Our panel discusses the state of the Swiss asset management industry and why gaining a passport under the AIFMD could be a game-changer.
Tim Blackwell (global head of core investments, Credit Suisse Asset Management)
Kim Do Duc (group executive committee member and group head of legal and compliance, Mirabaud Asset Management)
André Valente (head, fund management Switzerland, UBS Asset Management)
Régis Martin (deputy CEO, Unigestion)
Funds Europe: What were the obstacles that prevented Switzerland from gaining the third-country passport under the Alternative Investment Fund Managers Directive (AIFMD) and have these been removed?
André Valente, UBS AM: Switzerland was considered adequate for the passport and we received good feedback from Esma about the issue, but the European Commissioner then decided to carry out extra analysis on a country-by-country basis, which was the hurdle.
The Swiss Collective Investment Scheme Act (Cisa) that has been implemented here makes the Swiss regulatory landscape for alternatives compatible with the EU’s Alternative Investment Fund Managers Directive. Larger organizations like UBS benefit from the fact that they already have a global presence in the relevant markets.
Kim Do Duc, Mirabaud AM: I agree. The issue that we have now is more political than technical because, from a regulatory perspective, Esma confirmed that there was no obstacle to extend the passport rights to Switzerland.
The passport would allow Swiss asset managers to obtain an ‘AIFM’ status in the EU and to market alternative investment funds – including Swiss-domiciled funds – throughout the European Union to professional investors.
In terms of timing, Esma published its positive advice in July 2015 and we expected to have a Delegated Act adopted by the end of last year. Now that the European Commission has decided to postpone a decision on the passport extension and asked Esma to provide additional assessments by the end of June 2016, we don’t even know now if Switzerland will get the passport extension this year.
In practice, we see that larger asset management groups have already taken measures to build a presence in the EU and gain the passport that way. The passport extension will nevertheless be positive as it will show a willingness to give a certain access to the European market to third countries such as Switzerland.
Régis Martin, Unigestion: There was a small technical issue that Esma wanted to see amended. But I agree with both of you that Esma wanted to ‘play the clock’. Ostensibly the postponement of the passport for Switzerland and some other countries was about avoiding any possible adverse market impact – though I am not sure that was truly the reason.
However, during that time Swiss groups had the opportunity to set up subsidiaries within the EU to gain the passport. A level playing field for non-EU companies complying with the AIFMD would reduce the costs and burden associated with accessing the EU market. It would avoid groups having to set up subsidiaries in the EU or paying to operate through third-party independent management companies.
Tim Blackwell, Credit Suisse AM: Uncertainty around the time horizon for Switzerland’s approval remains and it is likely to last another one to two years until the passport can be applied by Swiss AIFMs. Organisations like ours, with a presence globally and able to take steps to gain AIFMD licences in Luxembourg and Germany, for example, are not dependent on the EU decision.
Martin: If there was any surprise at the EU decision, it was surprise at the fact we might even get a passport in the first place! This is because under the Ucits regulations, we dreamt about Swiss investment funds gaining the Ucits marketing passport for more than 20 years, yet we never got it. Ucits-compliant Swiss funds can still not be sold in the EU at all. So it came as a surprise that for alternative investments, we could get a passport mechanism in place.
Funds Europe: BlackRock is a noticeable top-ten player in the domestic market with all other players being Swiss. Has the Swiss market seen many attempts by foreign challengers to enter in recent years?
Valente: Foreign asset managers that come to Switzerland don’t build infrastructure or local manufacturing centres, but there have been some six or seven well-known ones that have opened offices in Switzerland during 2015. They are focused on distribution rather than core asset management functions.
In Switzerland, the needs of institutional investors and ultra-high-net-worth family offices have aligned, so this is a driver for those with the capabilities, as the potential institutional business is huge, with more than 1,000 billion Swiss francs of assets.
Blackwell: Yes, there are foreign players here, but not with the infrastructure and the full value chain in Switzerland. The two big banks [UBS and Credit Suisse] have fully fledged asset management competencies, and other smaller players do, too, and local players have upped their game to try and reach best-practice standards in terms of client service.
There has also been a lot of innovation in Switzerland. Sometimes Switzerland is not looked upon as being as innovative as London or New York. But as a matter of fact, you find that some of the leading investment competencies now come from Swiss players. Insurance-linked solutions, as an example, is an area where there are some very prominent Swiss players.
Martin: As was well publicised, two hedge fund managers moved from London to Geneva a couple of years ago, but that was more for tax reasons and unfortunately it did not start a trend. Since then, at least one of them went back.
The Swiss asset management industry is very innovative. But on a less positive level, despite having great wealth managers here, the asset management pool of talent is smaller than in London or the US. We have to change the mindset from ‘wealth management’, to ‘asset management’.
Duc: Of the ten largest investment fund promoters in the Swiss market, about three are from abroad. One thing that is clear is that these entities are clearly not in Switzerland for fund production, but rather for the distribution opportunities.
Martin: Switzerland has always been very open to overseas firms coming here to distribute products and almost anyone can just fly in and sell something without many hurdles. But there are more barriers now due to revisions made two years ago to the Cisa.
Valente: The Swiss parliament has just begun to debate the new Financial Services Act. The legislative proposal is deregulating where possible, which would reduce cumbersome barriers and help international managers to come here. The competition is a good thing. If the law will be adopted as proposed, it would end those Cisa requirements to have a legal representative for AIFs.
Martin: Yes, the new Financial Services Act and the Financial Institutions Act mean any firm offering financial services will be able to distribute products. Foreign competitors will have to comply with the law but without asking for any regulatory approval.
Funds Europe: To export its asset management business, Switzerland must have a regulatory regime that meets international standards. Are there any areas where Switzerland still lags the international regulatory environment?
Valente: There are areas of lag, which is why we are in the process of adopting the Financial Services Act and Financial Institutions Act. But as for Ucits equivalence, this is already contained in the Collective Investment Scheme Act.
However, what we really need to do is adapt to investor protection standards contained in MiFID [the Markets in Financial Instruments Directive]. We lack a legal framework that meets global standards in cases of abuse.
But the Swiss industry has been collaborating to fight market abuse and improve e.g. asset manager integrity, suitability checks, reporting and investor education. This effort will be reflected in the new laws.
When MiFID I was introduced, there was no real need for Switzerland to adopt European standards as the country was mainly an importer of assets. The cross-border business has gained importance after the financial crisis and increasing international tax transparency requirements. Being now an exporter of services to Europe and other countries, Switzerland needs to be aligned with international standards.
Duc: Switzerland follows EU trends in its legislation. The Swiss Collective Investment Schemes Act even makes a reference to EU legislation and the Swiss securities funds are almost a copy and paste of the Ucits regulation.
We do this to gain market access, but we do not truly gain it. On the other hand, Switzerland is very open to foreign firms and it is very easy for them to come and do business here. Even if there are some differences in our legislation compared to the EU legislation, this should be compared to how EU countries themselves have some leeway to transpose EU directives into their own national laws.
Martin: That’s true, but aside from that, for the Swiss industry it is not just about the EU market, but also the rest of the world and clients from other parts of the world do not always care about what’s in the EU regulations. This means we sometimes may have to add some additional regulatory requirements for non-EU clients, including the Swiss themselves. They can become unnecessary and costly for the end clients.
Dual arrangements, like between Guernsey and other markets, may be a good solution. This would allow us to be compliant for EU clients and to make lighter arrangements for clients from non-EU countries.
Blackwell: In my mind Switzerland does not lag the international regulatory environment in any particular field and I think adherence to international standards is something Switzerland has shown can really be achieved very effectively. There have been situations where a Swiss finish has been applied, but I think, as time has evolved, we see more convergence happening, particularly through the regulatory standards from MiFID.
However, there are still some concerns around differences between MIFID II and the Federal Financial Services Act. For example, discussions that were recently held by the Swiss Banking Association in Brussels showed worries about client categorisation, specifically regarding the difference between retail and professional investors.
Valente: UBS is a global bank and the international market is very important to us. Private banking and wealth management services are not only offered to investors living in Europe, but also in emerging markets, such as Asia.
There is obvious interest in Ucits because they really fulfil client requirements in many areas, in Asia and beyond. Compliance with EU regulation is therefore highly important for us.
Blackwell: Yes, but I think convergence through the current regulatory process should ultimately lead to a level playing field where Swiss-domiciled funds will be able to access these regions. My sense is that Swiss institutions have engaged in a much more intense dialogue with the Swiss regulator in terms of the importance of market access to Asia, and in turn I would imagine this influences the dialogue that the Swiss regulator has with its peers in the region and is leading to more cohesion.
Martin: It’s good to make that point. Cross-border activities have been under huge scrutiny from every country. It used to be much easier to sell services or products anywhere, but now going to the EU, Asia or the Middle East, there are some really strict rules surrounding national placement regimes and they are getting tougher day by day.
Some say the convergence of regulations is protectionist and not so much about investor protection. We can only wonder about that.
Funds Europe: Will the industry comply with MiFID II in all of its provisions?
Valente: At UBS, when we do business with a client from the European Economic Area, even if the book-keeping is done in Switzerland, we still need to ensure that we serve the client according to MiFID rules. This is our policy and it means ensuring our client relationship manager and portfolio manager are licensed in the country where we serve the client.
Duc: As soon as a firm has a connection with the EU, be it because of a client or because it has a presence there, there is a need to apply MiFID provisions.
One point to add, though, is the impact of MiFID on asset management. The regulations do indeed not apply to the whole chain of asset management activities, and for example the management of the assets are covered by Ucits and AIFMD. MiFID will have more impact on segregated mandates and point-of-sale requirements in fund distribution activities.
The Financial Services Act is today an act aimed at adopting the provisions of MiFID II. However, if you look into the details, there are some differences, such as in relation to client categories or remunerations.
Broadly speaking, though, we are implementing MiFID II in Switzerland and the differences are, as already mentioned, similar to the leeway used by EU member states to transpose EU laws into national legislations.
Martin: In Switzerland we are trying to raise the bar and comply with international rules, such as MiFID II, without a guarantee we will get equivalency and reciprocity. We have in place things like suitability assessments and are strengthening them, but we do not have key investor information documents for every product or a register for IFAs, which the EU does have.
Blackwell: By the time MiFID will have been implemented, much of that will have been covered. There is a lot being undertaken to meet those deadlines. Overall, we don’t expect to see any kind of deviation from MiFID II or issues of compliance.
Funds Europe: What are the implications of the Financial Services Act and the Financial Institutions Act?
Martin: It is still a serious possibility that these acts will not get passed. There is opposition from the whole spectrum, from the right and from the left. And there are some serious reasons for this.
Valente: Today we have about 2,600 independent asset managers in Switzerland. If their business is to remain local, the international regulation scope may add significant costs.
The larger providers, however, generally wish to have these laws put in place to make them compatible or equivalent to European firms. From a global provider’s point of view, the laws are really needed in terms of investor protection, European equivalence and market access.
Martin: The acts would also create a register of financial advisers, and advisers will have to be trained and all independent wealth managers will have to be regulated in one way or the other.
But some lobbyists in parliament are trying to reduce red tape and make the business landscape less bureaucratic. This is why there is opposition in parliament by some liberal people who want to reduce what they see as hurdles.
Blackwell: The Swiss Banking Association has raised points about the client register and about criminal processes and class action clauses. However, I think as was said, it’s mission-critical that we can achieve the implementation of the Financial Services Act for the sake of international standards and equivalence.
But I think it’ s different with the Financial Institutions Act, where there’s more and more recognition in the consultation process that it goes beyond the original intended purpose of the law. Unlike in the preliminary draft, key adjustments include banks continue to be covered by the Banking Act, with the Federal Council having abandoned its plans for the corresponding provisions to be transferred to the FinIA.
Funds Europe: What are the biggest challenges facing the Swiss asset management industry over the next two years?
Martin: For me, the challenge will be to remain competitive versus our EU competitors. The fee pressure is just enormous. And really being able to cope with the fees that are asked for by institutional clients, with the cost structure we have, will be a challenge. So I see some threats and I anticipate Swiss asset managers having to outsource or delegate functions, perhaps meaning they will move their business to the EU or somewhere else abroad in order to cope with the costs associated with asset management.
Blackwell: One of the major challenges is in dealing with the current low interest rate environment. Pension funds and private investors are looking to us to deliver solutions for this issue. So I think the increasing development of yield solutions and fixed income alternatives is something that the industry has to tackle and is tackling.
The industry here is undertaking a number of measures to provide responses to this challenge. It’s a big issue in particular for the Swiss pension fund industry, given the growing structural demographic and coverage ratio challenges. So there will be increasing pressures structurally relating to old age provision and from an asset management perspective, to provide appropriate investment responses in light of this low interest rate environment.
Duc: In my view, and I refer also to the regulatory aspects which we have spoken about, the biggest challenge is to grow the business. To grow the Swiss asset management business, we need to develop existing markets and develop new markets. And obviously, if you put that in line with all the regulatory constraints and requirements, some of which we discussed, market access is becoming always more difficult.
If a firm wants to go outside of Switzerland, it will obviously have to take into account various pieces of legislation, with often a need to be either equivalent or to have a local presence. Then it goes back to costs and, depending on the circumstances, it may be easier or less costly to have a presence in the EU. So this is potentially a threat for Switzerland because possibly being present in Luxembourg or Paris and having easier access to the EU may be much easier than with a Swiss operation.
Valente: There is a challenge to grow assets and profits. On the one hand, the Swiss market is pretty saturated as there is already a quite extensive fund offering in place. Given the limited capacities within the Swiss market, growth means gaining market shares, which might drive consolidation.
On the other hand, keeping up with regulation already requires high investments and therefore client requirements, innovation, new products – all these areas are becoming increasingly difficult to satisfy. But there are many positives in Switzerland. The synergies between the private banking and institutional business are a great competitive edge of Swiss banks towards foreign providers. Being strong in both means we can leverage our capabilities and expertise to the benefit of our clients.
©2016 funds europe