michelle Moran April 18, 2013
Slide 2
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
Slide 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? 3
Slide 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 ? 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 Januarys 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
Slide 5
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
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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
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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
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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
Slide 9
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
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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
[email protected]
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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 Luxembourg.
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12
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Product Drivers Changes in the environment and product design
Jeremy Soutter April 2013
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14 Changes in client Demands & needs The economic
background within which we operate has changed significantly and
Volatility 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
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15 Getting Product right The first rule of investment is dont
lose. And the second rule of investment is dont forget the first
rule. And thats all the rules there are. Warren Buffet
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16 Building Products to meet demand New Product Themes Absolute
Return The opportunity for liquid alternative funds is huge and is
perhaps 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
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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
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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 18
Demands on Managers
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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
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20 Panel Discussion
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21
Slide 22
PwC Pat Wall International Tax Update Post Crisis Tax Reform
Anti Evasion Anti Avoidance US, EU and OECD Slide 22
Slide 23
PwC Portfolio Investing The Tax Minefield 23 Fund
Investments
Slide 24
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
Slide 25
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!
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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
Slide 27
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)
Slide 28
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)
Slide 29
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
Slide 30
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
Slide 31
February 2012 Emerging Trends in Real Estate Europe 2012 Slide
31
Slide 32
A Quiet Revolution- Distribution of mutual funds in 2013 Simon
Ellis, Principal- Strategies in Asset Management Carne Fund
Congress April 2013
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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
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The World as we are coming to know it Industrialisation of
advice Dominance of platforms Transparency and fees Digital &
Direct Whatever next? ?
Slide 35
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 CRMs- not allowed to go off piste
Development of adviser brands Use of DFMs Concentration of asset
flows to the biggest and/or the best
Slide 36
Rise of platforms
Slide 37
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? Whos winning the debate over costs vs. value?
Slide 38
Digital and Direct Who do customers trust? Im onlineare you?
Technology is the disrupting force Transparency, are you worth it?
Its not the future, its the here and now!