Activity for 2014 in the Asset Management/Funds Sector
1. The Asset Management Sector, as with other sectors is suffering from an overload of regulatory initiatives and there seems to be no let-up in prospect for 2014.
2. In order to illustrate the challenges for asset management firms, I take just three examples of initiatives which will be progressed in 2014.
3. The FCA's updates of its website for the latest information on AIFMD serve to demonstrate the myriad of issues which fund managers are now working through so that they are ready to vary their permissions and comply with the AIFMD provisions by 22 July 2014.
4. The Alternative Investment Fund Managers Directive (AIFMD) came into force in June 2013 and the one year transitional period (which has been liberally interpreted) ends on 22 June 2014. New start-ups have already been encountering the issues raised as the transitionals do not apply to them. Established firms managing alternative investment funds (AIFs) are only now working through the detail of the major, and now imminent, impacts which the detailed AIFMD provisions will have on their operating models regarding policies for risk management including liquidity management, conflicts of interest management – and importantly remuneration– on which topic, despite the FCA's consultation proposal indicating that their Guidance on the AIFM Remuneration Code will focus on the application of the principle of proportionality, there will still likely be challenges for firms in complying.
5. The use of proportionality should helpfully apply not only for remuneration but also in other areas, such as in relation as to how AIFMs can comply in the proportionate way with the AIFMD's requirement under Article 15 for the hierarchical and functional segregation of a firm's risk management functions. But still there will likely be major changes required for some firms.
6. Firms which are AIFMs need urgently to devise actions plans, if they have not already done so; to review product structures and material contracts (given the new delegation provisions); produce their revised policies and procedures; where necessary appoint depositaries and certainly review or draft appropriate depositary agreements; and apply for their variation of permission to the FCA.
7. One useful feature is the FCA's agreement now to allow request a particular deferred effective date for any such change of permission so that there can be an orderly basis for making all the changes and making the relevant appointments of this entity as the AIFM of the AIFs concerned – the latest possible date being 21 July 2014. .
Money Market Funds
8. The development in proposed regulation of money market funds shows a somewhat different approach to that normally evident in fund regulation. Various proposals are under discussion on how best to deal with the perceived risks with money market funds which, during stressed market conditions, might not always be able to maintain the promise of immediate redemptions (liquidity) and preservation of value (stability) – with the constant NAV offered by some of the funds. The interconnection with the money market as a whole and the banking sector has led to concerns about any disorderly failure of a money market fund having broader consequences.
9. Despite the money market fund managers disagreeing with the assertion of such risks, the specific and interventionist proposals are now starting to emerge.
10. The European Commission's proposals for a new regulation (published in September 2013 and which is likely to be further considered in 2014) would make various proposed new rules the most contentious of which is introduced in the requirement for a capital cushion or 3% buffer for constant NAV funds that can be activated to support stable redemptions in time of decreasing value of the money market funds investment assets. This suggestion for managers to have capital available behind their funds affects the dynamics of the nature of products offered – and, if implemented, might result in some money market fund managers coming out of the market. The proposal seeks to intervene in the type of products to be offered to the market place – ironically in this instance where the principally institutional client base seems actively to wish to have the constant NAV funds available. Whilst the Commission has stopped short of the alternative of banning CNAV money market funds, this intermediate solution is unlikely to be a welcome one.
11. Firms in the money market sector should continue to explain their position so as to seek to moderate the proposed EU regulation – and, in various different ways, the other proposals of money market funds being promulgated in other countries, notably in the US - so as to achieve a more workable position which allows the products to remain available to meet investor demand.
Regulatory approach – both for the national and EU level
12. The third example I am taking is highlight an approach rather than a specific proposal for change.
13. As evidenced by the proposed money market fund regulations mentioned above, regulators are increasingly taking a proactive and interventionist approach.
14. Also the regulators all have ambitious work programmes. Just the quantity of new regulation plus the wide range of subject matter makes it particularly challenging for asset managers to keep up – and ahead of new regulation.
15. In the EU, ESMA for example has a lengthy 2014 work programme wishing to strengthen its single rule book and creating a level playing field across the EU both for general asset management (reviewing MiFID – assuming that the delays in agreeing MiFID 2 can be overcome) and reviewing the Market Abuse Directive; in relation to European investment fund legislation, ongoing work on the AIFMD framework, progressing the matching up of provisions in UCITS with the UCITS V proposals regarding depositaries and managers' remuneration and potentially UCITS VI proposals; and additional activities arising from venture capital funds and European social entrepreneurship funds – in addition to the proposals for money market funds mentioned above. UCITS VI, for which the proposal was issued in July 2012 in particular is likely to be a topic for debate in 2014, though it seems unlikely that the changes will come into force until 2015.
16. In the UK note only will the FCA be implementing European initiatives but also pursuing its own asset management strategy – and note the HM Treasury launch in March of the UK Investment Management Strategy. This is a welcome initiative seeking to look at tax, regulation and marketing so as to develop a comprehensive strategy to improve the UK's competitive position.
17. Some tax obstacles are being removed, such as the Schedule 19 stamp tax. We have the prospect of speedier FCA authorisation processes for funds – by April 2014 the FCA will have reduced the timeframe for NURS funds to three months and Qualified Investor Schemes to two months – and from April 2015 these should be reduced further to two months and one month respectively. All these are positives.
18. But a fair question might be" are there any negatives" in the FCA's more focused supervisory model? – with a pre-emptive and judgement based approach; looking to address underlying causes rather than dealing with the symptoms of problems; and encouraging firms not just to ensure compliance with the rules but to do the right thing in respect of their customers and the markets in which they operate. The increasingly pro active interventions from regulators could be a cause for concern, creating uncertainty and an argument that asset management firms are losing their ability to determine the nature of the products they offer and the terms on which they deal with their customers.
19. The new regulatory approach provides yet one more reason for asset management firms to ensure that they engage positively with regulators. There needs to be clear and fair communication of product issues – to use the fashionable word: "transparency" - not only to investors but also to regulators. This should help ensure that regulatory responses are fair and reasonable, and proportionate to the real risks involved; and satisfy a cost /benefit analysis.