Our Ireland funds industry panel talks about the country’s role as a domicile and how it is adopting to regulatory changes, such as Fatca. Chaired by Nicholas Pratt.
Liam Collins, Partner (Matheson)
Paul Daly, Head of Ireland (BNP Paribas Securities Services)
Cathal O’Daly, head of client and sales management (Citi Ireland)
David O’Keeffe, chief executive (SMT Trustees, Ireland)
Funds Europe: Given the strong links in Ireland with US fund managers, how is Ireland dealing with the Foreign Account Tax Compliance Act (Fatca)?
Cathal O’Daly, City: Ireland was one of the first jurisdictions to sign an intergovernmental agreement (IGA) with the US and that is down to the open and tax transparent environment in Ireland. We were already a reporting jurisdiction under the EU Savings Tax Directive, so the infrastructure was already there and our reputation as being fully compliant under the OECD as a tax-transparent jurisdiction has greatly helped us with regard to our dealings with US managers.
Liam Collins, Matheson: As the European domicile of choice for US fund managers, it was vital that Ireland was pro-active in being Fatca-compliant. At an early stage, the Irish Funds Industry Association established a steering committee involving members from across the industry to liaise with the Inland Revenue Service in relation to the implementation of Fatca. The early signing of the IGA gives us a competitive advantage over other jurisdictions that, because of banking secrecy laws, may not be able to reach an agreement with the US. There’s also been significant industry engagement in relation to the contents of subscription forms and ensuring that there is industry-agreed wording that would meet the Fatca requirements.
Funds Europe: Has the competitive advantage resulted in business for Irish service providers and managers?
David O’Keeffe, SMT Trustees (Ireland): It has not necessarily resulted in more business. It has just cemented the relationship that they have with us. I appreciate that Fatca is a moving target and there is an awful lot that only came out recently, but our US managers take great comfort in the fact that we’ve been proactive because they’ve had a lot of legislation to contend with themselves.
Paul Daly, BNP Paribas Securities Services: The Irish industry recognised very quickly that Fatca was going to be an administrative burden and complicated in certain instances, so much so it instigated a task force very quickly which is involved in the development of revenue guidance notes. Administrators are constantly being asked about our reporting capabilities and our adaptability to future change. Fatca is one challenge that we’ve solved and we’re moving forward. I know there will be new obligations with the OECD’s common reporting standards will be another challenge. Our aim as a service provider is to make it as easy as possible for our clients and for the underlying investors, and that is how we have done it, via a consultancy approach that has worked out pretty well.
Funds Europe: Another big regulatory theme has been the Alternative Investment Fund Managers Directive (AIFMD). Has it gone as smoothly as was hoped?
Collins: Given the manner in which it was introduced and the protracted gestation period, I don’t think that anyone expected it to be smooth, but it has gone as smoothly as could have been hoped. Ireland was the first jurisdiction to have a regulated hedge fund product back in 1990 and because industry and the Central Bank of Ireland (CBI) has been so proactive, Ireland was the first European jurisdiction to have a regulated environment around AIFMD and the first jurisdiction to be open to accepting AIFM applications. Concentration now will turn from the introduction of AIFMD to the reality. Investment managers are starting to look at the AIFMD as a brand in the same way as they would look at Ucits and are embracing the benefits that it can offer in terms of the marketing passport, and also the competitive advantage which comes with being compliant with the directive.
O’Keeffe: We have had the luxury of a reasonably long lead-in time and a transitional period but there has also been huge engagement by the industry because it affected so many of us in similar ways. There are some issues to be resolved and some interpretations to be made but we’ve achieved a great deal, despite a slow start.
Daly: The engagement with the clients has been a long process but we have moved forward. They are looking at the depository now a lot closer – the rating, their experience and their depth of expertise. Initially, there was a lot of focus on how were depositories going to price the AIFMD services, but we have been transparent on how we are pricing for the associated risks. Leveraging our global depository network has really helped us support our clients across the major European jurisdictions.
O’Daly: The first entities to get approval under the AIFMD were generally the large managers probably because they have more resource such as a much bigger legal and compliance infrastructure. I think that’s broken some ground for mid-tier and smaller managers. In due course, we are going to see an awful lot more approvals coming in very quickly. From our own perspective, it is going quite smoothly. Our organisation’s model is slightly different to the extent that we own our own network, and that has probably yielded some advantage to us.
Funds Europe: Big regulatory initiatives often produce unintended consequences. Will that happen with the AIFMD?
O’Keeffe: We have a lot of clients who left it late because of the decision to extend the implementation period. Those who perhaps had not considered it to the fullest extent, are now having to do so.
Depository agreements are being challenged and discussed regularly. There is an awful lot of work to do, but the CBI has been pragmatic in its approach to work through the inevitable backlog on a timely basis.
Daly: One of the difficulties is the cost of the regulatory burden on not only the service providers but also our clients. This has caused issues for the smaller managers and it is incumbent on the service providers to help clients through this difficult time.
O’Daly: That cost has to be borne somewhere because administrators and the depositories just can’t bear it all. Investors, ultimately, have to be prepared to pay a little more for a highly regulated product and that in itself produces challenges. Managers are trying to control their total expense ratio (TER) and the AIFMD will have consequences in terms of how the industry is structured and how products are distributed.
Collins: Over time, as the AIFMD develops as an international brand, the benefits offered by the marketing passport and the attractiveness of the additional regulation and comfort that it can offer to institutional investors, and the benefits that AIFMD can offer in terms of asset raising will offset any additional regulatory costs and burdens.
O’Keeffe: We’re not actually talking about significant fee increases and if the fund is doing well anyway, these things shouldn’t matter as much as they might do. There is an increase and it will be borne by the clients but, understandably so, because of the additional oversight and security requirements that they are now afforded.
Funds Europe: The proposal to impose a 3% buffer for money market funds has raised concern in Ireland about an exodus to non-EU jurisdictions. Have we seen any impact yet?
Daly: This is an important asset class in Ireland and for institutional investors, so the industry is actively engaged to ensure we protect the stable net asset value money market fund.
O’Keeffe: Things are on hold until after the European elections, but when you consider that the margins are so tight to begin with, a 3% buffer will clearly have an impact on yield.
Collins: The proposed buffer applies not only to funds established in the EU but also those marketed in the EU. Establishing a fund outside of the EU means you’re not going to get the benefits that you would get from having the Ucits international brand for a money market fund, both in marketing to European investors but also marketing in Asia, where Ucits are very popular.
O’Daly: Ireland is not the only country concerned about this. It is a Europe-wide issue and the European Fund and Asset Management Association has made its views very clear. Corporate treasurers, which would make up a significant portion of investors in money market funds, also have quite strong views on this. Ultimately, they’re the people who bear the risks, and they’re not in favour of such a buffer. You would hope that there would be a sensible and a pragmatic approach. In July, the US has some proposals coming out and I think they will take a sensible approach and I think the European authorities should keep a close eye on that because there really should be a global approach to this issue.
Funds Europe: What regulatory themes has the CBI implemented in the fund management industry in the past year? Has there been a more professional approach from regulators that makes Ireland an easier environment to operate in?
O’Keeffe: It’s a different landscape than it was just even a few years ago. It is more transparent and more organised and appears to be effective. The CBI’s Prism (probability risk and impact system) means they are making risk management reviews according to the information they recieve. Themes range from anti-money laundering to corporate governance so the focus is more targeted and specific.
Daly: We’re under the spotlight, more so now than ever. We are all interviewed individually as part of the Prism review. So it’s incumbent on service providers and the senior people within the service providers to ensure that they’re up-to-date with the regulation and they adhere to it. Regulatory reporting is a costly exercise, but we’ve all know the importance of it.
Collins: Last year, we had themed inspections around outsourcing by administrators and pricing hard-to-value assets. This year, there’ll be themed inspections around corporate governance. We need to ensure the CBI continues to engage with the industry to understand the way it operates and to understand its needs and to strike a balance between pragmatic and prudent regulation to ensure Ireland remains a competitive domicile.
O’Daly: There is a quid pro quo to the extent that strong engagement is required between the Industry and the Regulator. The regulated entities need to ensure the integrity of their data because this is what the CBI uses as part of their supervision of these entities. The regulator also need to ensure that the governance and structure of an entity is robust as this also forms much of the review.
Funds Europe: Has the new regulatory environment made Ireland a more attractive domicile?
Daly: It has been challenging. The corporate governance code did create an element of bureaucracy and we had to work with our respective clients to help them through that process. And from a service provider perspective, we also had to make sure that we were in full compliance with the corporate governance code but this has firmly placed the regulatory stamp on Ireland as a jurisdiction that is fit for purpose and this has helped and not hindered our business growth.
Funds Europe: Has Ireland’s exit from the Trokia/EU/IMF bailout had a positive impact for the funds industry or is it largely immune to these domestic issues?
Collins: If anything some of the domestic economic difficulties have actually contributed to further growth of the Irish funds industry because there’s been a lowering of the cost base for the industry and it has refocused the government’s attention on the importance of the funds industry as a growth sector and a source of employment. There are over 12,000 people employed directly within the funds industry in Ireland. There’s been a growth in Irish fund assets of over 14% since December 2012, which is clear evidence of the confidence that people have in Ireland. Any perceived issues that people may have had with the bail-out would have been dissipated with the Moody’s upgrade and we’re seeing Irish funds being registered for sale again in Chile.
Daly: The litmus test is the growth in assets, in new managers coming to Ireland and the growth in employment in the industry. Each of those three areas have got positive stories to tell, not only on the alternative side but also on our regulated product. New entrants on a continuous basis are coming to use Ireland as the base for their European products, not just from the historical major domiciles of the UK and the US, but from Latin America and Asia in particular.
O’Keeffe: There was a time when clients were asking how Ireland was managing its economy. It did not affect the assets of the funds but they wanted to know about service providers and the economy and employment. We haven’t had that conversation with any of our clients for a long time, which is fantastic and it puts us back on an level playing field with other domiciles.
O’Daly: A country’s sovereign debt rating and its attractiveness as a funds domicile should not ever be linked. What is most important is how we’ve emerged from the bailout, with our political institutions completely intact, a very stable society and a tax system that remains attractive and transparent to international institutions. Retaining all those things can only enhance our reputation overall.
Funds Europe: Is Luxembourg still the main competitor for Ireland or are other jurisdictions emerging?
Daly: Dublin and Luxembourg continue to remain two very competitive jurisdictions. However, as BNP Paribas Securities Services is a global organisation, we work with our clients helping them regardless of the jurisdiction in which they want to launch their product. From an Irish perspective, we are constantly aware of the competitive nature of this business and to attract business into a jurisdiction, such as Ireland, we have to keep our costs down and ensure that we make coming to Ireland a positive experience for investors and their clients.
O’Daly: There are other competing jurisdictions, such as UK, France and Malta, but the competition between Ireland and Luxembourg has driven innovation and helped to internationalise the Ucits product. But we have to stop looking over our shoulder. Instead, we should play to our natural strengths – robust common law, a transparent tax system and an excellent servicing environment – and worry less about the competition.
O’Keeffe: Luxembourg is still our primary competition for traditional funds, where European banks still dominate distribution but for UK and US managers there is a commonality in legal structure, we are more cost-competitive than we were in the past, we service hedge funds even though they’re not domiciled here and the funds are continuing to come here, so that’s testament to the fact that we’re doing something right.
Collins: Luxembourg is the only jurisdiction with a comparable offering in terms of an EU domicile for cross-border funds. What we offer in Ireland is a regulated product with access to marketing passports and there is an increasing demand from both managers and investors for more regulated and transparent products. Ireland is constantly looking to improve its offering and innovation. The Irish Collective Asset Management Vehicle (ICAV) Bill is in the process of being finalised. The ICAV will be the first corporate vehicle that’s been tailor-made for the Irish funds industry to meet the needs of managers and investors. It is going to be a welcome addition, and it just emphasises that Ireland is not satisfied to rest on its laurels and is constantly looking to make Ireland more attractive for managers looking to domicile their products in Europe.
Funds Europe: Ireland has always been popular with US fund managers. Is it also becoming more popular with Asian managers?
O’Keeffe: The Ucits brand has been massively popular on a global basis and particularly in Asia. It is well understood, well respected, well received and it’s been there for many years. From a servicing perspective we are seen as flexible and hard-working. While there may well have been a perception that the Asian markets were saturated this is certainly not the case. As the largest trust bank in Japan, our Asian clients are desperate for yield and they are looking for new products. Ireland sits well with that because we are flexible and quick to market and we service lots of other funds that are not domiciled here also.
O’Daly: The Irish market is predominantly Anglo-Saxon, but it was Korean managers which gave this industry a jumpstart back in the early 1990s. Since then we have had Japanese managers establish product here and now the focus is on China and Hong Kong. But Asia is a very disparate market, as we know. Ucits funds are predominantly distributed in Hong Kong, Japan, Taiwan, Korea and Singapore but we are now seeing new Asian managers setting up their own relatively small Ucits products with an eye on growing them but how sustainable are these funds given the regulatory environment and the focus on the TER? It will be interesting to see how these funds fare.
Funds Europe: Have there been any new entrants to the Irish market or is regulation and consolidation actually shrinking the landscape?
Collins: In the past two years 99 new fund managers came to Ireland from 21 different jurisdictions, which is evidence of Ireland’s continued growth as the European domicile of choice for fund managers. Inflows into Irish Ucits and alternative investment funds have been very positive year upon year. So while there is increased regulation, Ireland has continued to grow. The Irish qualifying investor alternative investment fund is increasingly being seen as a very popular vehicle for real estate investment, a lot of new real estate funds have been established and there’s an increased interest in Ireland on the private equity side because the AIFMD will bring previously unregulated private equity managers into its remit.
O’Keeffe: Recently, we have seen administrators being bought out by US banks and a relocation of resources. At one point, there were 45 administrators and 23 depositories in Ireland, but those numbers will consolidate as there is a huge increase in technology demands and infrastructure costs and sometimes it is easier to buy something rather than create it for yourself. We welcome entrants as it is good for competition.
O’Daly: A lot of the bigger service providers are focusing on their large global clients as a natural fit given their own global presence. This has all been driven amongst other things, by the need to allocate resources to global clients efficiently so as to deliver optimal service to these names and the smaller managers, which may not fit with one of the bigger international players therefore. These managers will probably find a more suitable home with one of the smaller or mid-tier service providers.
Daly: There is room for both the large global and the more boutique clients to be serviced in Ireland. We have seen more management companies set up to avail and support the new AIFMD legislation and we will have to wait and see how successful those management companies will be in attracting new assets. For us all as service providers, the fact that there are new clients setting up in Ireland is an overall positive experience.
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