The European Fund Landscape: Implications for Global Distribution

NICSA members examined the mutual fund industry from a European perspective during a recent breakout session at NICSA’s Strategic Leadership Forum. Moderated by Lisa Shea, Senior Vice President, Global Fund Services at Northern Trust, the panel featured experts from ALFI (Association of the Luxembourg Fund Industry), KNEIP and PwC

“In the aftermath of the financial crisis, regulators have embarked on a journey to repair failings in the system,” said Camille Thommes, Director General at ALFI, adding that most regulations share five major policy objectives:

1. To increase investor protection and transparency.
2. To reduce systemic risk.
3. To reinforce market infrastructure.
4. To improve cooperation between regulators.
5. To provide the regulatory framework for an ever-constant technological evolution.

Two recent regulations — MiFID II and PRIIPS — present particular challenges for asset managers, making efficient management of data more critical than ever.

“There is a huge overlap in these two regulations, both in terms of purpose, and in terms of data calculation and content,” said Lee Godfrey, CEO, KNEIP. “Most people don’t realize what pain the Europeans had to go through, and if this regulation moves in some shape or form over to this side of the pond, you’ll have similar pain, I assure you.”

“The closest to MiFID II we get in the U.S. is the DOL rule on fiduciary duty,” Olivier Carre, Regulatory & Compliance Advisory Services Leader, PwC, said. Unlike MiFID I, a principle-based regulation instituted for intermediaries, MiFID II is rule-based with expanded reach into the manufacturing world. Carre said the rule is relevant to U.S. asset managers “when a product that you intend for international investors gets into touch with EU-based investors.”

PRIIPs, on the other hand, is a packaged retail investment product regulation. Without compliance, “a product … cannot be sold to a retail investor in Europe,” Carre said. “A product without target market information and cost disclosures in accordance to MiFID standards cannot be distributed in Europe.”

Shea said that regulations both in the U.S. and Europe come with cost considerations. “There’s a focus on lowering costs to the end investor; meanwhile the costs of compliance are escalating, so it’s a conundrum that we’re all experiencing,” she said. “But I think what we’re seeing in Europe is much more granular in detail vs. U.S. regulators that are looking at the risk aspects of the market.”

Carre agreed. “On some of the matters, Europe is just a step further down the road,” he said, adding that both MiFID II and PRIIPs require cost disclosure around a product, including entry/exit fees, ongoing charges, transaction costs and implicit transaction costs.

These rules will have a direct impact on global distribution. “If you want to tap into the European market and it’s part of your business, you cannot avoid complying with these regulations, otherwise your product will be taken off the shelf,” Thommes said.

The industry must also face the consequences of Brexit. “How do you treat products and services that are offered by non-EU players; the so-called third-country passport? Under the Alternative Investment Fund Managers Directive (AIFMD), they started looking into assessing the regimes between the EU regulatory framework and that of a third country, and at some point the whole analysis was stopped because of Brexit,” Thommes said. “It will be interesting to see how that unfolds and develops going forward, because it all depends on the type of relationship the UK will have with the EU.”

After asset managers grasp what the rules require, they must enter data collection mode. “There are a couple of new data points that have come out, but the data exists somewhere, and in all of these regulations there’s a huge overlap in the data,” Godfrey assured the audience. “You just have to get smart about how you manage it — proactively and not reactively.”

Note: Although the observations contained in this work represent the best thoughts of the individuals comprising the NICSA event panel, they do not necessarily reflect the views of NICSA or any of its member organizations. Matters addressed in this work may touch upon legal or regulatory matters, however nothing herein is intended to be or should be construed as legal advice. You should contact your own counsel in order to obtain legal advice regarding these or any other matters.

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