Magazine Issues » May 2016

REGULATION: How ready are you?

Nearly a year on from the Ucits V survey conducted by Funds Europe and RBC Investor & Treasury Services, we gauge action taken by the funds industry as the updated Ucits rules progress. But the main focus of this 2016 survey is on the level of preparedness for the profound changes that MiFID II will bring.

Regulation survey questions1 2Between March and April, Funds Europe, in association with RBC Investor & Treasury Services, surveyed more than 50 international fund managers, providers and management companies on the regulatory landscape. A similar survey was conducted in 2015, looking at the market’s awareness of Ucits V and its implications. 

This year our focus is MiFID II, as well as an update to Ucits V, and a general outlook on market and economic conditions. 

The aim of the survey is to gauge the level of preparedness for the upcoming regulations and to see how concentrated or diverse any concerns may be. For example, is it product governance, market structure or unbundling of inducements that is of greatest interest to fund managers? 

Fortunately, the number of respondents with no awareness or idea regarding MiFID II is very small (figure 1). That said, just 18% have their implementation underway. The vast majority of firms are either monitoring progress or have formed a working group to review their response. 

Regulation survey question3This ‘wait and see’ approach could be due to the fact that, up until April 7, all Europe’s asset managers were waiting for the publication of the Delegated Acts, which were expected to contain the final technical details around issues like broker research unbundling and product governance. 

Even though these plans have been published, most firms will be consulting with their legal advisers, consultants and service providers rather than jumping straight into their implementation plans. 

MiFID II has been dogged by persistent delays, just as its predecessor was. The latest postponement means implementation will now be in January 2018. But, as the results of the survey show (figure 2), there are still doubts as to whether there is enough time. 

A third of respondents believe a 12-month delay will not be enough, while a slightly higher number (39%) feel the delay was sufficient. Just under half that number (18%) believe the year’s postponement was unnecessary, presumably the same 18% that already have their MiFID II plans underway. 

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Jurisdictional arbitrage is always a concern for a directive like MiFID that will be transposed at a national rather than EU level, but the survey results show (figure 3) just over a quarter of respondents are expecting to plough on regardless, while just under half (43%) anticipate more challenges running a pan-European business. 

Regulation survey question5A further 28% are awaiting more details, and this group is perhaps the wisest of all – we will not know until implementation is underway exactly what differences there are between member states. 

The two highest-ranking concerns for respondents are possible changes to market infrastructure and the ban on inducements around distribution (figure 4). Little is known as to the former, but the consequences could be enormous. 

Conversely, much more is known about the changes to the distribution model and the need for much greater product governance. The unbundling of broker research, somewhat surprisingly, is much further down asset managers’ list of concerns.

The range of answers to the question of product suitability reviews (figure 5) indicates why ‘product governance’ featured so prominently in the previous question. 

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Just over half of respondents will look to their regulators or industry associations for help, while the remainder of respondents believe the distributors and managers will be able to sort this out between themselves one way or another.

In last year’s survey, when asked what action had been taken on Ucits V, just 20% of respondents had either implemented any new processes (6.5%) or started the planning process (14%). Fortunately, 12 months on, progress has been made; over a third (36%) of respondents are ready to meet their Ucits V obligations (figure 6). 

However, an equal number have yet to implement any measures, and await a final position on remuneration before making any changes. 

Worryingly, though, the implementation date for Ucits V was March 18, 2016, so one has to question the wisdom of waiting beyond the deadline for full details before implementation.

As regards contracts (figure 7), a third (32%) have already started to review their agreements, while 44% of respondents are evenly split between those that have finished their reviews or will complete them after the March deadline. Just 16% are waiting for more information as opposed to 41% in last year’s survey, while the number of ‘don’t knows’ has fallen by half (from 16% to 8%).  

Regulation survey questions9 10The depositary rules are one of the more clarified parts of Ucits V, so it is little surprise 20% have now carried out a full review, as opposed to just 7.5% in 2015 (figure 8). 

In fact, just 22% have not already reviewed their arrangements but plan to do so, while a further half are either happy enough with their existing arrangement (28%) or can easily adapt them (18%). 

Interestingly though, the number of ‘don’t knows’ has actually increased slightly in the past 12 months from 11.3% to 12%.  

The impact of Ucits V on remuneration policies is a big issue for managers and one that divides opinion (figure 9). Seemingly little has changed in the past 12 months. The same number (16%) expect they will require new policies, while more than a third believe they have already addressed remuneration through the AIFMD. 

The interesting change is that in 2015, the most prominent answer was that firms were waiting to see the final Level 2 measures (35%). Now, 12 months on, the most prominent answer is ‘don’t know’ (28%) despite the final Level 2 measures having been published in December 2015. 

Firms were also asked how much longer, following the publication of the Level 2 measures, they thought they would need to be fully compliant (figure 10). Just over half expected to be so within three months. 

More than a third (36%), though, expected the compliance process to take between three and six months, while the minority of 12% expected the work to take even longer. The question is whether regulators or the market will take this 12% as an acceptable figure for non-compliance. 

The least surprising result of the 2016 survey is negative sentiment regarding the cost of regulatory compliance (figure 11). 

Half (49%) of respondents believe the cost of regulatory compliance is affecting their profitability, while 34.7% believe the costs to be higher than they should be. Just a fifth believe the bill for regulatory changes is a necessary cost. 

The survey results (figure 12) show more needs to be done by all participants, be that consultation or education, in order to make regulation more cost-efficient and effective with the regulators themselves being highlighted by 55.1%, followed by end investors (40.8%).

Regulation survey question11

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Fund managers do not excuse themselves though, with more than a third (36.7%) admitting they need to increase their understanding of their end investors’ needs. 

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Regulation can also have unintended consequences, for example, MiFID II is designed to create a more accessible and competitive pan-European marketplace but may actually lead to redomiciliations and concentration of business in a handful of key markets. But the survey shows the vast majority of firms (65%) expect no change to their existing model (figure 13). 

Given the range of answers to this year’s survey, it is fitting that just over half (51%) of the respondents remain neutral on how regulatory change will affect their general outlook (figure 14). Of the remaining half, there is a slight victory for the optimists over the pessimists (27% to 22%). 

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Regulation is normally a subject that elicits very strong opinions rather than a neutral consensus, but perhaps managers are just being worn down by the relentless volume of regulatory requirements they face, and are tired of fighting them – they just want to get on with it. 

Unfortunately it seems the biggest gripe – the wait for more information – shows no sign of being resolved with the late publication of Level 2 measures and the Delegated Acts affecting firms’ implementation plans for Ucits V and MiFID II respectively. 

Perhaps the conclusion to be drawn from the survey results is that the firms capable of extricating their operational strategy from the influence of an uncertain regulatory timetable will reap the greatest award.

©2016 funds europe