Our panel discuss the development of Ireland’s funds industry, from the Icav to Asia and Brexit and beyond. Chaired by Nicholas Pratt.
Robert Hennessy (director of risk and compliance, SMT Fund Services)
Oscar Garcia (CEO, Caceis Ireland)
Tadhg Young (head of global services, Ireland, State Street)
Kieran Fox (director of business development, Irish Funds)
Peter Stapleton (partner, Maples and Calder)
Mark Mannion (head of relationship management, BNY Mellon)
Olwyn Alexander (Irish AM leader and partner, PwC)
Funds Europe: How would you describe Ireland’s position as a funds industry?
Robert Hennessy, SMT Fund Services: Ireland has a very strong position that has survived the test of time. It’s the largest onshore domicile for hedge funds and for exchange-traded funds (ETFs). It’s very well regulated and extremely well serviced.
Oscar Garcia, Caceis Ireland: In comparison to rival domiciles, Ireland is much better placed. The willingness of everyone in Ireland to do business is what makes the difference. Whether it is a UK, German, Spanish or American promoter, they feel that all of us want to do business with them and help them to succeed.
Tadhg Young, State Street: I would emphasise the deep product expertise we have in Ireland. The regulator is pragmatic. There is a very strong investor-protection culture, there is a strong commitment from government, and the ability and flexibility of the workforce is what makes us very popular with US and international managers.
Kieran Fox, Irish Funds: The reputation and the expertise of the regulator is critical. It is very highly, regarded across Europe and globally.
Peter Stapleton, Maples and Calder: From a legal and regulatory perspective, Ireland distinguishes itself by always being at the forefront of cutting-edge product innovation, and striking a very good balance between giving investors and promoters the products they want, but in a safe, regulated and transparent way. We have numerous recent examples, in the areas of Ucits, AIFMD, MiFID and other pillars of EU financial services legislation.
Ireland has often been a first mover in key areas domestically, which then get wider acceptance in the market, e.g. Irish alternative funds had a requirement for a separate depositary long before it became a mandatory requirement under AIFMD. Ireland also tends to implement European directives on time and put in place the necessary regulatory framework. The Central Bank of Ireland was among the first regulators globally to publish its framework for AIFMD; the Directive itself implemented on day one, and one of the world’s largest alternative investment fund managers also received authorisation on day one. Ucits V followed a similar timetable. This reputation for efficiency and excellence has helped create significant momentum for the Irish industry in both Ucits and AIFs.
Mark Mannion, BNY Mellon: Ireland is a market leader in key growth areas such as alternatives, ETFs and money-market funds. The industry has reached nearly €4 trillion in total assets. Our company centres all of its alternative processing, irrespective of domicile, here in Ireland, which I think is a great tribute to the depth of expertise in the industry.
Olwyn Alexander, PwC: We have a very open and tax-transparent approach with tax agreements with 72 countries and a corporation tax rate of 12.5%, which has been very attractive over the years in attracting business. We also have the skill base and a long history as a servicing centre for alternatives, ETFs and money-market funds. Labour-law flexibility is a big factor in attracting companies to Ireland, as is the work ethic – the fact that we’re always ‘on’, we’re very responsive and very hungry for business. I don’t think that should be underestimated.
Funds Europe: How successful have the Icav and Qif fund structures been for Ireland?
Alexander: It is not an either/or between an Icav or Qif. When setting up an Irish fund, you first determine if you want a Ucits or non-Ucits (Qif) and then you choose your corporate structure – be it a plc, a trust, an LP or an Icav. What you choose obviously depends on your audience and whether you need a qualified product.
The Icav has been by far the most popular vehicle of choice since its launch. At the end of June, there were more than 200 registered Icavs. A significant advantage of the Icav is the ability to tick the box for US tax purposes. There is also flexibility around accounting standards and a simplification around corporate requirements – for example, AGMs or shareholder approval for changes to consultation documents.
The Qif has huge flexibility for alternative investment funds. There’s very little restriction around what you can invest in, very few restrictions around leverage, and all of the usual benefits around taxation because most of the taxation occurs at the investor level, so the fund remains a tax-neutral vehicle.
Mannion: The Icav has become the default vehicle of choice for new managers setting up in Ireland. It has also made it more straightforward to re-domicile existing structures outside the EU into Ireland, using the Icav structure.
Managers, obviously, are very interested in the US as a key source of assets, so naturally the check-the-box structure is attractive, but there are some other aspects to the ICAV which are proving very popular – reduced corporate administration but also the fact that you don’t have to produce consolidated financial statements.
Aifs for Ireland have been massively successful because they play on our reputation for being strong in alternatives, and it’s the perfect product. Wherever you find a strategy that isn’t a natural fit into a Ucits product, it is the vehicle of choice, and we’re seeing a lot of activity particularly in the private debt and credit area.
The big selling point of the Aif is the AIFMD passport and the ability to sell this product across Europe.
Stapleton: The Icav and the Qiaif follow a long line of speed-to-market and product innovation, including the implementation of the Ucits Directive at the end of the 1980s, which also saw the adoption of numerous domestic laws to facilitate the establishment of Irish investment funds. On the regulatory side, Ireland permitted the first onshore regulated hedge funds by allowing the appointment of prime brokers. Quite often, these changes are the result of the industry, the regulator and government agencies working well together, which is at the heart of Ireland’s successful financial services sector.
In the case of the Icav, new legislation and the government were able to work with industry and the regulator to deliver it in a prudent manner. Turning to the very successful Qiaif regime, this stems more from the regulatory side. The Qiaif category permits the establishment and marketing of Irish Aifs to qualifying investors and in this sector, we identified a demand for loan-origination and credit vehicles. In this case, the industry was able to go and speak with the Central Bank of Ireland and discuss their loan-origination rules, which resulted in an adoption of a completely new set of rules for loan-origination Qiaifs. Interestingly, we have since seen mirror regimes being copied throughout Europe. But the important thing was that the Irish regulator had moved first.
Fox: More than 230 Icavs have been launched from asset managers all across the world since the legal structure became available in March 2015 until the end of August 2016. It’s not a complete reinvention, it’s more an incremental improvement in efficiency, and we are seeing lots of managers who are using that structure for new fund launches. I think there will be a slightly slower process for converting funds, but certainly for new fund launches, the Icav is the fund structure of choice.
Young: The Icav is testament to Ireland being a solutions provider for this sector. Our regulator and our public authorities are doing this in a way that’s thoughtful and responsible and takes investors’ interests into account. I think that our track record is hugely important when you look at challenges that are coming down the track, such as the Capital Markets Union (CMU) and getting investor flows in Europe working better. The issue is bigger than Icavs and Qifs, but it certainly gives me confidence that the domicile is well placed.
Funds Europe: How are the AIFM and Ucits regimes developing and is there much crossover between the two?
Alexander: The AIFMD really raised the bar in terms of a regulated product and was the impetus behind Ucits V to bring things back in balance. It gave alternative managers pause for thought. A common perception might be that Ucits are purely for retail but a lot of professional and sophisticated investors invest in Ucits. It also gave birth to liquid alternatives and a number of new strategies which could comfortably sit within the Ucits banner. If your strategy fits within that framework, it gives it huge credibility because it’s such a well-trusted and established and globally distributed product.
Mannion: We’ve seen our alternative managers faced with a clear product choice, with Ucits remaining the dominant brand with access to huge pools of capital through various platforms in Europe, which are not yet as open to Aif-type products. And hedge fund managers may look to mirror a successful offshore vehicle and establish it within the EU, within a Ucits structure, to access those types of investors that cannot invest in Aifs. Ucits provides transparency, liquidity and good governance, but I’d focus on the liquidity side in terms of whether particular strategies can be accommodated successfully within Ucits when making the selection. If they can, it is the default choice and where they aren’t, then they are going with an Aif.
Stapleton: Ucits has over a 30-year head start on AIFMD, so it will take a little while for AIFMD to develop that same cachet and brand. The obvious difference is that Ucits incorporates the regulation of both the fund and also the management company of the fund, whereas the AIFMD regulates the manager but leaves the fund relatively untouched. This is largely because there is a wider range of liquidity options and asset types in the alternatives world and some of the hard-coded Ucits rules would not be appropriate.
However, there is a definite trend toward harmonisation in the asset management space, which we are seeing at European level. In this area, there are three main regulatory pillars – Ucits, AIFMD and MiFID II. Unfortunately, the harmonisation efforts are only substantially progressed in Ucits and AIFMD, meaning we see a lot of Irish promoters running dual-authorised ‘Super ManCos’. While these entities can also avail of some MiFID permissions, they are limited in scope and require the entities to adhere to additional requirements in MiFID.
As a result, and despite some convergence of the main regimes, there is not one EU product of a one-size-fits-all nature. Increasingly, we see managers look for separate Aif and Ucits products, with liquid alts emerging as a potential middle ground. In this area, traditional asset managers can look for better returns and hedge fund managers that can move their products into a Ucits structure.
Fox: Ireland has staked its claim as the leading jurisdiction in Europe to launch a liquid alternative fund, and that’s partly due to the success and experience we have on the Ucits side and the expertise on the alternative side as well. But not every fund type can just be dropped straight into a Ucits fund. There are Ucits rules that have to be complied with, but there is a reasonable degree of flexibility in terms of investment strategies that can be deployed within a Ucits and including strategies like smart beta. In Ireland, we also have the retail investor Aif fund structure, so you can have an Aif fund structure within AIFMD, that can be sold to retail investors as well.
Garcia: When AIFMD first came into force, it was more restrictive than Ucits regulations, which was confusing. With the implementation of Ucits V, the two are at a similar level., This will facilitate the convergence of the two into one regime, which could help to simplify the already complex regulatory environment we have.
Hennessy: There’s obviously crossover, but I think that distinction will stay for a long time to come as more complex products are taking longer to be authorised as Ucits. Also, the regulatory requirement for promoters to describe the vehicle’s strategy in a two-page Kiid, in a way that a retail investor can understand, can be very challenging.
Funds Europe: What are the implications of Ucits V, MiFID II and anti-money laundering (AML) regulations for asset servicers?
Garcia: We have to do more. We are assuming additional risks and responsibilities and, unfortunately, our costs of doing business keep increasing. In the majority of the cases, service providers have to absorb these extra costs as it has proved extremely difficult to pass them to investors. Ucits V is trying to resolve something that happened in 2008 with Madoff and Lehman Brothers. However, in my opinion, they are just moving the risk from one part of the industry, brokers or managers, to another, custodian banks. I do not think this is the right approach, as custodian banks do not make any investment decisions. I believe the solution to the problem would be increased transparency for investors to understand the risks they will face by investing in different instruments and markets.
As a comparison, if you look into the property industry, buying a house is the biggest investment most people make in their life, yet the industry is largely unregulated. The average individual investment in the funds industry is much less, so one could question whether regulators and policymakers have got their priorities right.
As for AML rules, I welcome any development that clarifies the requirements. For many years everything has, more or less, been open to interpretation depending on the risk appetite of different organisations, which, in my opinion, has created regulatory uncertainty and potentially regulatory arbitrage, which is damaging for our industry.
Young: It is a reality of life after the financial crisis that financial institutions need to invest more in risk management and compliance in response to new regulations. As a result, the costs of doing business get higher and barriers to entry are increased. Financial institutions that are not fully committed to our sector will struggle. For example, as a result of additional depositary liability and duties under Ucits V, depositaries have hired more
staff and invested in technology. MiFID II is having a major impact on asset managers and, downstream, it will have a direct effect on asset servicers in terms of transfer agency and the reporting that we provide to managers. We are all working through that with our clients.
The new AML directive is being implemented in June and it will also require more investment in transfer agency capabilities. And we haven’t even talked about new data protection and privacy regulations. All of this means that to be in this business, you have to be completely committed over the long term.
Mannion: I think the industry had clearly learned from the AIFMD experience, so both legally and operationally we were ready for Ucits V and did not experience the same industry-level logjam that we did back in 2014.
But that work comes with a cost, and really it’s at a time in the industry where margins are under pressure, performance is challenged and investors are asking why they’re paying the fees that they are. It is difficult for managers to justify increased fees and even more difficult for depositaries to recoup their costs.
There are certainly increasing costs associated with Ucits V and MiFID II. To some extent, the additional liability for depositaries under AIFMD can make it more difficult for investors to access riskier markets, even if those investors are prepared to accept the risk.
Hennessy: There are certainly increasing costs associated with Ucits V and MiFID II. To some extent, the additional liability for depositaries under Ucits V can make it more difficult for investors to access riskier markets, even if those investors are prepared to accept the risk.
Young: Data is now the big issue for our industry. There are technology solutions out there that are outside of this industry. Ireland has a growing fintech industry with some very strong local companies here who are well ahead of the game with people who’ve come out of the major technology companies.
Alexander: The main issues at a high level for Mifid II are increased reporting to clients, increased requirements around client classification as well as safeguarding of client assets. To the extent that custodians are supporting clients through this, it probably brings an opportunity to broaden the scope of services provided where managers need help. Ucits V brings the Ucits industry in line with AIFMD from a depositary liability perspective, but obviously creates more work and liability for depositaries. Some clients and indeed investors would say that they don’t believe there is much benefit in another layer of monitoring and oversight as mandated.
Mannion: The focus of the entire administration industry and how we look at technology has changed. We’re not focusing as much any more on our legacy accounting systems or TA systems. We’re looking very much at how we aggregate the data from multiple systems and create data warehouses or repositories so that we can deliver meaningful MIS to our clients.
Funds Europe: Asia has long been a target for the Irish funds industry, so how successful has Ireland been in Asia, and is it a growth area for the future?
Hennessy: There is a well-trodden path for Irish domiciled funds in Asia. Irish Ucits products have been recognised for distribution across various countries in Asia, mainly Hong Kong, but also Singapore, Taiwan and Japan since the 1990s.
There has been a lot of talk about a pan-Asian product that would challenge Ucits, but it has not yet materialised and Ucits are still recognised as a market leader. SuMi Trust is the largest asset manager in Asia, and also has the largest distribution network in Japan. Japanese investment managers often have a preference for Cayman trust structures rather than Irish-domiciled funds. We service this business from our Dublin office and it is a very important business for us.
Mannion: Our perspective is two-pronged. Firstly, to attract asset managers in Asia and make sure that they’re aware that Ireland is a fantastic jurisdiction to domicile investment funds for global distribution, either back into Asia or across Europe. And secondly, for asset managers that may not be in Asia and have Irish-domiciled investment funds and want to distribute those funds into Asia and access Asian investors.
Irish funds are widely sold in Asia and we have a very active Irish Funds Asian chapter helping to raise our profile and build links with the regulators. We found it essential to have a local presence to support our clients’ distribution efforts.
Young: In terms of servicing funds that are distributed in Asia, there’s a big advantage to having a presence on the ground. Investors are demanding a client service with the ability to call the administrator within their time zone, speak in their language and assess information on a real-time basis. So you do need to establish some form of operation there that links, efficiently, back into the Irish operations.
Garcia: We are seeing now the results of all the marketing and commercial efforts the Irish funds industry has made over the last five or six years. But in order to be successful in attracting Asian promoters, you have to have a presence there. It is not just the cultural aspects, but also the proximity to the client that makes the difference. For instance, and from a purely practical view, the AML documentation provided by investors can be reviewed by your Chinese office, and additional translation costs might be eliminated.
Funds Europe: What will be the implications of Brexit?
Mannion: There is so much uncertainty at the moment. In that vacuum, our UK clients are currently reviewing their passporting regime across Ucits, MiFID and the AIFMD. They are looking at the potential impacts of not being able to access the passporting regime in the future and any issues that might arise if the UK is unable to secure equivalence in terms of its ability to continue to provide investment management from London for products sold in the EU.
Some major names have publicly said they will be increasing their EU products based in Ireland. And others have gone even further to say that because of the uncertainty, they may also relocate portfolio management to Ireland and that would be a big change.
Stapleton: Ireland has a very successful and longstanding working relationship with UK fund promoters, managers and investors. As a result, the uncertainty and disruption caused by Brexit is a negative.However, while there is uncertainty in the UK as to when Article 50 will be triggered and whether it will be a soft or hard Brexit, there is absolute clarity for anybody wishing to look at alternative solutions in Ireland.
The issue is very different to the ones the asset management sector wrestled with recently on implementation and interpretation of Ucits V and AIFMD. These rule are now settled and when we speak to our UK clients, it really is quite a very clear and binary process as to whether they want to pursue Irish options to secure EU passporting rights and permissions.
Ireland has a lot to offer UK managers in this regard and they already make up the single largest block of promoters of Irish funds. So if Brexit does mean these managers will reconsider their locations to protect passporting rights, Ireland is extremely well placed.
Fox: There are 463 asset managers around the world with investment funds domiciled in Ireland. Over a third of them come from the United Kingdom. We have been providing solutions and partnering with the UK for a long time, very successfully.
We want to make sure that whatever the outcome, if and when Article 50 is triggered, that Ireland is ready, willing and able to provide all the solutions that are necessary for a smooth transition.
We are having lots of conversations with managers, some of which, quite rightly, are being driven by investors asking questions. Will certain services that are currently being passported from UK entities be able to continue? What are the contingency measures? Are there plans in place to allow investors to continue to invest and access funds via existing structures for the next three, five, seven years?
Young: It is as quick to get from London to Dublin as it is to get from London to Edinburgh and the culture point is really important. A lot of US managers also have UK-based MiFID-compliant firms as well, and there are ways in which they can maybe expand their Irish ManCo licence to include some basic portfolio management. There are options available and that is the key point.
The other key item is that Ireland is absolutely committed to the European Union and our position as a gateway to Europe for US, UK and Asian managers is as strong as it ever was.
I think there is an opportunity for Irish policymakers to deepen the footprint they have at the moment in European structures like the Commission and Esma, where we really do punch above our weight as a country in multiple policy areas, not only financial services.
We are probably going to be the only English-speaking country in the European Union that is committed to globalisation and international finance and to all the CMU initiatives.
And we can be a very powerful advocate if our policymakers are open to that.
Hennessy: I don’t see any threat to the UK investment managers that have funds domiciled in Ireland, where it’s an Irish-regulated fund managed by a UK-regulated investment manager. I don’t see that arrangement being impacted, really, no matter what happens.
Garcia: I always try to have a pragmatic approach to things and I am very optimistic about this because Britain is extremely important to the EU and the EU is extremely important to Britain. Hence, they have no other choice, and they will make sure they strike a deal that guarantees what both parties want.
Whatever the scenario, Ireland will remain more or less neutral. If there is a soft deal, it will keep growing organically as we’ve been doing for many years. And if there is a hard deal, I’m pretty sure that many of the managers based in the UK, that will want to still have access to the European market, will relocate to Dublin.
Alexander: Some of the open questions about the post-Brexit operating environment are:
• Will the UK’s exit from the EU result in the loss of EU passporting rights for UK funds and asset managers under the Ucits Directive and for non-UK funds into the UK? If so, what alternative arrangement might be put in place?
• How does AIFMD provide UK asset managers with the ability to access the EU market?
• Will the UK continue to allow access to the UK for non-UK-based alternative funds and if
• Should UK-based asset managers continue with their MIFID II implementation projects, and what EU market access could the ‘third-country provisions’ of MiFID II provide to UK-based asset managers?
We will have to wait for the negotiations between the UK and the EU to conclude before all the answers become clear.
Funds Europe: How will the Irish funds industry look in five to ten years’ time?
Hennessy: We must continue to stay ahead of the game. The government’s International Financial Services 2020 plan is encouraging. The funds industry is just one piece of the Irish financial services industry, whereas in other jurisdictions it might be a bigger part of the whole economy. However, I think it’s a very positive outlook, and we need to continue the improvements in our service offering. Implementing new regulations has been a challenging exercise, but the marrying of fintech to improvements in the way we all do our business will definitely present significant opportunities.
Garcia: I honestly believe that no one can tell what the industry will be like in ten years’ time. What it is obvious is that it will be a very different and a more consolidated one. What I would say is that the biggest challenge for our industry is to adapt to the changes that are happening, especially in the fintech space and how this will impact our industry.
Considering that Ireland is an extremely dynamic country and economy, that people doing business here are always willing to find a solution and that they reinvent themselves when necessary, I really believe we
Mannion: I could see Ireland becoming the domicile of choice for private equity, incorporating real asset infrastructure and all of the very significant activity that we’re all seeing in that. It’s a complex area and there are some barriers, but it would be great if we could resolve them in five to ten years’ time. Then we will be strong across all asset classes, from the most illiquid to the most liquid.
Young: Looking forward five to ten years, you would expect the British to have definitely triggered Article 50. And whether it is a soft or hard exit, I think we are geared for either outcome. We can build on the thought leadership we have had from within the industry and be a solution powerhouse for the investment management sector. I expect that we will continue to be a domicile that combines service centre excellence, product depth and innovation, investor protection, and leadership in fund governance and oversight.
Alexander: I am very positive about the future of the Irish funds industry. I see asset management moving centre-stage as banks have had to deleverage and with impetus from the EU now to get more private capital investing actively, rather than remaining on deposit.
We are well placed to capitalise on our very strong history in servicing, our product knowledge and expertise, in ETFs, money-market funds and alternatives, and our hardworking, flexible workforce.
Obviously, Brexit will have an impact on the industry – while it won’t be positive for many other industries, it likely will be beneficial for Ireland if the funds industry positions itself to help support UK-based clients with the changes they need to make.
New innovations in technology will also be central in the next five or ten years. Fintech will be a huge game-changer on how we all do business.
Stapleton: I’d like to see some innovation in non-bank financing. Loan-origination products are going to be very strong. There is definitely a recovery in private equity and real assets and property development.
Ireland has been incredibly successful, not just in financial service but wider afield, in positioning itself as the gateway to Europe for many US multinationals in the pharmaceutical and technology sectors.
Hopefully it is a soft Brexit and things remain unchanged, but if it is a hard Brexit, I’d love to see Ireland position itself as the gateway to Europe for the UK. Positioning ourselves as global hub for UK and US businesses accessing the EU is a good place to be and I think it’s a realistic possibility.
Fox: Ireland is clearly the European leader in ETFs, money-market funds and the more alternative-type structures. We have smart, hardworking people with public sector support, the necessary infrastructure and a very well-educated, young population. That doesn’t mean that there aren’t risks out there on the horizon and there will always be threats, so we’re not complacent. But the people, the relationships, the infrastructure, the support and product range and innovation that we have means we are extremely well-placed for the next five to ten years.
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