Regulated enough already?
April 2016

Aren't we regulated enough already? This was the principal theme to emerge during a recent Regulatory Roadshow hosted across several key European locations by Societe Generale Securities Services.

A significant number of asset managers took the opportunity to attend the Roadshow on UCITS V and AIFMD, as it toured Luxembourg, London, Milan, Paris and Zurich under the leadership of Jean Pierre Gomez, the SGSS Head of Regulatory & Public Affairs. "One of the aims was to demystify AIFMD, and to help asset managers identify and address any outstanding issues that they might have in helping institutional investors," Mr Gomez tells us.

A 50-minute panel discussion featuring representatives from SGSS, including Serge Balatre, Head of Business Development for Depositary services, and from regulatory bodies, addressed industry-wide and location-specific topics, followed by questions from the animated audiences. There was a strong, almost tangible feeling that there must be a stop to the near decade-long practice of piling regulation upon regulation, if only to allow industry participants and their essential service providers to absorb and adjust to the new demands continually being placed upon them.

AIFMD and the upcoming UCITS V Directive both place key emphasis on investor protection and this remains sacrosanct. The consensus view from the Roadshow, however, is that the time is approaching when regulators ought to draw the line. Says Mr Balatre: "AIFMD has now been in force for nearly three years, and we are already talking about AIFMD II, for instance. And UCITS VI, even though UCITS V is only now being transposed into national law across the European Union."

For what it is worth, he adds, he and his colleagues do not currently expect UCITS VI to happen any time soon, even though an initial draft document on the subject was published in 2012.

Mr Gomez concludes that the UCITS brand is firmly established in the affections of asset managers after more than 30 years in existence. Interest from investors as far afield as China serves to demonstrate the appetite of non-Europeans for the brand. Every iteration since the first launch has served to boost the attraction of UCITS to investors around the world.

There is, however, another side to the issue. "Every new regulation comes with a cost, he says. And we must all ask whether the expected benefits to be obtained are worth that additional cost. To put it another way, are we regulated enough already?"

AIFMD

AIFMD targets managers of alternative investment funds operating within or marketing to the European Union, and hopes to protect investors by improving transparency with new investor disclosure rules and enforcing new standards for reporting to authorities. It aims to tackle safekeeping of investments through the mandatory appointment of depositaries and custodians as well as issues around conflicts of interest, remuneration, risk management and valuation.

But the regulation has raised concerns from fund managers, especially around compliance costs, with smaller firms expecting to be hit the hardest. This was shown in a July 2014 report from Preqin, along with fears regarding confidentiality of information being passed to regulators, market complexity and risks arising from uncertainty and lack of guidance. In the US, 71 percent of fund managers believed the regulation would have negative effects on the industry and 40 percent stated that they would not actively market to the EU. In the EU itself, outlook was slightly more positive, but there were still concerns for costs, which had been higher than many had expected. In Asia and the rest of the world, 27 percent stated they would not actively market to the EU.

UCITS

The UCITS regulation relates to the distribution of UCITS funds that are transferable across the European Union, and so require a certain level of regulation to protect investors. The latest directive (V) sets new requirements for managers, depositaries and EU member states to step up investor protection. This includes: mandatory appointment of a single depositary for each UCITS; re-evaluation and harmonization of depositaries' duties and liability; specifications for funds' remuneration policies; and the responsibility of member states to ensure protection of assets held by a depositary in the case of insolvency. A notable percentage of asset managers have expressed apprehension about the regulation; in one survey at the 2012 ALFI Conference London 27 percent were reported to see it as a 'burden'.

SGSS REGULATORY ROADSHOW Q&A

Insight: What does UCITS V provide to investors in terms of protection?

SGSS: A quick review of the historical context will help in appreciating and understanding the situation in which we now find ourselves. UCITS IV, published in 2009, came at a bad time because it was just after the 2008 financial crisis.

The European Commission realized at that time that the UCITS Directive did not take investor protection sufficiently into account. This explains why we now have UCITS V, five years after UCITS IV, to enforce and/or reinforce investor protection. This is also the main objective of other current Directives such as MiFID II, the second version of the Markets in Financial Instruments Directive, AIFMD, the Alternative Investment Fund Manager Directive or PRIIPS, packaged retail and insurance- based investment products.

Insight: Why does the regulator believe AIFMD II & UCITS VI aren't necessary at this stage?

SGSS: Regarding UCITS, EFAMA Director Vincent Ingham confirmed on March 15 at our session in Paris during the SGSS UCITS/AIFMD Roadshow that there would be no UCITS VI for the time being. Echoing some of our own and our client concerns, European regulators are conscious of the fact that the financial industry in general and the fund industry in particular, needs time to digest current and upcoming regulation in order to implement it efficiently and comply in accordance with the timeframe fixed by the regulators.

Regarding AIFMD II, it is clear that the original AIFMD was set up for hedge funds and is therefore not fully adapted to the entire scope of alternative investment funds. For example, 70 percent of the data required for fund reporting is simply not relevant for private equity and property funds that will also fall under the Directive (data relating, for instance, to value at risk, derivative positions, leverage and long/short positions). This makes us think that AIFMD I could possibly be revised through new technical guidelines produced by ESMA or we could even see a complete overhall of AIFMD I.

Insight: What challenges face asset managers and service providers waiting to implement the Level 2 measures?

SGSS: The Level 2 measures – an extensive set of implementing measures that provide details on the framework established by the Directive – address, among other things, delegation, the calculation of assets under management, leverage, reporting and disclosure obligations, conflicts of interest, risk and liquidity management, the safeguarding of assets by depositaries and cooperation agreements. They introduce two new elements that were not detailed in Level 1: insolvency rules and independence requirements. In addition, our client asset managers are very keen to know exactly what information will be required regarding remuneration.

Insight: In conclusion, how would you describe the general feelings expressed by clients during the Roadshow?

SGSS: We wanted to address three pertinent issues: whether regulation is a driving force for improvement, or not, whether more regulation is helpful for the industry and whether the UCITS brand is helping the industry to grow. On the first two points, it would seem that our clients accept that regulation is necessary and can help to improve the investment fund business by providing more transparency and protection for retail investors, and we share that view. On the latter, the answer is increasingly a clear yes, but it is absolutely essential that information provided to retail investors should be clear, and fair, and not misleading.





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Aren't we regulated enough already? This was the principal theme to emerge during a recent Regulatory Roadshow hosted across several key European locations by Societe Generale Securities Services.

A significant number of asset managers took the opportunity to attend the Roadshow on UCITS V and AIFMD, as it toured Luxembourg, London, Milan, Paris and Zurich under the leadership of Jean Pierre Gomez, the SGSS Head of Regulatory & Public Affairs. "One of the aims was to demystify AIFMD, and to help asset managers identify and address any outstanding issues that they might have in helping institutional investors," Mr Gomez tells us.

A 50-minute panel discussion featuring representatives from SGSS, including Serge Balatre, Head of Business Development for Depositary services, and from regulatory bodies, addressed industry-wide and location-specific topics, followed by questions from the animated audiences. There was a strong, almost tangible feeling that there must be a stop to the near decade-long practice of piling regulation upon regulation, if only to allow industry participants and their essential service providers to absorb and adjust to the new demands continually being placed upon them.

AIFMD and the upcoming UCITS V Directive both place key emphasis on investor protection and this remains sacrosanct. The consensus view from the Roadshow, however, is that the time is approaching when regulators ought to draw the line. Says Mr Balatre: "AIFMD has now been in force for nearly three years, and we are already talking about AIFMD II, for instance. And UCITS VI, even though UCITS V is only now being transposed into national law across the European Union."

For what it is worth, he adds, he and his colleagues do not currently expect UCITS VI to happen any time soon, even though an initial draft document on the subject was published in 2012.

Mr Gomez concludes that the UCITS brand is firmly established in the affections of asset managers after more than 30 years in existence. Interest from investors as far afield as China serves to demonstrate the appetite of non-Europeans for the brand. Every iteration since the first launch has served to boost the attraction of UCITS to investors around the world.

There is, however, another side to the issue. "Every new regulation comes with a cost, he says. And we must all ask whether the expected benefits to be obtained are worth that additional cost. To put it another way, are we regulated enough already?"

AIFMD

AIFMD targets managers of alternative investment funds operating within or marketing to the European Union, and hopes to protect investors by improving transparency with new investor disclosure rules and enforcing new standards for reporting to authorities. It aims to tackle safekeeping of investments through the mandatory appointment of depositaries and custodians as well as issues around conflicts of interest, remuneration, risk management and valuation.

But the regulation has raised concerns from fund managers, especially around compliance costs, with smaller firms expecting to be hit the hardest. This was shown in a July 2014 report from Preqin, along with fears regarding confidentiality of information being passed to regulators, market complexity and risks arising from uncertainty and lack of guidance. In the US, 71 percent of fund managers believed the regulation would have negative effects on the industry and 40 percent stated that they would not actively market to the EU. In the EU itself, outlook was slightly more positive, but there were still concerns for costs, which had been higher than many had expected. In Asia and the rest of the world, 27 percent stated they would not actively market to the EU.

UCITS

The UCITS regulation relates to the distribution of UCITS funds that are transferable across the European Union, and so require a certain level of regulation to protect investors. The latest directive (V) sets new requirements for managers, depositaries and EU member states to step up investor protection. This includes: mandatory appointment of a single depositary for each UCITS; re-evaluation and harmonization of depositaries' duties and liability; specifications for funds' remuneration policies; and the responsibility of member states to ensure protection of assets held by a depositary in the case of insolvency. A notable percentage of asset managers have expressed apprehension about the regulation; in one survey at the 2012 ALFI Conference London 27 percent were reported to see it as a 'burden'.

SGSS REGULATORY ROADSHOW Q&A

Insight: What does UCITS V provide to investors in terms of protection?

SGSS: A quick review of the historical context will help in appreciating and understanding the situation in which we now find ourselves. UCITS IV, published in 2009, came at a bad time because it was just after the 2008 financial crisis.

The European Commission realized at that time that the UCITS Directive did not take investor protection sufficiently into account. This explains why we now have UCITS V, five years after UCITS IV, to enforce and/or reinforce investor protection. This is also the main objective of other current Directives such as MiFID II, the second version of the Markets in Financial Instruments Directive, AIFMD, the Alternative Investment Fund Manager Directive or PRIIPS, packaged retail and insurance- based investment products.

Insight: Why does the regulator believe AIFMD II & UCITS VI aren't necessary at this stage?

SGSS: Regarding UCITS, EFAMA Director Vincent Ingham confirmed on March 15 at our session in Paris during the SGSS UCITS/AIFMD Roadshow that there would be no UCITS VI for the time being. Echoing some of our own and our client concerns, European regulators are conscious of the fact that the financial industry in general and the fund industry in particular, needs time to digest current and upcoming regulation in order to implement it efficiently and comply in accordance with the timeframe fixed by the regulators.

Regarding AIFMD II, it is clear that the original AIFMD was set up for hedge funds and is therefore not fully adapted to the entire scope of alternative investment funds. For example, 70 percent of the data required for fund reporting is simply not relevant for private equity and property funds that will also fall under the Directive (data relating, for instance, to value at risk, derivative positions, leverage and long/short positions). This makes us think that AIFMD I could possibly be revised through new technical guidelines produced by ESMA or we could even see a complete overhall of AIFMD I.

Insight: What challenges face asset managers and service providers waiting to implement the Level 2 measures?

SGSS: The Level 2 measures – an extensive set of implementing measures that provide details on the framework established by the Directive – address, among other things, delegation, the calculation of assets under management, leverage, reporting and disclosure obligations, conflicts of interest, risk and liquidity management, the safeguarding of assets by depositaries and cooperation agreements. They introduce two new elements that were not detailed in Level 1: insolvency rules and independence requirements. In addition, our client asset managers are very keen to know exactly what information will be required regarding remuneration.

Insight: In conclusion, how would you describe the general feelings expressed by clients during the Roadshow?

SGSS: We wanted to address three pertinent issues: whether regulation is a driving force for improvement, or not, whether more regulation is helpful for the industry and whether the UCITS brand is helping the industry to grow. On the first two points, it would seem that our clients accept that regulation is necessary and can help to improve the investment fund business by providing more transparency and protection for retail investors, and we share that view. On the latter, the answer is increasingly a clear yes, but it is absolutely essential that information provided to retail investors should be clear, and fair, and not misleading.