Heading into 2021, fund managers face a wealth of disclosure requirements, substance and delegation rules and sustainable finance reporting rules. In a webinar hosted by Funds Europe, a panel comprising Eoin Motherway of AMX, Ken Owens of PwC and Roelfien Kuijpers of DWS detailed the relevant regulations and the challenges they present and proposed a possible action plan.
In 2020, the Covid-19 pandemic caused massive disruption to social and economic activity. While national lockdowns and the absence to face-to-face meetings curtailed much activity, regulatory requirements and reporting obligations continued largely unabated.
Much of the work concerned preparation ahead of new requirements that are due to take effect in the first quarter of 2021.
For Roelfien Kuijpers, chief ESG client officer and head of UK, Nordics and Ireland for DWS, the main focus has been preparing for the EU’s Action Plan on Sustainable Finance (SFDR). As of March 2021, funds classified under articles 6, 8 and 9 will have to meet the EU’s new taxonomy.
“Not only have we made sure our funds are classified correctly, we also have had to educate our sales teams, distribution partners and clients across Europe as to what those fund classifications and methodology mean for them,” said Kuijpers.
For Ken Owens, asset and wealth management regulatory advisory, PwC Ireland, the regulatory focus in Ireland was liquidity management. Initially this focus, including ESMA’s guidelines on liquidity reporting, was a result of redemption issues around open-ended property funds that cropped up in 2019 and led to the temporary suspension of various funds.
However, said Owens, once the pandemic hit and market turbulence followed, regulators had an insatiable appetite for liquidity data. Liquidity risk reporting and liquidity stress tests have become a weekly discussion point now with clients.
Looking to 2021, one new regulation that Owens has focused on in 2020 is the IFR/IFD prudential regime for EU investment firms. “It will be a new capital framework for investment firms, designed specifically for the sector. There will be new data required and a significant increase in the amount of reporting and the amount of data they will need to collect,” said Owens.
Next year will also see the conclusion of the EC’s consultation on the AIFMD review which, despite the title, is likely to go beyond the confines of alternative investment managers and could shape the industry for the next five to ten years, said Owens.
“The EC is calling for an evidence based, data-driven response, so it is very important that the industry engages with that process.”
According to Eoin Motherway, Ireland country head for AMX, the asset management infrastructure provider, the pandemic and the move to home working has caused regulators to focus on firms’ resilience, particularly where they have third-party outsourcing arrangements in place.
“In many instances, that work was insourced or near-shored, so we have had to check that everything is still working and there are no operational delays,” said Motherway.
The other focus, and one that will dominate the early part of 2021, is CP86, the governance framework created by the Central Bank of Ireland (CBI). In October, the CBI concluded a review of firms’ compliance with the framework based on empirical data for the first time. Its conclusions, detailed in a ‘Dear Chair’ letter to all fund management firms, were equally telling, exacting and scathing, said Motherway.
This was then backed up by another letter, this time to chief executives, on fitness and probity. The letter, along with the Senior Executive Accountability Regime (SEAR) proposals echo the Senior Managers and Certification Regime (SMCR) in the UK, signalling not just the need for greater governance within firms but also a move from corporate responsibility to individual accountability.
“Previously, regulators have been focused on the firm but SEAR and SMCR is about the individual officer and it will be interesting to see the impact, either a whole new degree of atonement or more firms or directors walking away from scenarios they feel are being inappropriately managed or governed,” said Motherway.
The panellists then turned to 2021 and the regulatory deadlines looming in the first quarter. The EU’s SFDR March deadline is one of those and while there has been some pushback from less prepared fund managers, DWS is still working towards the original deadline.
One obvious headwind is Brexit and the UK’s decision to introduce its own taxonomy for sustainability. This will leave some firms in the difficult position of having to duplicate their reporting and administration efforts, but also opens the door to regulatory arbitrage if there are differences in standards and supervisory rigour.
More encouragingly, the Dutch and French regulators have called for a European framework for sustainability data. “We are very much in favour of more harmonisation of that data and of sustainability service providers across the EU. Ultimately for investors it will increase transparency, prevent greenwashing and lead to a lower cost for those sustainability products over time,” said Kuijpers.
While the environmental and social elements of ESG were at the forefront of 2020 through climate change and the Black Lives Matter movement respectively, 2021 could be the year of the ‘G’ as corporate governance comes to the fore. In addition to CP86, proxy voting is likely to be a key focus in 2021.
“If you really believe in a topic like climate change, and you want to create an impact as either a fund manager or asset owner, the best way to do that is through governance – either corporate engagement or proxy voting process,” said Kuijpers.
However, proxy voting has not always been possible for investors in pooled funds and finding a remedy for this limitation will be a priority in 2021, as underlined by the decision of the UK’s minister for pensions, Guy Opperman, to launch a pooled fund voting taskforce in December 2020.
Another issue that will affect all firms but particularly the small and medium players will be resourcing, agreed the panellists. One the one hand, the sheer load of reporting requirements – from MiFID II to the AIFMD Review - will require more compliance resources. On the other, CP86 will require more senior executives.
As a consequence, this will likely confirm the end of an era for Single Management Investment Companies in Ireland, said Owens. While they were instrumental in establishing Ireland as a gateway into the European market, there have been no new ones since 2017 and the heightened substance requirements will likely make most self- managed funds financially unsustainable.
“But the industry is very innovative and as that structure has become challenged, we are seeing more platform and infrastructure businesses being set up to provide the same access under a new structure,” said Owens.
Finally the panellists addressed the issue of cost. As Owens said, the costs in financial services only go up. The issue is how the industry responds to that. For example, will firms be able to apply automation and digital technology to reduce their compliance costs? Or will end investors end up bearing the cost?
For Kuijpers, should fund managers face extra costs for their ESG reporting, they will find it nigh impossible to pass those on to investors. “All investing will become ESG investing in the near future. So investors will not pay a premium for something that becomes common industry practice.”
Motherway agreed with Kuijpers assertion. However, he added that it might take time to get to that point and in the short term, some of those costs will be passed on to the fund and to the investor. That is why initiatives like the French and Dutch regulators looking for coalescence on definition of data will be critical, he added.
“The current reality is that to do ESG investing properly, you have to take several streams of data and that data is not cheap,” he said. “The greater the harmonisation, the cheaper the data and while that may be bad for the data providers, it will be good for investors.” fe
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