ALFI: Returning to the Grand Duchy

It’s no surprise that regulation will again dominate the agenda at the spring conference of the Luxembourg funds association. We ask key figures what they expect to be discussed.

The spring conference of the Association of the Luxembourg Funds Industry (Alfi) is happening on March 19 and 20 at the Nouveau Centre de Conférences Kirchberg (NCCK), Luxembourg.

As in previous years, the huge amount of regulation that faces asset managers and asset servicing companies in Europe is high on the agenda.

The conference programme includes dedicated sessions on the packaged retail investment products (Prips) rules. What will be the effect on the Ucits brand, and how will it change the production of key investor information documents (Kiids)?

Delegates will also discuss non-fund-related regulations that are destined to affect the funds industry, namely the Solvency II rules, which apply to insurance companies, and the dreaded Foreign Account Tax Compliance Act (Fatca) which imposes reporting requirements on asset managers with US clients.

There is also a session about the European Market Infrastructure Regulation (Emir), which is aimed at improving transparency, and Target2Securities, which seeks to harmonise post-trade infrastructure in Europe.

Of course, the conference also includes a discussion about the Alternative Investment Fund Managers Directive (AIFMD), which imposes a raft of new requirements on managers of real estate funds, private equity and hedge funds.

The conference line-up reflects the environment in which both fund managers and asset servicers operate, a world in which regulation has become the all-consuming focus of many members of staff.

Yet, amid the regulatory acronyms and compliance debates, delegates will also find time to discuss the future of Luxembourg itself. What must the Grand Duchy do to maintain its position as a major international fund domicile?

One goal is to attract the right people. Frédéric Perard of BNP Paribas Securities Services (right) says there is a shortage of quantitative analysts in the country. As risk and compliance become more important parts of the fund industry, Luxembourg must ensure it has enough staff to meet these needs.

Meanwhile, Luxembourg must continue to refine its services and remain cost-competitive with other domiciles. Countries such as Ireland would be only too happy to capture some of Luxembourg’s market share, and see regulations such as the AIFMD as an opportunity to do this.


How are you dealing with your regulatory burden?
We are in the implementation phase and BNP Paribas is participating in various working groups at the Luxembourg regulator, the Commission de Surveillance du Secteur Financier, to help this process. The main difficulty is that we are caught between very short deadlines and a continuing number of unknown factors with regard to operational aspects. That said, we have developed expertise in implementing different regulations, and we are supporting our clients and discussing with them the key challenges we all will face. For example, to implement the Foreign Account Tax Compliance Act (Fatca), we help the asset managers or management companies to understand the impact of the respective roles and responsibilities and prepare the to-do list of the tasks to accomplish for being ready.

What does the Luxembourg funds industry need to do to remain competitive and keep hold of its position as the most popular fund domicile in Europe?
The country will continue to surf the wave of the new legislation, as we have a responsive and relevant expert environment, consisting of service providers, consultants and lawyers. For example, an alternative investment fund could be attracted to the Grand Duchy as a result of the new legislation, and there is considerable potential in niche markets such as real estate funds, loan funds and infrastructure funds. We must capitalise on Luxembourg’s excellent global image.

What are the main challenges for the Luxembourg industry in the year ahead?
There is a recruitment challenge. The strengthening in assets in Luxembourg has led to a need for specific skills in risk and compliance. Quantitative analysts, for example, are not to be found so easily. More broadly, everyone in the sector must get used to a growth in competition. Several players offer similar services and differentiation will come from expertise and market presence.


Is it possible for asset servicers to increase their fees or is fee revenue in an unstoppable decline?
It is almost impossible for asset servicers to increase their unit fees. Fee revenues may increase with higher volumes and should also increase with the generation of more value for clients. With the numerous regulatory changes, such as the onset of the Alternative Investment Fund Managers Directive (AIFMD), asset servicer responsibilities are substantially higher, which means more safety for asset managers and investors. Asset servicers also develop new services to help their clients focus on their core activities, investment strategy and risk management, and also client management for asset managers. New revenues may also come from the globalisation of clients’ reach.

Will asset servicing companies be forced to bear the cost of implementing regulation such as the AIFMD?
Regulations are made to increase investor and system safety, so it would make sense for asset servicers and asset managers to bill their clients. However, asset managers and asset servicers are bearing most of the implementation costs, while running costs can be split between the investor, asset managers and asset servicers, even if the balance is not favourable to asset managers and asset servicers. The real issue is regulations that bring no value for clients, for instance tax regulation such as Fatca, where asset servicers will have to bear most of the cost. 

What subjects do you expect to see discussed at this year’s conference?
Topics that will be discussed include: the deadlines for Fatca registration  (25 April), AIFMD implementation (22 July) and trade repository reporting under the European Market Infrastructure Regulation (February 12 and August 11). Delegates will also consider the complexity and simplification of reporting, such as AIFM regulatory reporting, tax-based reporting such as Aktiengewinn, transparency-based regulation such as the Capital Requirements Directive IV and Solvency II, or marketing-based performance and risk reporting.


What challenges does cross-border fund distribution present, and how can fund companies overcome them?
The cross-border model is complex and, in the long-term, it is difficult to see how it can be sustained without radical changes. But there has been continuous but slow change over the past few years. A bigger increase in automation and standardisation levels is of primary importance. Removing redundancy of similar activities performed by all actors, typically in order routing and dissemination of fund information, will be critical. Greater transparency for investors and more efficient global know-your-client tools are needed. In addition, we are seeing more emphasis on risk reduction. Another consideration is that, for fund groups distributing outside of Europe, in South America and Asia for example, these issues can be especially complex.

Will cost pressures on the funds industry continue to increase? What can be done about them?
Yes. The fund industry will have to deliver the outcome required for pensions and be competitive against other existing products. Mutualisation is the only way forward to reduce costs and it has proven to be successful in other markets where the total expense ratio is lower than in Europe. Standardisation through technology and software thanks to the emergence of companies [in that area] will provide a space for this mutualisation to happen.

What role can you play in solving the cross-border distribution problems?
We started operations last July and rolled out a range of services for fund information, regulatory reporting and order routing. We launched a platform for order routing and the first transactions took place in September. Fundsquare is a wholly-owned subsidiary of the Luxembourg Stock Exchange but our ultimate ambition is to become a user-owned and user-governed market utility.


How have you helped members negotiate the complicated regulatory environment in the past year?
Alfi follows European and international regulatory developments closely. Our offices in Brussels and Hong Kong are helpful in spotting important trends early. In 180 technical committees, working groups and forums, we involve our 1,500 members in the analysis and the understanding of regulation that impacts the industry. Our continuous contacts with the regulatory and government authorities aim at finding common pragmatic and operational solutions. We communicate with the international fund community by publishing position papers, guidelines and studies.

What areas are your members most in need of help?
For the past few years, the industry has faced an avalanche of new regulation. Fatca and the AIFMD are the most prominent. The Alfi Alternative Investment Funds Technical Committee and its specialised sub-committees and working groups met 54 times in 2013 to provide guidance on implementing the directive at the national level. The clarification of Fatca operational requirements has been, and continues to be, a priority for our members.

What are Alfi’s goals for the next 12 months?
The regulatory agenda will still be busy and ALFI’s goal is to carry on defending the interests of the fund industry and to maintain the Luxembourg investment fund centre’s leading international position.

For sure, the AIFMD will keep us busy in 2014. We believe Luxembourg is a centre of choice for alternative fund managers and we will continue to highlight the advantages we can offer in this area.

Other issues that we will continue to monitor are the proposed financial transaction tax – which we strongly oppose – as well as the draft regulation on money market funds and the final agreements on the Markets in Financial Instruments Directive (MiFID) and Packaged Retail Investment Products (Prips) regulations, which will impact the European asset management industry.

©2014 funds europe



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