INTERVIEW: The global picture

Ireland is right at the centre of international fund developments, from China’s march of progress, to Washington legislation. Nick Fitzpatrick talks to Pat Lardner, chief of the Irish Funds Industry Association.

Pat Lardner is at Dublin airport waiting for a flight to Washington DC. He has gained a reputation as a globetrotter since becoming the chief executive of the Irish Funds Industry Association in 2012, working to attract more international fund business to Ireland. Ireland is a major rival to Luxembourg as a domicile and service provider for European Ucits funds and alternative funds. The industry employs over 12,000 people.

A milestone for Ireland’s funds business came in January when Source, a US exchange-traded fund (ETF) provider, and CSOP Asset Management from Hong Kong, jointly listed Europe’s first ETF that invests in the equities of companies listed in mainland China known as A shares. Though the ETF is listed on the London Stock Exchange, the fund is domiciled in Ireland.

The Source/CSOP ETF was launched under Beijing’s renminbi qualified institutional investor (RQFII) programme, which allows fund managers to invest renminbi held in accounts outside China into the mainland.

“We’ve spent a lot of time with fund managers locally and held many events that focus on RQFII,” says Lardner. “We saw the first RQFII fund in January and we had the second in the last few days from E Fund.”

This second fund Lardner is referring to is the ETF that one of China’s largest fund managers, E Fund Management, launched with ETF Securities, a European specialist exchange-traded product provider, across three European exchanges in May. It is the first RQFII ETF in Europe to track the MSCI China A index.

RQFII is part of Beijing’s strategy to internationalise the renminbi, turning it into a trading currency to rival the dollar. Lardner says China’s fund managers involved in the RQFII project have shown a clear demand for Irish Ucits structures.

“The [launch] process is quick and clean – fund managers tell us that. There are timely launches and that’s what it comes down to, that’s what we are about.”

RQFII is also a conduit for China’s homegrown fund managers to expand their business overseas, particularly by offering their investment capability in mainland assets to foreign investors. 

Ireland and Luxembourg will be competing strongly in the coming years to attract these managers to their domiciles, into Ucits structures and into the arms of local service providers.

Yet, in the meantime, China and Hong Kong have their own cross-border funds project going on. Known as Mutual Fund Recognition, the initiative – though by no means finalised – looks set to allow China and Hong Kong to recognise each other’s locally domiciled funds. At present there is no sign that Ucits funds, which are domiciled in Europe though sold in Asia, will be let in.

If this continues, it potentially sets a limit on expansion for many Ucits fund managers in this important Greater China market. What does Lardner make of that? 

“As we look at the internationalisation of the Chinese currency, it would seem natural and sensible that Ucits will get a designation,” he says, and speculates that the Ucits product could become eligible in time. 

The speculation is reasonable in light of China’s gradual development of its own fund management industry. The RQFII was initially open only to Chinese fund managers in Hong Kong before access was widened, paving the way for the Source and ETF Securities launches this year.

Looking west rather than east, of all the regulation keeping fund managers and their asset servicers busy, probably the Foreign Account Tax Compliance Act (Fatca) from the US is one of the biggest. Ireland has strong historic links with the US and, like other countries, Ireland’s financial institutions are being forced to give up details of US citizens with assets there. Fatca has been variously described as a weapon in the global clampdown on tax avoidance and a huge invasion of privacy.

Ireland was an early adopter. Lardner acknowledges operational difficulties, but says Ireland was a “willing participant” in the Fatca project.

A challenge for Ireland has been to marry its very strict privacy laws with the transparency required by Fatca, which comes into law on July 1 this year. There have been challenges over the ability of funds to take on details of investors’ US citizenship, tax residence and tax identification numbers in advance of Fatca entering Irish law. Recent discussions to allow funds to obtain tax details of US citizenship have taken place, Lardner says. 

He also says legislative changes are required to enable tax residence and identification numbers for non-US investors in anticipation of the Common Reporting Standard, which is effective from 2015.

Like many countries, Ireland now has an intergovernmental agreement (IGA) with the US over Fatca. It also has favoured-nation status, meaning any subsequent IGA signed with another country on more favourable terms, will automatically apply to Ireland.

And of course, the Alternative Investment Fund Managers Directive (AIFMD) is another piece of legislation, this time from Europe, which has kept Ireland and many other fund players busy. As in Luxembourg, the AIFMD is seen in Ireland as an opportunity because the directive dresses alternative investment funds that meet its criteria in the robes of a European regulatory regime, making these funds more appealing to institutions.

Ireland had expected a wave of hedge funds to redomicile from outside of Europe, such as the Cayman Islands and Bermuda, to take advantage of the AIFMD tag. This has not happened, though some funds have created onshore mirror funds of their offshore vehicles.

Lardner admits “as yet, there have not been as many as originally expected”. And he says: “We have a very effective redomiciliation regime in place. It’s probably fair to say that some managers are still early in their AIFMD implementation.”

He has not given up hope that redomiciliation will still occur: the introduction of the Irish collective asset management vehicle, or Icav, could be a spur. 

“It is a structure that is bespoke and well made for investment funds and we will see it in a matter months.”

©2014 funds europe



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