Claude Noesen of Credit Suisse Fund Services looks at how the European fund industry is responding to the deluge of regulatory changes and the large number of fund structures.
Twenty-five years ago, the European Community established the Ucits framework, which regulates local investment fund legislation. With relatively few amendments until recently, Ucits has established itself as a very strong brand worldwide.
Over the past few years, however, the industry has faced a flood of regulatory changes such as Ucits V, AIFMD, MiFID II, Prips, RDR, the Volcker Rule, Fatca and Emir. The question now is whether these regulations actually help the industry and/or investors. For instance, directives like Ucits IV were considered very efficient and effective at the start, especially in the areas of master-feeder structures, cross-border mergers, and passporting by management companies. Now, however, reality paints a different picture as some of these initiatives have turned out to be more complicated than expected.
One major obstacle is that Europe is not yet a harmonised market, as each member state still applies its own rules and procedures. In order to stay successful and competitive, we need to place a greater emphasis on the harmonisation process so that we truly act as one market.
Reducing the number of funds is also essential to this process. This will provide investors with a better overview and the benefits of a lower cost structure.
In addition, there is no room for Europe to rest on its laurels as the competition never sleeps, with Asia, in particular, becoming a competitive threat. The risk is that Asia sooner or later will create its own brand for active marketing in Europe. This process is further supported by the outsourcing of Europe’s fund servicing machine, which sends a lot of core activities abroad and allows these countries to gain the know-how to create their own fund industry.
In Europe, Ucits IV has just achieved full implementation status. Ucits V is already on the horizon and focuses on custodian bank responsibility, including the delegation of tasks. Additionally, Ucits VI for custodian bank passporting, efficient portfolio management, over-the-counter (OTC) derivatives, and so on, is already being drawn up. Because the rate at which these new Ucits directives are being drafted puts a strain on national parliaments, local supervisory authorities, service providers, and investors, we have to ask ourselves if it wouldn’t be better to take more time and introduce one directive covering the most important issues, particularly as even long-term, experienced specialists are finding it increasingly difficult to deal with all of these directives, circulars, and guidelines.
As a result, the establishment of fund structures is being delayed, which often leads to considerable client dissatisfaction.
This is also becoming a problem for the supervisory authorities as they have to implement these changes in their control framework and hence need very experienced staff, which they pull from the service provider reservoir.
This is directly impacting the service providers who for efficiency reasons and due to the increasing complexities cannot afford shortages of experienced people.
Nonetheless, there is reason to be optimistic about the future of the fund industry. The key moving forward is to focus on things that really matter through a more efficient regulation process with fewer, more specific directives that are less complex and easier to implement. Directives should also focus on reducing the number of fund structures in order to bring costs to acceptable levels.
Claude Noesen, director sales management, Credit Suisse Fund Services, Luxembourg
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