Focus on regulation – KPMG partner urges managers to heed UCITS V, despite regulatory fatigue

An “avalanche of regulation” threatens to overwhelm asset managers and distract them from attending to their clients, says a Luxembourg-based partner at KPMG, but he is urging managers to heed forthcoming Ucits V rules nevertheless – not least because of sections on fines and remuneration.

Charles Muller, partner at KPMG in Luxembourg, says: “Managers want a break from regulation. So much of their energy is going into regulatory issues that they have less time to look after their clients.”

The list of upcoming regulatory measures European asset managers are faced with is extensive.

Various iterations of the Ucits rules are only one part of the flood.

Other parts are Mifid in Europe and assessing the retail distribution review (RDR) in force in the UK. But European managers must also be mindful of provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act, and any implication for their activities of the Volcker Rule provisions, coming out of the US.

Muller acknowledges it can be difficult for managers to know what to focus on among such an “avalanche of regulation”.

But he says there are certain issues highlighted in the current UCITS V proposals that require particular attention from both managers and investors.

One pressing concern is the introduction of new sanctions, and in some cases even penalties leading to the loss of licenses. Managers would do well to study these areas in detail, Muller says.

Another proposed change is around remuneration policies, setting new rules on the size of bonuses managers are allowed to receive.

The proposal suggests the bonus may comprise only a certain proportion of the salary, and the manager would no longer be able to receive the bonus as a lump sum.

Instead, the payment would be stretched out over two years, subject to satisfying investment objectives for the fund. Additionally, part of the bonus would be paid in shares of the fund – ensuring the manager has a vested interested in achieving high performance.

Fund distributors are also being looked at by the EC in regards to their relationship with fund managers whose products they sell.

At the moment the distributor is paid an “inducement” from the manager, but the EC is concerned that this setup undermines the distributor’s independence.

(Such concerns partly underlie the move to fee-based payment models under RDR in the UK.)

The EC suggests, therefore, creating two types of distributors. Independent ones would be prohibited from accepting fees, while others would receive a commission from the manager and essentially act as its sales representative.

This poses the question, however, of how independent advisors will earn money. Most likely they would charge their clients on an hourly basis, just as other types of advisors do at the moment.

Some parts of Europe have already willingly embraced this model. Andreas Gruenewald, senior manager at Germany’s Association of Independent Wealth Managers, says it is logical investors pay a professional, independent advisor for expert advice they receive – or at the very least that they know if other monies are flowing to the advisor giving the advice.

But would private investors be prepared to pay for advice?

The answer can be difficult to gauge, since private allocators have not yet engaged as much as advisers in the whole discussion. Events about regulation are mostly attended by managers, while private individuals arguably remain largely in the dark regarding the implications of regulatory change.

Muller says, if the UCITS rules become too onerous, then there is a risk product design could be the loser. “At the moment there is no alternative if you want to sell products to retail investors, but managers may well try to launch something less complicated if the product becomes overregulated.”

The review of the UCITS V proposal by the European parliament is expected to be finished by the middle of next year. The rules would then take two years to implement, coming into force by 2015. But Muller cautioned that this only a preliminary estimate, provided that the parliament does not try to amend or add to the proposal.

And just when managers have tackled UCITS IV and got ready for UCITS V – with the European Commission sending off its proposal to the parliament – then comes UCITS VI, already being discussed.

In a bid to make investment products less risky, measures there will touch upon the use of derivatives and leverage, and reconsider the types of assets eligible for UCITS distribution.


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