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Today New City Initiative is comprised of 51 leading independent asset management firms from the UK and the Continent, managing approximately £400 billion and employing several thousand people.

Reflections on NCI’s Blockchain Event of 28 March 2018

Reflections on NCI’s Blockchain Event of 28 March 2018

On 28 March 2018, New City Initiative (NCI) held a discussion and panel event on the topic of how Distributed Ledger Technology (DLT) and other technologies would likely affect the boutique asset management industry. In some of NCI’s recent policy papers we have explored the unique culture within small and medium-sized boutique asset managers: that culture promotes innovation and use of DLT is likely a trend that will advance rapidly in the industry.

The evening was structured as follows. Firstly, I gave a brief introductory presentation on DLT, including some usage cases across industries such as banking, insurance, music and public services. The common perception of DLT is its usage in Bitcoin, yet that is merely one usage case and moreover presupposes that public blockchains will dominate. The transformative effect runs more deeply and is likely not yet fully perceived, just as early use-cases of the internet in the late 1990s were not necessarily those that thrived: companies such as Amazon have used the internet as an enabler to drive changes in real-world businesses and, in my opinion, that is how the effect of DLT will ultimately be seen. This was followed by a panel discussion featuring three expert panellists: Liliana Reasor, who is CEO of SupraFin; Richard Maton, Partner at Aperio Strategy and Founder of the Financial Institution Innovation Network, and; Nick Bone, Founder and CEO of EquiChain.

Liliana talked about how the traditional IPO market can be disrupted by the processes used in Initial Coin Offerings (ICOs), transforming the operation of capital markets and empowering individual investors: SupraFin is a leader in this space. Nick commented on how DLT can be used to automate middle and back-office functions, but how there should be an awareness of vested interest in resisting change. Rather, investors may ultimately access securities and the custody chain directly, a usage case that EquiChain is developing. Richard commented on the need for changes in organizational culture and collaboration models to create and develop solutions that incorporate DLT and other technologies such as Artificial Intelligence (AI) and the capacity to be self-critical: by way of example, Kodak, Xerox and the like could not adapt, and perhaps actively avoided change; the result is self-evident.

Another interesting topic discussed was how DLT, and the security it can give, could allow emerging economies to leapfrog legacy economies, a process assisted by demographic change and a modern dependence on the state in Western countries. I walked away feeling excited about the future yet thinking that the asset management space, and financial services generally, will change rapidly in the face of technology: DLT intersects with AI and the increased data processing capabilities often called Big Data.

Panels such as these are a good opportunity to consider major changes in our industry and make us rethink certain assumptions. For instance, it may not be Brexit or regulation that turns out to be the biggest threat and opportunity to asset managers, but instead the adoption of disruptive technologies such as DLT and AI, amongst others.

Furthermore, the insightful questions from the industry audience put paid to the view that asset management is conservative and resistant to change; instead they demonstrated an appetite for innovation.

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Brexit - Still far from settled

Brexit - Still far from settled

To say the timing of AIMA’s (Alternative Investment Management Association) Global and Regulatory Policy Conference in Dublin was fortuitous is an understatement, happening less than one day after the UK and EU announced a conditional agreement for a transition or implementation period, potentially giving businesses an additional 21 months to finalise their Brexit planning. The word conditional here is very important because the transitional arrangement will only be formalised if the withdrawal treaty is fully agreed.

To summarise one AIMA attendee, "it is an agreement conditional on an agreement." Any number of issues could wreck UK-EU negotiations over the next 12 months including the future status of the Northern Ireland border; Spanish disagreement over Gibraltar; or even insistence from nationalistic Greeks that a Brexit transition be somehow linked to the immediate return of the Elgin Marbles (sadly not a joke).

If no withdrawal agreement is ratified, a Hard Brexit in March 2019 beckons. Despite all of the vainglorious media reports over the last 48 hours, it is very difficult to see what has actually changed. EU regulators – conscious of this misplaced optimism - have been at pains to stress that the risk of a no-deal is not a remote possibility, but something which organisations should still be actively provisioning for.

As such, fund managers must not over-analyse this relative thawing of Brexit negotiations, but should continue making preparations to ensure EU access – assuming they still want it – is still available to them following the UK’s departure. With delegation and reverse solicitation’s future both looking increasingly precarious in the AIFMD review, now is the time for firms to consider whether they create subsidiaries in the EU-27.

On the basis that there is unlikely to be any certainty around Brexit until early next year, the decision to relocate will have to be made blindly.  However, regulators at the AIMA event warned UK fund managers and banks that establishing shell companies inside the EU to game market access will not be tolerated post-Brexit. A number of EU regulators have also told managers that authorisations could take time if submissions all occur concurrently, and are recommending that firms send over their applications by mid-2018.

The other big risk for asset managers is fragmentation. Recent statements from EU regulators have been revealing. While fragmentation is not ideal, many EU regulators seem resigned to the fact it will happen, and have urged firms to plan for it.  For boutiques, this risks adding more costs to their operations if they are marketing into the UK and EU. Managers should start factoring these potential costs into their businesses, and build buffers accordingly.

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liquidity - avoiding a mismatch

liquidity - avoiding a mismatch

Liquidity – when markets are volatile – is a priceless commodity for fund managers to have, which is why UCITS’ products – for example - have seen strong, regularised inflows from investors globally.

However, some NCI members are warning that certain daily dealing products are at risk of facing a liquidity mismatch, causing significant damage to their reputations. UCITS’ brand strength is attributable to several factors, not least of which is the daily liquidity these funds provide clients. Nonetheless, there have been warnings that macroeconomic conditions – most notably in the fixed income market – could present liquidity challenges for UCITS managers running bond funds.

In 2016, Fitch issued a statement warning that 90% of UCITS running fixed income strategies were at risk of suffering a liquidity mismatch amid volatility in bond prices. While not a UCITS, a high-yield mutual fund in the US shuttered in 2016 after it failed to satisfy client redemption requests during the bond market volatility. Similar outcomes for UCITS cannot be ruled out if fixed income trading conditions take a turn for the worst.

The growth of alternative UCITS operated by hedge fund managers typically replicating their flagship products albeit under more regulated conditions is also a worry for some NCI members, mainly because they believe unsuitable or illiquid strategies are at risk of being distributed under the UCITS banner. If markets were to seize up, and redemptions grounded by one of these firms, the UCITS brand could be seriously undermined.

However, it is important to note that most hedge funds running UCITS will do so within the confines of the rules, while regulators are very proactive at flagging strategies down which they believe are unsuitable for the brand. Equally, esoteric or complex strategies should not be misinterpreted as being illiquid in nature. 

NCI members also expressed misgivings about the proliferation of daily dealing open-ended property funds. It was well documented that a handful of such funds were forced to temporarily suspend redemptions following the shock Brexit vote, and its immediate hit on UK property prices. Despite these funds having large cash reserves to satisfy redemptions in ordinary market conditions, these holdings are not always sufficient during periods of high volatility.

In extremis, firms could be forced to unwind property in fire-sales at uneconomic prices causing widespread losses for end clients. Even if a property fund was able to sell its underlying investments, it would be very difficult not to suspend redemptions as it is physically impossible to offload a building in a single day to a buyer. In response, some NCI members feel regulators should scrutinise the liquidity terms offered by daily dealing property funds.

NCI will produce a white paper exploring whether or not some fund types including alternative UCITS, daily dealing open-ended property funds and certain ETFs are at risk of facing a liquidity mismatch, a scenario which if played out would undoubtedly result in serious damage to the industry and its standing among investors. NCI will be consulting with its membership on this paper shortly.

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Blockchain and Boutiques

Blockchain and Boutiques

Having begun its life as a fairly unimposing piece of technological infrastructure supporting the then peripheral and arguably mysterious world of cryptocurrencies, Blockchain is now seen as being one of the biggest potential enablers of cost reduction and efficiency in financial services, including fund management.  

Blockchain or shared, immutable distributed ledger technology (DLT) is forecast to save the financial services industry approximately $110 billion in costs over the next three years, according to McKinsey, with cross-border B2B payments, trade finance, P2P payments, repo transactions, derivatives settlement, AML and KYC likely to be the areas targeted for streamlining and disintermediation.

Fund managers – at least in the short term – are likely to find Blockchain technology being increasingly used in client and regulatory reporting, corporate actions, proxy voting and automation of transactional processes in the distribution cycle. Over time, the use cases will expand with the technology – which can process transactions in real-time -  potentially disrupting clearing and settlement. The elimination of intermediary costs – certainly in the custody chain – will bring cost savings for managers which can be passed on to customers.

Boutique asset managers will not be omitted from the Blockchain revolution. Admittedly, most boutiques will not develop proprietary Blockchain solutions, mainly due to the initial costs of the R&D being too high, but also because service providers should do it for them, providing industry-wide solutions and infrastructure. As fiduciaries, however, fund managers have a responsibility to investors to mitigate operational risk, and this applies to how they use Blockchain.  

Interoperability: Getting it Right

System upgrades and transformations rarely go ahead without some form of inconvenience or impediment to the end client. The legacy technology supporting the fund management industry and their service providers can be antiquated, making it very difficult to introduce new systems without causing massive disruption. If Blockchain is to work, it must be able to operate with legacy infrastructure, which can be decades old.

This may require service providers to maintain their existing technology simultaneously to rolling out a Blockchain solution in parallel. A dual infrastructure should help avoid IT meltdowns as and when Blockchain becomes more customary in financial services, but the cost of running two systems may result in the industry and its customers being saddled with higher fees during that interim or transition period.  

Making a Complex Ecosystem More Unnavigable

Given the gravity around unwanted disclosure of confidential information and cyber-crime, most fund managers do not support the idea of a public Blockchain despite the efficiencies it will bring. As such, most service providers are developing private Blockchain solutions.

This has scope to exacerbate complexity in an already convoluted and crowded financial ecosystem, particularly if different Blockchain solutions cannot interoperate, or were fund managers to find themselves working across dozens of distinctive and arbitraging DLT interfaces. Rather than saving costs, this could potentially add to them. 

No Standards

Market-wide standards are essential as they help create uniformity across capital markets. SWIFT, for example, has played a vital role in setting the standards for payments and securities transactions across multiple geographies. Nothing of this sort exists for Blockchain although this is symptomatic of any technology’s early stage development and a reluctance among industry participants to impose prescriptive requirements at the expense of innovation.

Regulation of Blockchain is limited for similar reasons. Without some standardisation or regulation, Blockchain’s development is likely to be slightly staggered and uneven across markets, something which will make it harder for the fund management industry to fully embrace.

Secure or Not?

Cyber-security was found wanting in 2017 as a number of multinational organisations fell victim to sophisticated hacks. Information contained on a Blockchain is protected through encryption and cryptography, barriers which make it materially harder for hackers to breach, or so the theory goes.

Advances in technology have cast doubt as to whether Blockchain encryption is sufficiently capable of protecting client information against future threats such as those posed by quantum computers.  Quantum computing is an extraordinarily powerful, theoretical form of computational strength which could decipher or crack even the most sophisticated Blockchain encryptions and cryptography.  

If Blockchain providers do not take note of this potential risk, the technology may only be usable for a decade or less. It is critical for managers to pause before they consider Blockchain, and ensure the technology is future-proofed, otherwise they could end up spending significant sums on a short-lived concept vulnerable to new, unexplored risks.

Blockchain Bubble?

The highly speculative Bitcoin and Initial Coin Offering (ICO) mania which has swept the world over has alarmed some Blockchain providers. For several years, they have worked assiduously to disassociate themselves from Bitcoin, and the big fear now is that any sudden price rationalisation in cryptocurrencies could hurt a number of investors which in turn may sour (unfairly) the reputation of DLT.

Conversely, there is a Blockchain bubble in itself, namely an oversupply of providers, many of whom are hoping to capitalise on the technology’s popularity in financial services. Most Blockchain providers will fail and it is important managers work with established or credible organisations when implementing a DLT strategy to avoid any business disruption.  

The Best Approach

Blockchain will have a positive impact on asset management, but firms still have time to make a decision on how to apply it to their businesses. It is probable the larger asset managers that will embrace the technology initially, before it trickles down to the boutiques unless they collaborate. NCI is hosting a Blockchain seminar later this year for its members. Venue and details will be published shortly.  


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2018: Key Considerations for NCI Members

2018: Key Considerations for NCI Members

Mathematical economist Irving Fisher once confidently assured his followers that prosperity would be in a perpetual state, arguing that the stock market had reached “what looks like a permanently high plateau.” The only issue was that he made those comments in 1929 and three days later the stock market nosedived leading to the Great Depression. In short, making predictions is not for the faint-hearted, but New City Initiative (NCI) will have a go, looking at some of the key regulatory trends likely to impact asset management in 2018.


MiFID II will be EU-wide law on January 3, 2018, one year later than its original implementation date. For NCI members, MiFID II will introduce significant change, most notably in their ability to source sell-side research. Inducement bans mean research cannot simply be given to managers in exchange for equity commissions. Instead, the cost of research needs to be unbundled and managers must pay for it out of their own pocket.

Larger fund houses have confirmed they will pay for research out of their P&L, but smaller firms are likely to face more serious cost pressures. Most NCI members and asset managers generally are either paying for research directly out of their P&L; increasing management fees, or establishing separately funded research payment accounts (RPAs) in order to keep accessing sell-side research.


GDPR imposes strict standards on data governance and protections across EU-wide companies including investment funds. Breaches of GDPR will lead to significant fines, and potential reputational damage and even client redemptions. Firms need to be preparing for the rules, identifying the location of any client data that they possess, in addition to obtaining consent from clients if customer data is used for purposes of analytics, distribution to third parties and marketing.

GDPR also lays out a framework for organisations to report data breaches, and requires firms with more than 250 people to appoint a chief data officer. For asset managers, GDPR needs to be a business priority in 2018.


The Senior Managers & Certification Regime (SMCR) has been bedded down for more than a year now, although it currently applies only to banks and PRA regulated financial institutions. It will, however, be extended to asset managers in 2018. Its core demands are fairly uncontroversial with a number of organisations welcoming the regulation. Put simply, SMCR introduces prescribed responsibilities for senior managers, and subjects them to greater accountability when rules are breached.

David McNair Scott, CEO at Trailight, highlighted the biggest SMCR challenge for buy-side firms was around allocating responsibilities and functions to designated persons within an organisation. He added a number of asset managers had yet to systematise and document their SMCR processes, something which can be quite painstaking. McNair Scott also acknowledged that most of the contents of SMCR were proportionate and the FCA had sought to curtail any destabilising impacts on smaller managers.

AMMS Consequences will be felt

SMCR is only one part of the FCA’s efforts to heighten standards in asset management. The FCA’s AMMS was released in June 2017, and it was a report many in the industry considered to be fairly even-handed. Most significantly, the industry is not staring down at a Competition and Markets Authority (CMA) probe unlike the investment consultants. Overall, the AMMS is likely to bring about tougher standards and greater competitiveness in asset management.

One of the proposals being put forward is to require managers to independently assess whether they deliver value for money to clients, a process which will be overseen by an impartial board of directors who are all subject to the SMCR. This recommendation is a regulatory reaction to concerns that retail investors sometimes struggled to understand precisely what the objectives of their managers were.

The AMMS also led to the creation of the Institutional Disclosure Working Group (IDWG), a body looking at formulating a template to be provided to investors about cost disclosures across different segments of asset management. Anecdotal reports suggest the template will be detailed, which may be a problem for smaller asset managers, although many will probably outsource data aggregation to third party vendors. Creating a framework for transparency and competitiveness is certainly not a bad thing for asset management during this period of Brexit uncertainty.

And finally Brexit…..

At the time of writing, nearly all newspapers appear to give the impression that Brexit negotiations are finally making progress, as the UK confirmed a willingness to pay a substantial divorce bill to the EU. NCI members have repeatedly urged there be a transitional arrangement in place to enable its constituents and their clients to manage Brexit risk in a calm and composed manner.

A cliff-edge Brexit would be devastating for asset managers, leading to rushed decision-making, potential redemptions and possible relocations. NCI urges the government and the EU to minimise any instability in financial services that may come about through Brexit.

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Complacency is not an option

Complacency is not an option


Clarity about the UK-EU future relationship may be provided later this year, a full seven months after Article 50 of the Treaty of Lisbon was invoked by PM Theresa May, which ratified the start of Brexit talks. It is hoped the EU will sign off on a transitional arrangement for the UK in December 2017, a milestone which would significantly reduce the risk of a sudden, hard Brexit. 

A transitional agreement would allow impacted organisations such as fund managers, their staff and clients to accustom themselves gradually to the new UK-EU relationship, with limited disruption. A transitional agreement is fully supported by New City Initiative (NCI), as we believe it will provide essential stability in what could potentially be a highly uncertain process. The likelihood of a transitional arrangement may be assisted by the increasingly rational and pragmatic approach being taken by EU and UK negotiators, who realise that a traumatic Brexit could aggravate systemic risks and economic damage.

The key to any future UK-EU relationship has to be certainty. Even if the net outcome is poor, businesses need to know specifics in order to adapt. At present, there does not appear to be a tsunami of businesses moving operations into the EU. Many firms will probably retain a strong presence in the UK, while partially increasing their footprints on the continent. So far, financial services have not shifted operations into the EU at a pace or scale that many had envisaged following the referendum last year.  

UBS, for example, publicly said the number of staff likely to relocate into the EU post-Brexit would be far lower than initially forecast. Some attributed this to the absence of flexible employment laws in parts of the EU jostling for business. This business commitment, however, should not be taken for granted, as an absence of a transitional agreement and a lack of substantive progress on trade talks could force organisations to execute Brexit contingency plans. This could seriously threaten and impede the UK’s competitive edge over the next few years.

The Risk of Domestic Change

There are other risks to UK businesses not emanating from the EU, but rather domestic forces. The decision to hold an election in June 2017 cost incumbent PM May her majority and there is a very real possibility of a change in government prior to Brexit talks concluding.

This would lead to serious disruption in the Brexit negotiation process, particularly if there was a material change in policies and priorities put forward by an incoming regime. This could result in delays to Brexit and further uncertainty at a critical point. 

Domestic policies by any new government could also exacerbate business disruption. The opposition Labour Party, which many believe could win the next election, has made a number of statements – which if implemented - would seriously impact financial services. These have included calls for an introduction of a Financial Transaction Tax (FTT) and mandatory nationalisation policies. The Shadow Chancellor of the Exchequer also suggested capital controls could be implemented in the event of capital flight.

If such events transpired and domestic policies became hostile to free enterprise and financial services, there is a very real risk businesses that had once remained committed to the UK after Brexit may leave on their own volition, either for the EU, North America or APAC.  Several industry experts have said that Brexit is manageable, but the spectre of FTT or capital controls unleashed by a government unreceptive to free markets could prompt a number of organisations to hoist business from the UK.

NCI is engaging with its members and external service providers about how they would react to the possible introduction of forced nationalisations, the imposition of capital controls and an FTT. This will form the basis of a research paper being produced over the course of the next few months looking at what these potential policies could mean for financial services and most importantly, its customers, and how the industry can best prepare themselves.

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ESMA Delegation

ESMA Delegation

The simplicity by which an AIF or UCITS can structure itself in an onshore EU market (Luxembourg, Ireland, Malta) and delegate the running of its portfolio and oversight of risk management back to the manager in a third country is a fundamental reason as to why both of these brands have enjoyed considerable popular appeal and global success.

Put simply, delegation is a cost-effective way of getting an AIFM or UCITS running without having to invest in onshore physical infrastructure. That the European Securities and Markets Authority (ESMA) is potentially calling into question this existing set-up should alarm not just UK asset managers, but investment firms all over the world.

Brexit is obviously the impetus behind ESMA’s proposals. It is no secret that some of the EU 27 have been trying to capitalise on the uncertainty in the UK to attract business into their domestic markets. ESMA has repeatedly warned these countries that standards cannot be loosened otherwise it risks creating regulatory divergences.

The regulator has also warned UK financial institutions against setting up letterbox entities in the EU 27 as a tool by which to continue passporting cross-border. The funds’ industry opposes the creation of letterbox entities, but the present regulatory structure in major onshore European fund domiciles around delegation is mature and substantive, a point made by industry groups including the Association of the Luxembourg Fund Industry (ALFI).

Some of the core proposals include forcing managers to appoint at least three people in their EU fund domicile, and it is also very probable that delegated activities will be subject to even more regulatory scrutiny. This will inevitably bring added costs and requirements to the funds world, eating into the revenues and returns of boutique asset management providers.

The cost of running an AIFM and UCITS – with its existing depositary and reporting obligations – is high, and many boutiques could end up shunning both brands, particularly if their European flows are small relative to other markets. In short, this protectionist measure would immediately reduce European investor access to boutique providers as non-EU firms look to distribute their fund vehicles elsewhere, and outside of the EU’s regulatory oversight.

UCITS has had a stranglehold on APAC and Latin American markets for quite a few years now. At a recent ALFI Conference in Luxembourg, financial services professionals from APAC and Latin America spoke extensively about their own various regional fund passporting initiatives. If delegation is scrapped or impeded, a manager in Sao Paolo or Hong Kong will likely pivot towards a regional fund passporting solution as opposed to UCITS.

Financial services regulators that comprise ESMA often applauded the UK’s Financial Conduct Authority’s (FCA) contributions to policy discussions, acknowledging that it curtailed some of the worst excesses of protectionist rulemaking in favour of free market thinking. With the FCA's role within ESMA much diminished now as a consequence of Brexit, the risk of protectionist market initiatives such as the restrictions around delegation have risen and UK firms need to keep a close eye on developments.

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2018 is likely to be a fairly difficult year from a regulatory perspective for asset managers. Sandwiched between Brexit planning and Markets in Financial Instruments Directive II (MiFID II) compliance lies the General Data Protection Regulation (GDPR). GDPR will become EU-wide law in May 2018 yet many in the asset management world have not given it due priority. This is ill-advised.

As the name would suggest, GDPR demands companies (of which asset managers are included) make material improvements around how they manage data on behalf of customers and employees within the EU. A failure to do this properly could result in a fine of up to 20 million euros or 4% of global turnover. GDPR should, however, not be viewed as a radical new change but rather a strengthening of already robust data protection laws.

So what does it mean? Firstly, asset managers need to ensure their customers consent fully to their data being used on a “purpose by purpose basis, using clear and plain language, in circumstances where, in order to be valid, the consent must be an unambiguous indication of the individual’s wishes, by a statement or clear and affirmative action, and individuals must be informed they may withdraw their consent at any time.”[1]

In short, consent must be obtained if customer data is used for purposes of analytics, distribution to third parties and marketing or anything else. Anyone who has attended a Fund Forum over last two years will attest that big data – has been high on the agenda as managers look for increasingly innovative means by which to sell the correct products to customers. Such analytics may involve managers scrutinising the economic wellbeing or buying trends of clients, among other factors.  

GDPR will not be the end of big data, but it will force organisations to be more circumspect about how they use it. Managers and their service providers will have to redouble efforts to ensure that personal data is not processed for any other reason than what it was intended for; and that it is not excessive. The situation could be quite complex as GDPR applies to data that has already been collected. Getting permission from clients to process this backdated information may be challenging.

GDPR also sets out a formalised framework for organisations to notify the authorities of any data breaches, while the rules stipulate firms should have robust security measures in place to prevent such violations from happening. Unfortunately, some breaches are completely unavoidable, but regulators will assess if firms have had lapses in their data protection processes and security measures, and fines may be issued as a result.

In addition, GDPR mandates organisations with a headcount of more than 250 people appoint a chief data officer, a threshold which exempts nearly all boutiques. Despite this, smaller managers should ensure an existing, qualified employee has a remit for data protection, a provision recommended in GDPR.

So what do asset managers need to do? To begin with, they need to identify where client data is held, before they start implementing processes around aggregation and collection. From here, gap analysis can be conducted, and subsequent documentation of processes and procedures drawn up. Any service providers hosting sensitive client data should be scrutinised by the manager to ensure their systems are sufficiently protected and compliant. Equally, any shortfalls in cyber-security needs to be remedied immediately.

The nxt twelve months are going to be a busy time for asset managers, and it is crucial they start taking GDPR preparations seriously.


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MiFID II - Five months to implementation

MiFID II - Five months to implementation

In less than five months, the Markets in Financial Instruments Directive II (MiFID II) will become UK law. The asset management industry – certainly in the UK – has faced a number of disruptions over the preceding 12 months including a hard-hitting Financial Conduct Authority (FCA) market study, and Brexit. 

Brexit remains an unknown, but it is an obvious priority for managers distributing UCITS or AIFMs into the EU. It is understandable that some managers may have been morepreoccupied with formalising or contemplating the best way to navigate Brexit than MiFID II

Analysis of 562 asset managers of all sizes in June 2017 by RSRCHXchange found 54% of firms said they did not have enough information about research unbundling. Fortunately, only 2% of managers said they were unaware of unbundling, although arguably this statistic is 2% higher than what it should have been.  

Most managers are seemingly leaving MiFID II compliance until the last quarter of 2017, although 60% told RSRCHXchange that they had already set or begun to set their research budgets, and decisions were in train about how they would pay for the research. Managers are now – after all – not allowed to use equity commissions to pay for research. 

Most managers are either choosing one of; a transactional research payment account (RPA); an RPA funded by a direct charge to investors; incorporating research into overall profit & loss; or a hybrid model. Managers in different markets have their own preferences for how they will pay for research going forward. It appears managers in the UK, Benelux and Germany are happy to incur the cost of research into the P&L, while client funded RPAs are more popular in Scandinavia and Spain. 

The debate about research is highly sensitive. It is true that some managers may find themselves deciding not to acquire research, which could undermine their ability to trade. Others warn it creates operational problems, particularly if research is sourced by a foreign subsidiary of an EU firm from a bank which operates in an ex-EU market.  Lawyers have warned those subsidiaries could be prevented from passing on research to their EU colleagues. 

The extraterritorial nature of MiFID II also presents issues for EU managers obtaining research from US brokers. Under Securities and Exchange Commission (SEC) rules, only US-based entities registered as investment advisers can receive payments for research. In other words, MiFID II will complicate the lives of many US broker-dealers as they are not allowed – because of US securities laws – to be remunerated for providing research to the buy-side in the EU. The SEC is aware of this issue, and it is expected to give an opinion in the fourth quarter of 2017 outlining its stance. 

Firms which have yet to clarify their research budgets generally blame a lack of information on how research will be priced. Around 23% of respondents to RSRCHXchange said that research providers had not given them any pricing information, and some have complained there are significant disparities in terms of the costings being provided to big and small managers.  

However, a number of NCI members have acknowledged a lot of research they receive is of limited value, and being deprived of it would not be a problem. Most firms – if they feel the research is of sufficiently high quality – will pay for it. Even so, research charges at some organisations could be quite high. 

An article in the Financial Times said major investment banks were proposing charges of up to $1 million and more for annual subscriptions to their research platforms. It added smaller banks in Europe, or those with a fixed income as opposed to an equities bias – were charging less, quoting sums between $100,000 and $500,000. Others expect research to be priced in a fairly bespoke fashion depending on how frequently managers use it. Despite this, those research costs are not trivial and some boutiques may struggle with the overheads. 

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The FCA's plan for Asset Managers

The FCA's plan for Asset Managers

Many in asset management were bracing themselves for an uncomfortable summer period ahead of the UK Financial Conduct Authority’s (FCA) final report on the industry. Having been caught off guard somewhat by the extent of the criticism in the AMMS Interim Report in November 2016, the spectre of the FCA referring asset managers to the Competition and Markets Authority (CMA) could not be discounted. 

While the report does make for uncomfortable reading at times, the bulk of the recommendations can be accommodated and are broadly fair. Active managers reading the report certainly had their nerves calmed when they arrived at Section 1.7. Here the FCA confirmed that it never intended for its interim findings to be construed as arguing the case for passive funds over active. 

The debate over passive versus active has somewhat consumed the industry since the AMMS interim findings were first released. The big issue for the FCA is not so much if people invest into passive or active – both obviously have their respective merits and are key to a balanced investment portfolio, but whether clients are paying active fees for closet tracker products. NCI has always taken a firm line that investors should only pay for performance, and we believe that boutique providers are very well placed to deliver this. 


Governance is central to the FCA’s report. The FCA said it would use the Senior Managers & Certification Regime (SMCR) as a tool to ensure fund managers are adhering to their duty of acting in accordance with the interests of the end investors. 

The FCA also recommended enhanced board independence, advising managers appoint at least two independent directors, or have such individuals comprise 25% of the board’s membership. A handful of asset managers have expressed concern that qualified, independent directors are not in abundant supply, and those that are tend to be expensive. 

NCI believes in robust governance, as we feel that having a strong board can ensure business interests are aligned strongly with investors’ needs.  Institutional investors are increasingly scrutinising manager boards in due diligence, and many operations’ teams do veto investments if they feel corporate governance is subpar. As such, we feel a more independent and strengthened governance set-up can only be an advantage for the fund management industry. 

An All in one Fee

Fee transparency has long been an area of interest for the FCA, and it was expected that an all-in-one fee charge inclusive of transaction costs would be proposed. Such a charge, argued the FCA, would help investors understand better what they are paying, but also help them compare different prices across asset managers more effectively. NCI believes strongly in fee transparency, and we are looking forward to engaging with the FCA on the matter.

However, there are some challenges, which were cited by the FCA itself. “Some warned against investors becoming too focused on charges or not understanding the charges. A number of respondents argued that while charges are important they are not the only thing that investors should consider,” it read. The paper cited other respondents who complained that incorporating transaction charges into the headline fee would be practically complex, mainly because such costs can be difficult to predict ahead of time. 

Another risk of an all in one fee could be that it inappropriately incentivises asset managers to not trade even if it was in the clients’ best interests. This would immediately result in the manager being in a conflict of interest situation, and could put them in non-compliance with their new obligations. Again, this is obviously a scenario that nobody wants to see emerge. 

One of the bigger challenges of the FCA’s proposal is that a single figure fee could make it difficult for clients to compare funds accurately, unless a breakdown of the component charges is provided. An all in one fee could also dent the competitiveness of the UK asset management industry, as charges may appear higher than their peers in other markets. The UK financial services industry – including fund management – is facing huge challenges and threats to its eminence over Brexit, and now is a difficult time to introduce rules which could undermine its ability to compete internationally. 

Switching Share Classes

In the FCA’s AMMS interim report, the regulator criticised the asset management community for making it difficult for retail investors to switch share classes. It identified managers often levied charges on investors looking to switch, and said the process could be an administrative headache. This meant investors – predominantly retail - simply stayed in fund share classes which may not necessarily be in their best interests. 

NCI members acknowledged in response to the AMMS that switching share classes was operationally straightforward, and could be done “at a push of a button.” However, permission must be given by the investor for switching, and this can be surprisingly difficult to obtain and creates administration, which the clients rarely want anyway. The FCA agreed that switching share classes needed to be simplified, and that it would support removing the obligation of the manager to explicitly seek investor approval to do so. 

“Several respondents suggested removing the opt-in requirement to seek consent from investors before moving them into a different share class where they would be better off. Respondents also suggested replacing the opt-in requirement with an opt-out style requirement. Respondents felt that this should be considered especially in cases where the investors are not paying trail commissions. Respondents argue that this would be more straightforward for investors, from whom consent is often difficult to obtain, and make it cheaper for asset managers to implement bulk switching,” read the paper. 

NCI also pointed out in its AMMS response that switching could have associated tax implications, and can result in investors being subject to capital gains tax. As a result, many investors simply are reluctant to switch. The FCA recognised this issue in the final report, and we look forward to working with them more closely on this matter. 

Future FCA Areas of Scrutiny

➢ The FCA said it would consult further on whether to refer investment consultants to the CMA. The FCA believes there are high levels of concentration in the consultancy market, a lack of transparency over fees, and potential conflicts of interest particularly where providers offer fiduciary management services. This could precipitate further regulation of consultants. 
➢ Further scrutiny is to be undertaken on investment platforms, in terms of their competitiveness and cost efficiencies.
➢ Managers of private equity and hedge funds should expect similar FCA scrutiny in due course.  
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