Our panel looks at Ireland as a funds jurisdiction and considers the changing supervisory landscape, the effect of the banking crisis, and ultimately Ireland's future under the Alternative Investment Funds Managers Directive. Chaired by Nick Fitzpatrick.
Killian Buckley, partner, Kinetic Partners
Liam Collins, partner, Matheson
Sarah Cunniff, partner, Arthur Cox
Andrew O’Callaghan, asset management and FDI partner, PwC
Cathal O’Daly, director, head of client and sales management for financial institutions, Citi
Furio Pietribiasi, managing director, Mediolanum Asset Management
Funds Europe: Under the Central Bank of Ireland’s Probability Risk and Impact System – its new supervisory framework – what has changed for fund managers?
Cathal O’Daly, Citi: Generally, the larger financial institutions that pose the greatest potential risk to the financial system will receive a higher risk rating. From a practical perspective, this risk based approach is very welcome.
Specifically in the funds world it is factors like assets under management and fund turnover that are taken into consideration. Funds with a lower risk rating will probably end up having more ‘desk top’ type reviews compared to the higher risk-rated funds, which I expect will be subject to more on-site type inspections.
Furio Pietribiasi, Mediolanum: Having the experience of regular visits by the central bank and an open dialogue with them, we feel the system is very good.
The Irish approach is different from other jurisdictions where we have operations. Everything is very much spelled out in advance to avoid any grey areas surrounding rules.
The regulator has been looking particularly at companies with retail distribution – whether through aggregators or direct distribution – and this is an area the regulator ought to be looking at the details of.
Dialogue has aided the regulator’s understanding of the funds business and this is obviously much preferable than having to explain the business in court to people that do not understand it.
It is more like an open-ended inspection and learning process.
Sarah Cunniff, Arthur Cox: The regulatory approach for funds focuses on themed inspections, anti-money laundering inspections and in the course of this year the regulator will also look at fund outsourcing, data integrity, corporate governance and adherence to Ucits IV business plans.
Service providers will also have their own inspections.
Killian Buckley, Kinetic: The regulator is on record as saying that funds are different to other financial entities with its focus on distribution channels and the impact on investors. Investor protection is at the core of this. It means fund managers can point to Ireland as a jurisdiction that looks after investors.
Ireland’s approach to regulated entities though is similar to what has happened internationally. We’re seeing principle-based regulation replaced by a more risk-based supervisory approach.
Liam Collins, Matheson: I don’t think that fund managers have anything to fear in terms of the new regulatory approach. If anything, the risk-based framework and the risk assessments will serve to enhance Ireland’s reputation for prudent regulation and the high esteem in which Irish investment funds are held globally.
The assessments that have been carried out so far in respect of management companies haven’t led to any material changes to the Irish structure or the Irish model.
Ultimately, the risk-based approach should mean the central bank will engage with fund managers and investment funds at a level that corresponds with the impact category that they fall into.
Andrew O’Callaghan, PwC: I think the most important point is that the regulator views funds as being ‘low impact’ in terms of financial stability. For the approximately 900 or so firms that use Ireland either as a domicile or as a servicing centre, that’s very important. If you’re developing products for global distribution, and certainly for European distribution, it is important to know what view the regulator takes of a product. In this case, certainty about the low-impact status of funds is very important.
Funds Europe: As regulation proliferates globally, how serious is the threat to Ireland that fund managers will take advantage of regulatory arbitrage and move their operations elsewhere? What does Ireland offer to keep them here?
Callaghan: The idea that some people have and put around in the press that Asia is a ‘light touch’ in terms of regulation is not true. Anyone who has dealt with the Securities and Futures Commission, or the Monetary Authority of Singapore, will find they’re not light touch at all. That’s a misnomer.
Collins: The vast majority of Irish regulation now comes from Europe under the overall supervision of the European Securities and Markets Authority (Esma), and so there’s not a lot of scope for regulatory arbitrage to take place.
Ireland distinguishes itself in terms of its pragmatic but practical approach to the application of the regulation.
This practical but prudent approach adopted by the regulator is what Ireland has to attract fund managers as well as the very strong professional service culture.
Ireland was the first jurisdiction to have a regulated alternative investment fund product and is now the centre of excellence in terms of the alternative investment fund world. There’s no serious threat there for Ireland.
Pietribiasisi: Ireland is a business district with global intelligence that can be accessed very easily. This is why we decided to establish our business here.
When you think about all the consultants, administrators and custodians that have been developing fund management product here, and developing it in partnership with the largest asset managers in the world, you automatically have cheap and easy access to this knowledge by engaging with the industry here.
In Ireland, you could outsource a lot of your activities within your business model, which in other jurisdictions you weren’t able to. That is much more cost-efficient as well.
It becomes even more compelling to be in Ireland today because of information technology, which is another real economy here.
Windows 8 was developed here. Google, Facebook, LinkedIn and many others are here. Many of them are developing here.
In financial services we are in the 3.0 era with Big Data, analytics and digital media. All are elements that are contributing to make business more successful, with tools for your clients and internal tools to do your own work.
With the big data that is sitting here in Ireland, you can get incredible value out. Everything is within the range of a few miles. You don’t have to travel to the other side of the world in order to engage with the brains that are at the cutting edge of these specific industries.
Cunniff: It’s fair to say regulatory change impacts the fund industry worldwide, whether you’re based in the US or Cayman or the EU. What counts is a pragmatic approach to implementation. The service environment that Furio mentioned all helps clients to get to where they need to be ultimately in the face of regulatory change.
O’Daly: I think it’s important to understand that Esma is looking to promote a harmonised and consistent approach to regulation across Europe, so therefore given the increasing powers of Esma, the ability to engage in regulatory arbitrages is pretty much limited because of this consistency of approach across Europe.
However, it is important to point out though that the timing of regulatory change is still within the power of the regulator, and I think it’s important to that end that Ireland continues to remain responsive to regulatory change.
Buckley: Regulatory arbitrage is a buzz term at the moment. The right approach by fund managers is to ask themselves where they want to be in five years’ time, what kind of products they want to run and where do they want to raise assets from.
That’s a global business decision.
There are situations where sometimes an offshore fund is a solution for clients. We acknowledge that, so our role then is to service that fund in the best way possible. It is not all about bringing funds to domicile in Ireland. There are many other things we can do for fund managers even if they choose not to launch an Irish fund.
Cunniff: As for funds moving elsewhere, it’s important to note that many non-Irish funds are serviced here and this is very significant for Ireland.
Funds Europe: Did the banking crisis seriously affect Ireland’s standing as a fund domicile?
O’Callaghan: I would disagree. The net inflows into Irish funds over the past two to three years have been higher than they’ve ever been.
Ireland has been fortunate in that many of the products that are domiciled here – fixed income funds, money market funds, exchange-traded funds – are the funds that have been in demand post-crisis, so we’re fortunate in that respect.
Ireland’s reputation, certainly from a domestic banking perspective, has been damaging, but I don’t believe it’s damaged the funds industry per se, because all of us would have very frequent conversations about it with all of our clients from around the world.
A couple of clients in the early days did get questions from their large institutional investors about whether to keep money in Irish funds but that has been managed.
Pietribiasi: There is no link whatsoever between funds and the Irish economy, Irish solvency or with the Irish banks.
Ucits is the most secure vehicle worldwide for the safety of assets. The asset manager can go bankrupt, the custodian can go bankrupt, even the country the fund is domiciled in can go bankrupt, but investors can still take out their money whenever they want because of the infrastructure. That’s why Ucits funds are growing in certain countries.
Cunniff: Of course, the banking crisis seriously affected Ireland, but not directly as a fund domicile. Although it’s probably worth saying that there has been consolidation in funds industry service providers over that period of time, so there has been an impact on the way in which we operate in Ireland.
It’s also worth noting that the service providers have become much more competitive as a jurisdiction, which is a good thing.
Collins: I think investors have been able to distinguish between the banking industry and the investment funds industry.
As just mentioned, if anything, the crisis has been positive in terms of the investment funds industry, increasing competition, reducing costs, and refocusing the government’s attention on the importance of the funds industry to the economy as a whole.
Net inflows to Irish Ucits funds in 2011 were €62 billion – almost €50 billion more than any other jurisdiction.
In 2012, that trend continued and Ireland again had the highest Ucits growth, at about 18%.
On the alternatives side, the number of Qualified Investor Funds (QIFs) and the net assets of QIF funds are at an all-time high. So I think the evidence is clear: the funds industry hasn’t been affected and has been able to move on and grow stronger.
Buckley: Domestically, Ireland has come through a difficult time. I think what that has done for the government and for government policy is highlight the importance of the funds industry to the health of the country. We employ about 12,000 people directly in the industry. Those numbers resonate with politicians and thus the funds industry is very high on the government’s agenda.
Pietribiasi: The concern is that if the fund industry is linked to the banking industry and the global crisis at the European level, then rather than see this industry as a component that can help the European economy recover, it may be seen instead as an industry that needs to be put under a tighter control, like the banks. In my view this is very, very dangerous for the funds industry and the economy in Europe, not only for Ireland.
Funds Europe: Given the globalisation of the funds industry and, particularly, the importance of the Asian market, should Ireland still be the first choice of domicile for US managers looking to internationalise?
O’ Daly: An asset manager trying to raise assets will need a strong service provider to help them through the swathe of regulations and the increasing complexities of funds. They will look to have good quality administrators servicing their funds and, to that end, Ireland, regardless of the domicile of the manager, remains a very good place to do business.
Last year Citi globally co-sponsored research with The Economist Intelligence Unit on the best cities in the world to do business. Dublin ranked as the number one city in the world in the context of human capital. That speaks very highly of the quality of people here. Human capital is a very important factor for the fund servicing industry especially given the ever increasing complexity of fund product and investment manager needs.
O’Callaghan: US businesses generally do feel at home in Ireland, not just in this industry. Ireland attracts more foreign investment from the US than Brazil, Russia, India and China combined. Something close to 20% of US investment into the EU comes into Ireland, notably the technology sector and pharmaceutical and life sciences sectors, but also in this industry.
The reasons for that include English language, proximity to New York or Boston, common law jurisdiction, a pro-business environment, and somewhat of a US mindset about getting things done.
Collins: The question refers to the increasing globalisation of the funds industry. In reality, and particularly with Cayman funds becoming more unattractive to investors, Europe is truly the only international funds domicile.
If you’re a US manager looking to access Asian investors, there’s no pan-Asian investment product and I don’t really believe that there’s one on the horizon. So a US manager who establishes an Irish fund is getting a tax-efficient, flexible vehicle, that will then allow them to access European investors, Asian investors and Latin American investors, without having to go to the expense and the administrative burden of establishing separate fund products in those separate jurisdictions.
O’Callaghan: It’s important to remember how US fund managers generally structure their products. Products for the domestic US market would generally be structured under the 1940 Investment Company Act. When they started to look internationally, US managers came to Europe and, in most cases, set up a Ucits fund either in Ireland or in Luxembourg.
But now they want to gather assets in Asia and Latin America. The question is, will Ucits be the product?
They won’t use their US product because they don’t subject non-US investors to US Securities and Exchanges Commission regulation, but will they want to sell the European product in Asia? The answer is yes, they do.
Unless a local market demands otherwise, a fund manager’s preference for product efficiency will be to have no more than two very large fund ranges.
US managers who already have an existing platform for US distribution and a second one for international distribution do not want a third one. They will do it if they are forced to, but it is inefficient and not the preferred approach currently.
Funds Europe: Will Ireland be the leading centre of excellence for AIFMD-branded funds and attain a status similar to that enjoyed by Luxembourg in the Ucits sector?
Pietribiasi: Ireland already services 40% of assets in alternative funds. Ireland looks much smaller in terms of assets under administration because the data look more at what is domiciled here. But in reality, if you combine that with what is serviced here, Ireland is already a leader in Europe. So from my perspective, it will be a natural progression for alternative managers to relocate to where their administrators are regulated or governed, so then they can know exactly what the rules are and what works. So AIFMD is a battle only to lose, not to win.
Cunniff: As a centre of excellence, the services that we provide here are valuable for all products, AIFMD or Ucits.
Buckley: The new Qualifying Investor Alternative Investment Fund (QIAIF) will be a fully compliant AIFMD product. The QIAIF can itself act as an AIFM thus giving managers access to the AIFMD passport throughout the European Economic Area. We were one of the first countries to publish draft AIFMD rules and now to finalise those rules, so we’re at the forefront of thought leadership on this and many other investment management issues.
But I think it’s important to say that we’re not jumping for joy about this directive at all. We realise it’s a very difficult issue for fund managers. It means extra costs and arguably negligible investor benefits to it, but as an industry and a regulator we have come up with solutions to help mitigate those costs and issues.
To the point that it’s a battle to lose, I would just phrase that differently.
We have all the fundamentals here to be the leading alternatives centre, but we’re not going to be complacent about it. We know it’s a very difficult battle to win and that it isn’t just an EU battle. There is also an EU versus non-EU angle to this.
O’Daly: I think it’s fair to say the evolution of the Ucits regime has been good to both Dublin and Luxembourg. The Ucits industry in Ireland distributes to 70-plus countries through about 440 promoters from 50 different countries. Ireland’s footprint is the same as Luxembourg’s though its assets under management are a little bit higher.
AIFMD is a good opportunity for both Ireland and Luxembourg.
Collins: Firstly, I would note that Ireland is a centre of excellence in respect of Ucits, with over €1 trillion in Ucits assets under management and over 3,200 Ucits sub-funds domiciled in Ireland. On the alternatives side, figures over the past few years have shown that since publication of the first draft of the AIFMD in April of 2009, the net assets in Irish Qualified Investment Funds (QIFs) have more than doubled, showing that asset managers see Ireland as the domicile of choice in terms of AIFMD and have been establishing QIFs in preparation for AIFMD.
Many of the requirements of AIFMD are requirements that Irish QIF funds would already be subject to and the service providers would already be very familiar with. Obviously there are new requirements, but it’s not as significant a change as it may be for other jurisdictions.
We are already a centre of excellence in terms of alternative investment funds and AIFMD provides Ireland with an opportunity to build on that.
O’Callaghan: Ireland should be the leading centre. Ireland has a natural head start because a large number of hedge fund administrators chose Ireland when they were looking at the European channel. Now that we’re moving between un-regulated alternatives and regulated, Ireland is in a very fortunate place again in terms of being able to offer the kind of expertise that’s needed in the regulated space.
Pietribiasi: Competition between Ireland and Luxembourg is a good thing. For promoters like ourselves with operations in both countries, we do recognise the value of maintaining both countries as providers. Having two ports that are competing and striving to be the best is very helpful and keeps cost low.
But the real challenge and the real concern is not looking at the competitiveness of Ireland and Luxembourg, but looking at the competitiveness of Europe.
This determines how these two countries will be enabled to make a statement of their support of financial services, and specifically the funds industry. These countries have done a very good job at maintaining a stable environment and a successful and vigorous control environment. The work that these two countries have done, they are not even able to publicise too much because it is difficult to be appreciated by the public after the financial crisis.
That’s wrong, because it is a missed opportunity to strengthen the credibility of our industry.
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