Germany’s regulator talks to David Walker about steering the industry between investor protection, product innovation and competitiveness of the jurisdiction.
Germany’s regulator talks to David Walker about steering the industry between
investor protection, product innovation and competitiveness of the jurisdiction.
Thomas Neumann, head of the department supervising Germany’s fund industry at regulator BaFin, is aware of the requirements of the industry he oversees, as well as the sometimes conflicting needs of investors in it.
On the one hand, the head of collective scheme supervision at BaFin does not want regulation that needlessly constricts the activities of managers. This may be in contrast to the prevailing mood among many people who have called for tighter regulation since the financial crisis.
On the other hand, Neumann’s department has introduced strong rules around portfolio risk management and disclosure since the crunch. It also took supervisory measures against managers it believed over-stepped German fund law last year. And from July, regulated funds will have to come with ‘KeyInformation Documents’ (Wesentliche Anlegerinformationen) giving investors important decisionmaking
data in a standardised format.
Neumann says the crisis has not changed BaFin’s dual strategy – “to protect investors and market integrity, but also to develop appropriate conditions for the fund industry to do business”.
His job involves dealing with the different needs that naturally come into conflict from time to time – and Neumann says they should.
Fund managers and investors must recognise their watchdog has teeth when required, but managers should also know they will not be punished when acting within the law. “You cannot totally avoid this conflict, but we must realise both matters are strategies for BaFin.”
His job looks as if it could bring various other challenging situations in the future, too. Alternative investment funds, in particular hedge funds, are discussed on various political levels in Germany. Some politicians have a reputation for promoting them, others dislike them.
Neumann will be obliged by the Alternative Investment Fund Managers Directive to supervise his country’s 12 hedge fund managers, their 34 funds, and eight funds of hedge funds, from 2013.
The challenge is not only one for the future – BaFin already oversees onshore products similar to hedge funds, governed by Ucits rules. Some Germans might hold their financial community – the €2trn fund industry included – responsible for the crisis. Yet, more than two years since the crisis began, Neumann says BaFin needs to allow Germany’s fund managers to be competitive with rivals outside Germany.
“Besides its responsibility for investor protection and market integrity, BaFin feels responsible for regulation, liberal enough to give Germany’s fund industry the chance to be competitive. We apply the Investment Act precisely, but with a sense of proportion so the industry here has the chance to do its business in a competitive way when compared to other countries.”
An Importer of funds
Germany is considered to be far more of an importer than an exporter of funds, so the larger threat for domestic operators is external managers coming into Germany to sell, rather than having to worry about their own competitiveness overseas.
Interest in investing via the fund structure helped Germany’s fund industry grow by €87.1bn last year, just short of the €87.8bn record set in 2005.
Domestic groups such as Deutsche Bank, through various asset management units, DekaBank, Allianz Global Investors Deutschland and Union Investment Group remained dominant, but BlackRock Asset Management Deutschland and Pioneer Group also won new ground.
Neumann’s key task in 2011 is to work on two large bodies of EU fund law. Measures for Ucits IV are being implemented, while the final precepts of the AIFM directive are being voted upon in Brussels, before taking effect in individual nations from 2013.
Neumann says Ucits IV greatly aids pan-EU harmonisation of fund law. Regulators will consult their counterparts in a fund’s home state when deciding on local distribution rights, rather than each product’s manager approaching his watchdog issuing a passport for registration in a foreign state.
BaFin can still refuse the right to market a foreign Ucits under the new rules if, for example, a prospectus or other marketing documents carry clearly misleading words, or the fund begins marketing before finishing the notification procedure.
In the past, Europe’s various regulators have not always agreed about allowing all funds into their home country.
Neumann says Germany is “strongly European”, but has still occasionally disagreed with other authorities’ interpretation of specific financial products. This never resulted in BaFin stopping a fund entering Germany, in his memory – “never under Ucits III, and it will surely happen even less under Ucits IV”.
If Europe’s regulators disagree with one another on interpretations of Ucits IV, they can approach a panel at the European Securities and Markets Authority. If agreement cannot be reached, there is the European Commission itself.
Neumann says the Eligible Assets Directive – the result of controversial discussions when introduced in 2007 – has also been a major step in setting out what assets Ucits funds can invest in, as well as diversification criteria.
He also adds that the application of it could be improved, as could some guidelines. Improvements, Neumann says, should be the answer to critics who argue some allowable asset classes were too volatile in the crunch, or that structured products should not have had to consider analysis by clearly fallible credit rating agencies before investing in
The new risk management guidelines BaFin issued for fund managers last year also emphasised the importance of managers researching complex instruments before investing, of reviewing positions taken in them regularly, and making this whole process transparent to investors. Manager adherence is audited each year.
Critics argue this is excessively burdensome, especially on smaller managers. Neumann says: “We need to ensure the industry has good risk management for investors.”
He says it is “of concern to BaFin” that some hedge fund strategies can operate within Ucits rules while investing only in eligible assets. He notes BaFin may only assess if Ucits’ requirements are being fulfilled, and if risk management and disclosure is adequate for potentially complex structures.
“These so called ‘Newcits’ are good examples of the necessity, particularly for risk management and disclosure, to be improved to a higher level than today, to reach sufficient solutions for the concerns arising from products allowed under the Eligible Assets Directive,” he says.
BaFin’s second main task thisyear is to help implement the AIFM directive after it takes its final form .Neumann admits the time between AIFM’s ratification in 2011 and enforcement at national level from 2013 is “a big challenge, both the national regulators and the industry are pressed for time”.
At the same time, the directive is being implemented in German law, BaFin is also involved in putting in place ‘implementing measures’ at the ESMA level.
However, as home to relatively few hedge funds, BaFin will not face a Herculean task of regulating many more managers when the AIFM takes force, and Neumann adds Germany already has well-developed hedge fund regulation in its Investment Act.
“Germany will be challenged in particular by other kinds of non- Ucits which will fall under the scope of the AIFM – for example real estate funds, private equity or closed end funds.”