With the UK’s EU membership renegotiations on the horizon, industry experts are suggesting we might see a more liberal set of reforms for the asset management industry both in Europe and the UK.
Two UK think-tanks, Open Europe and New City Initiative, are finalising a report that will cover current European asset management regulation and how it could be improved as part of EU reforms.
Open Europe head of economic research Raoul Ruparel says some regulation, such as the Alternative Investment Fund Managers Directive and rules on depositaries, have protectionist elements to them that should be removed.
The Aifmd, which became law in July 2013, seeks to improve investor protection by imposing new depositary standards through investor disclosure rules and mandatory client reporting.
It is intended to give fund managers the ability to market more widely in Europe, although costs will rise because of onerous reporting requirements. Each alternative investment fund has to have, among other requirements, a depositary monitoring cashflow and looking after the assets, adding further costs.
Nicholas Holman, a partner responsible for the investment funds team at international law firm Hogan Lovells, says AIMFD has gone “too far” and that the additional regulatory costs for firms didn’t translat into actual benefits.
“A lot of the regulations are treating fund managers in some respect as if they are as risky as banks and they have the same role in the financial economy, which is nonsense,” he says.
Barriers remain to any change occuring, he acknowledges. Big asset management firms can live with the regulation and, although “irritant”, they have other priorities, he says. Coupled with that, there is more to deal with in the renegotiations than just a couple of “tweaks” on Aifmd.
Holman adds that Cameron has more pressing issues, such as immigration, to focus on in the negotiations.
Law firm Pinsent Masons’ consultant Elisabeth Todd says Aifmd was the first directive to be negotiated during the stresses of the financial crisis and was designed “to address a problem that didn’t exist in reality” including the fact that fund managers had a pivotal role in causing the financial crisis.
Todd was senior counsel on Aifmd at the FCA during its negotiations in the EU and led the FCA’s UK Aifmd implementation project.
She adds: “It is commonly acknowledged that the disproportionate strictness of most Aifmd rules has had negative impacts on the real EU economy, and its intended deregulatory benefits – a single manager authorisation for access to 28 member states – have largely not materialised.”
One bright spot, experts agree, is the appointment of Lord Hill as European commissioner. Thanks to his work on liberalising the EU’s capital markets his appointment is seen as “the best thing Cameron could have done in terms of financial regulation”.
“Commissioner Hill’s stated approach is that the Commission’s overriding objective for financial services is to step back and reassess where financial regulation adopted during the crisis is less than optimal,” says Todd.
Holman adds: “The message I am hearing is that the EU authorities understand that they need to regulate asset managers differently to how they regulate banks but in terms of the Aifmd, it has protectionist elements that should be removed but I don’t think they will be.
“Anything that involved watering down the directive … is going to be politically difficult because there are people in other parts of Europe who think that investment funds caused the financial crisis.”
According to Todd, within the next few months the European Commission will evaluate the efficacy of the Aifmd passport and possibly also bring in a single market passport for non-EU alternative fund managers who have to date largely been barred from entry to EU fund markets since 2013.
“Aifmd is therefore likely to be one of the first candidates where the spotlight of Hill’s mantra on ‘less new, better existing regulation’ will quickly fall, and its rules on depositaries, delegation and possibly remuneration may well be significantly pared back,” she says.
Todd believes that the outcome will be positive for the fund management industry, including the City as an industry hub, and ”will give the impetus to a review of other asset management regulation,” including Ucits and European long-term investment funds.
“That would pre-empt what David Cameron is seeking to achieve more broadly in his political mission to push back on European regulation,” she says.
However, Britain exiting the EU would not necessarily benefit the asset management industry Blackett-Ord says: “It is true that if we came out [of the EU] then Aifmd wouldn’t apply and life would be simpler…but it is not going to be the right answer for the big guys that clearly want to market their funds to European investors.”
A ‘Brexit’ wouldn’t necessarily mean an easing up in regulation either, he says. “As a country we’ve always taken a stringent approach to regulation. Even if a Brexit happens regulation will continue.”
One downside for asset managers is that the City is treated as one homogenous block when it comes to EU views, and the talk tends to be dominated by views from the banking world, says Ruparel.
“We’d like to see more liberal and flexible approach that either you need to be specific within the different subsets of financial services or being more liberal and more macro level to allow the flexibility to shake out. At the moment we are caught somewhere in the middle that needs improvement,” he adds.
Financial services in general is “the most uncertain sector” in terms of the impact of a Brexit, Ruparel adds.
“It is quite likely we’ll be able to negotiate a trade deal on goods…but we don’t know how the deal on financial services will look. It is one of the hardest processes to estimate on what the fallout would be exactly,” he adds.
Ultimately investors have a smaller selection of funds to pick from as fewer managers outside the EU are marketing their funds in Europe, Holman concludes. “Giving sophisticated investors a smaller group of funds to chose from is a bad thing as it is limiting choice and would result in a lower returns over the next few years,” he says.
However, he acknowledges that may not be enough. “That is not a political wind for the government to change the directive”.