Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
One of the biggest challenges facing asset managers, be it those regulated under UCITS or the Alternative Investment Fund Managers Directive (AIFMD) surrounds EU cross-border marketing.
It is a point repeatedly made by The New City Initiative (NCI). In our paper – “Asset Management in Europe: The Case for Reform” – produced in conjunction with Open Europe, we estimated a UK manager distributing and marketing its fund in all other 27 EU member states plus Switzerland would incur initial set-up costs of over €1.5 million. Total on-going maintenance costs – allowing for the continuation of cross-border marketing – could be near €1.4 million per year. If a firm has yet to raise meaningful capital, such costs are a huge hindrance.
But there is reason for hope. A senior regulator at the European Commission (EC), speaking at a private equity conference on AIFMD, confirmed regulators were cognizant of this issue. The policymaker said a review at an EC-level of the impediments and restrictions around cross-border marketing would happen in 2018. This is all part of the reformist agenda laid out in the Capital Markets Union (CMU), an initiative designed to facilitate harmonisation in the EU’s capital markets and bolster non-bank lending in the real economy.
UCITS IV was designed to remove barriers that had emerged in some member states preventing cross-border distribution of UCITS. UCITS IV did have a positive effect but national gold plating does continue. Tax transparency rules in Germany and Austria are onerous. Furthermore, different regulators have different registration requirements and fees. Others force asset managers to appoint local agents. And this is just for UCITS. AIFMs report similar issues despite the presence of the pan-EU distribution passport. The costs of appointing lawyers, auditors and local consultants in multiple jurisdictions is not insignificant and adds to the cost of running a viable asset management business.
These costs ultimately add yet another barrier to entry for mid-sized and smaller managers thereby reducing competition. The UK’s Financial Conduct Authority (FCA) is conducting a market study, due out in 2017. In its announcement of the study, the FCA acknowledged that regulation was introducing barriers to entry - potentially hindering competition and reinforcing the dominance of large asset management players. As such, the UK FCA should work closely with other European regulators in formulating the CMU to make it more straightforward for mid-sized and smaller asset managers to market across the EU. This will boost competition and ensure investors get good value for money, which is a core component of the FCA’s market study.
Part of the EU’s regulatory agenda to review the barriers to marketing derive from the ascendency of digitisation. UCITS and AIFMD did not really envisage the role disruptive technology would have on distribution. As such, the EC recognises that it needs to promulgate regulation where funds are being distributed across borders through online platforms.
The ambition of the CMU should not be underestimated, and neither should the divergences in opinion across the EU. Overcoming these challenges will not be straightforward, and will likely take some time. This has been evidenced in a number of regulatory discussions over the years. Nonetheless, it is a step in the right direction should it come into fruition. Easing the cross-border marketing restrictions and harmonising the rules will make distribution of funds a more straightforward process.