REGULATION: Taking a hard line

Chalk_boradThe financial crisis shook regulators to the core and led them to take a stricter stance than ever. Angele Spiteri Paris finds that Sweden’s regulator is being particularly exacting While all depositories active in Europe grapple with what is known as Ucits V, banks in Sweden with asset management arms may be thrown into even deeper water. The regulator proposes that depository banks cannot act on behalf of funds belonging to the same parent group and although it’s doubtful that this will be taken up at European level, it is still a likely possibility for the Swedish players. Experts say that the Swedish Financial Supervisory Association’s strict stance is part of its attempt at having a more proactive role in the industry
But the issue is that in doing so, it seems to be going a bit too far and may need to be reined in and find some middle ground.
In its response to the European Commission’s Consultation Paper on the Ucits Depositary Function and on the Ucits Managers’ Remuneration, Finansinspektionen (FI), the Swedish regulator, says: “FI suggests that the commission considers the introduction of a new provision in the Ucits Directive or on Level 2 that a depository shall not be affiliated with the management company of the Ucits.”
The regulator claimed that an intra-group relationship between the management company and the depository gives rise to significant conflicts of interest. “Such conflicts of interest make it very difficult, if not impossible, for a depository to act independently of the management company and solely in the interests of the unit holders,” FI says.
Explaining the response, Jonatan Holst, acting chief press officer at FI, says: “Our recommendation comes from years of supervision of the fact that banks do not handle conflict of interests in an acceptable way.”
This proposition by the regulator was an issue taken up by the banking players at our asset servicing roundtable (see p 16-26).
In the discussion, Henrik Staffas, head of funds services at Swedbank, says: “I still believe that the Swedish banks can continue to perform the depository service for their own funds, but it must be done more professionally than it has been. Furthermore, I think that if the Swedish FSA acted more proactively in communicating and deciding on the guiding principles for the depository service, the market will be able to adopt a common market practice, making additional regulation unnecessary.”
A number of experts say that the FSA needs to provide more guidance around what it requires from depositories and what its demands are around the segregation of different functions.
But Holst says: “It is the responsibility of all depositories to know, understand and implement demands required of them by law.”
Some market observers say that the regulator has been taking more of a hardline approach in recent times and, in fact, the hefty fines it doled out to some local players could be seen as a good example of it putting its foot down. Discipline
Nordic banks Swedbank and Handelsbanken were severely rapped over the knuckles by the regulator. In January the institutions were heavily fined for deficiencies in services for fund companies whose assets were held and controlled by the two as custodians.
Swedbank was fined SEK2.5m (€300,000) and Handelsbanken was fined SEK3.5m.
When it issued the fines, the regulator commented: “Swedbank has not conducted annual controls of all of the funds for which it serves as a depository for a number of years. The control unit at the bank was also organised over a period of one year in such a way that a large number of the funds were not controlled at all.
“Handelsbanken has not conducted sufficient and independent controls of investment funds managed by one of the bank’s own fund management companies for several years. FI has also identified deficiencies in the bank’s independence regarding the group’s own fund management companies.”
In response to the ruling, Swedbank said in a statement: “Swedbank shares the Financial Supervisory Authority’s view that there have been shortcomings in Swedbank’s depository bank function. The shortcomings that were called to attention have been corrected on Swedbank’s own initiative.”
Reportedly, Handelsbanken also made changes in accordance with the regulator’s request and added that customers had not been affected, nor were any at risk.
Holst says: “From years of supervision we have concluded that banks tend to not handle the self-evident conflicts of interest that arise from intra-group relationships and that a ban on an EU-level is recommendable. At the same time, FI welcomes the current EU initiatives, which will provide more detailed provisions regarding the duties of a depository function. We consider that a harmonised approach in this area is necessary.” ©2011 fund europe

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