Alternative fund managers will find that the controversial Aifm directive will create a world-class brand just like Ucits, Ugo Bassi, the European Commission's head of asset management, tells Nick Fitzpatrick
The proposed Aifm directive has been the most controversial regulatory change in asset management to emanate from Europe this side of the financial crisis – but Ugo Bassi, the man in charge of it, expects the rules to work wonders for the alternative investment business, which it is designed to govern.
Aifm will be a brand that carries as much recognition as the Ucits stamp does for mainstream investment funds, he says.
If Bassi is right, this would make it easier to raise assets and open doors for Aifm products internationally.
It is surprising that he feels an industry which has struggled so much with Aifm – the Alternative Investment Fund Managers directive – will one day see it as a coveted seal of approval, but Bassi, who is the head of asset management within the European Commission’s internal market and services division, believes it.
“Investors, such as large pension funds, will feel much more secure with Aifm-stamped products. Aifm will bring some guarantees, like the Ucits brand does. With Aifm we are creating another brand that implies quality,” he tells Funds Europe.
Bassi is a lawyer by background and has held his current position since 2009. Many policies he oversees are a response to the financial crisis. Aifm is just the tip of the iceberg in terms of the EC’s response. There is MiFID II, the Investor Compensation Scheme and Ucits V’s depository rules, among others.
All these new rules will add extra costs for asset managers. But will they lead to any genuine value for money for the investor?
Bassi, who points out that the EC’s response to the meltdown was elaborated within the framework of the G20 rather than in a vacuum, says: “The challenge for the Commission is to regulate in a proportionate manner and the debate around the regulations that have followed the crisis – particularly the Aifm directive – has led to a proportionate result. What we have now is smart regulation, regulation that is proportionate.
“There are benefits from the Aifm that will compensate for the costs. One of them is the passport, including for third-country managers, which will increase choice for investors and simplify their ability to invest in EU and non-EU domiciled products.
“Another is increased investor confidence. It’s in the investors’ interests to have a proportionate regulation.”
But will all this address systemic risk, which was the reason for the regulatory overhaul? Bassi says Aifm and other directives contain tools to aid transparency. The only way to tackle systemic risk is through transparency.
Yet with so much European regulation for the asset management and financial services businesses, there have been delays in implementation. Is this because a lumbering regulatory monster is being created?
Bassi says: “When you look at Aifm, yes, there have been delays. But this was unexplored territory.
“If you look at the scope of Aifm and consider that the first draft that came out in the aftermath of the crisis was probably not the best, most carefully assessed proposal, and then consider that in only 18 months of negotiation we concluded the final text with unanimous council approval and a large majority of MEPs, this shows that Aifm is not disproportionate nor has the process been too long.
“It was not a simple adjustment or recasting of existing regulations. I respectfully challenge the perceptions that this took a long time. It took the time that was necessary.”
So what about overlap? What about conflict? Ucits V and the Investor Compensation Scheme both contain rules for despositories.
“I have to be honest and recognise that the post-crisis agenda brought a proliferation of initiatives. The agenda before the crisis was quite relaxed,” he says.
“When it comes to depository rules in Ucits V and the Investor Compensation Scheme, it’s true that they serve the same purpose about what happens when things go wrong. However, the detail is different. Ucits V sets out what happens on an ongoing basis. The Investor Compensation Scheme is relevant only in a specific case, which is insolvency.”
Bassi reveals that the day before the Funds Europe interview, Julia Leung, undersecretary for the financial services and the treasury in Hong Kong, met with him in Brussels. At the same time, Michel Barnier, the internal markets commissioner, was in China.
So will regulators in Asia, some of whom could create their own competing fund management hubs, gain from regulatory arbitrage as Europe tightens its legal framework?
Bassi says: “Do not forget we are acting in the framework of the G20 and that progress in the various jurisdictions will have to be measured. Each has to report to the G20 which will check the progress of every jurisdiction.
“It’s true that the G20 principles are not binding, but the political element of it is still important. There should be no jurisdiction that diverges substantially from the core of regulation.
“The larger jurisdictions are interested in what we do. For example, we have intense dialogues with China and Hong Kong.”
He says the next step is to make regulatory systems converge.
“This is what other jurisdictions such as Hong Kong want because it is in everyone’s interests that they all look the same. Other jurisdictions that do not attempt to be equivalent will end up with poorer quality asset managers.”
Room for adjustment
The reason for the existence of the EC’s internal markets and services division is to bring harmony to Europe’s financial services markets. It does this with directives, which leave room for national regulators to interpret rules according to local nuances.
But Europe has been accused of becoming more prescriptive in its approach to regulation.
Asked about this, Bassi indicates he has no concerns and, in fact, favours more rigidity.
“… when we talk about directives, there is room for adjustment that takes into account elements within national markets. But the more room we leave for national adjustment, the more we risk making the internal market less efficient.
“To be honest, we would like to see more directly applicable regulations at European level, not directives, because we would like to see a more integrated internal market. Leaving no room for national interpretations ensures the continued existence of the internal market.”
In our conversation, Bassi also said that legal certainty offered by the new rules, once in place, will help innovation, and he tried to quell concern that the role of fund directors will reduce. Aifm addresses fund managers but this does not mean that specific roles for directors are forbidden or prevented, he says.
“We are targeting managers because they make the key decisions. The directive does not go into the detail of defining the legal structure of those managers. They can be of a different legal status or nature.
“Directors will be able to perform all tasks and duties provided they respect the directive.”
So what next, then, for Aifm?
The next step is the level 2 procedures for implementation.
“What makes this difficult now is that there are two new elements: First, the introduction of Esma [the European Securities and Markets Authority], which replaces Cesr; and, second, the Lisbon Treaty, which changes procedures for level 2 measures.
“Therefore, we have a number of question marks on the procedures that risk impacting the content,” he says.
Esma should report back to the Commission on November 15.
©2011 funds europe