Fresh from moderating a panel at the ALFI Global Distribution Conference in Luxembourg, RBC Investor & Treasury Services’ Johan Lindberg considers the measures asset managers can take to maximise efficiency in European distribution.
The UCITS brand remains the key prerequisite for distributing funds across the EU, as well as in many other parts of the world. But while the structure provides a very solid start, local market nuances can still have a big impact on distribution.
Harmonisation of access
We believe that domiciling in Luxembourg optimises the UCITS structure. Luxembourg funds have always been 100% aligned with UCITS legislation and this consistency has been the key to its success in cross-border distribution from the beginning. Luxembourg did not alter UCITS regulations when implementing local fund legislation; other countries in Europe typically change something.
The abolition of the requirement for a local paying agent was an important recent change. However, on a recent panel discussion at the ALFI Global Distribution Conference in Luxembourg, SEB and Union Investment confirmed they still see the need for paying agents or at least some form of local representative. This was due to agents’ connectivity to local markets, local language skills and simply being on the ground for investors. As a result, even though they are not required, both asset managers are retaining their paying agents.
RBC Investor & Treasury Services (RBC I&TS) reached exactly the same conclusion. We still offer paying agent services in all the markets we offered before the regulatory change. While on paper the change means it is much easier to operate without agents, in practice the market still sees value in them.
One of the panellists at the conference noted that platforms are adding local services to enhance fund distribution. While platforms have long provided efficient buying and selling solutions, he said that some are adding local services including local agency. It appears that platforms, as well as third-party management companies, see the value in such services.
Local market practice hurdles
While UCITS provides a solid foundation for fund distribution around Europe, in practice there are many variations in local regulation and other market practices that result in significant hurdles. There are several, distinct examples that reveal how challenging it can be to distribute across many markets.
Registering non-UK funds for distribution in the UK is not a simple procedure; due to Brexit, quite the opposite. A second panellist pointed out that it now takes a very long time to register funds for distribution in the UK, suggesting the UK doesn’t really want EU funds to be distributed within its borders.
The Danish market presents a different problem. Retail distribution is almost monopolised by local banks due to their understanding of unique local practices for calculating NAVs, tax reporting and trading fund shares. The challenge has been sufficient to put off many international fund managers from entering the market. Denmark has not changed in the last 30 years, and I’m not sure it’s going to change anytime soon.
The second panellist also highlighted the difference between the Netherlands, which can be quickly accessed with very little administration, and Switzerland, which is cumbersome to access, as it’s costly and takes a lot of time. Sweden is a very attractive market, as it has a large variety of e-banks and direct retail funds platforms that have large clienteles.
How can service providers help?
RBC I&TS is a leading provider of transfer agency services in Europe. Transfer agents facilitate connection with markets and distributors, so choosing the right one means asset managers can expand their options. Larger organisations obviously have more capacity and, just as importantly, have already conducted due diligence on all their likely fund distribution counterparts. Our connections span from the US and South America to Europe and Asia.
The choice of a transfer agent is not only about having a partner to deal with tasks such as subscription redemption, operational processes or the fund’s share register – it is also about connectivity. We cover 114 markets and 10,000 distributors. Most others are present in fewer than 50 markets and cover only hundreds of distributors. When a service provider enters a new market, it needs to conduct due diligence on big banks, distribution platforms and/or large institutional investors; today, this all takes a lot more time. Our long-standing connections, therefore, make a big difference.
The other main area is tax calculation; if end investors need this service, asset managers need to be able to provide it. While many providers of bundled services calculate tax, they cannot necessarily do so for every market. And asset managers may operate in markets where they need to do several different NAVs for several different entities, for example for early cutoff in the insurance market to settle all trades.
RBC I&TS can also support UCITS asset managers through access to its network of partner third-party management companies and their agents. This broad range of specialist partners offer expertise for all investment strategies, types of client and markets.
Distribution market differences
While the UCITS brand is a passport to distributing retail funds in any EU country, in practice it can be challenging for managers. UCITS does not cover tax reporting as this remains very local; if an asset manager wants to distribute across many markets, on a practical level it needs to offer comprehensive local tax reporting.
An asset manager’s choice of service provider can make a big difference. A provider that is not well connected, doesn’t have sufficient bandwidth or cannot calculate the different types of retrocessions that are accepted locally could cause a big drag on business.
Asset managers could opt for a best-of-breed strategy, which allows them to pick and choose providers but has downsides in terms of fees and efficiency. I would certainly argue for a bundled solution that provides widespread connectivity and deep expertise. An asset manager that is adding markets to its distribution needs both transfer agency and general administration services to support them in their journey.
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Johan Lindberg (pictured) is managing director, head of nordics, client coverage, RBC Investor & Treasury Services.