- Benoît de Juvigny – Secretary General, Autorité des Marchés Financiers (AMF)
- Neena Gill – MEP, Committee on Economic and Monetary Affairs, European Parliament
- James Hopegood – Policy Analyst, DG Financial Stability, Financial Services and Capital Markets Union, European Commission
- Cyril Roux – Deputy Governor, Financial Regulation, Central Bank of Ireland
- Giovanni Siciliano – Head of Research Department, Commissione Nazionale per le Società e la Borsa (CONSOB)
- Frédéric Bompaire – Head of Public Affairs, Finance and Strategy, Amundi
- Dennis Gepp – Senior Vice President, Managing Director & Chief Investment Officer, Cash, Federated Investors (UK) LLP
- Massimo Greco – Managing Director, Head of European Funds, J.P. Morgan Asset Management
New investment fund categories such as ELTIF and loan origination funds can support the financing of the EU economy provided some conditions are met
European Long Term Investment Funds (ELTIF), which will be launched at the beginning of 2016, have an important role to play in the Capital Markets Union (CMU) given their long term characteristics and their objective to foster investment in non-listed companies and infrastructure projects. Actions are however needed to support their take up. The approach to ELTIF needs to be as pan-European as possible in order to ensure sufficient scalability and competition at the EU level. Investor needs and incentives should also be carefully considered. Proposals were made by some panellists to provide tax incentives to attract investors into such products, which are intrinsically risky and illiquid due to their long term characteristics. The danger however is that of the fragmentation of the market if there are different tax levels and mechanisms across the EU. An ambitious solution could be to work on a legislation to foster a further convergence of the tax treatment of financial revenues at an EU level. An alternative, already being discussed for pension products, could be to ensure that the level of taxation of ELTIF is aligned with the most favourable one for similar products in each member state. The liquidity characteristics of ELTIF may also need to be reviewed in order to attract retail investors. One speaker suggested that the 30% maximum level of investment in liquid products recommended in the current ELTIF legislative text is not a strong protection for retail investors and may be inconsistent with the long term perspective of the ELTIF product. Allowing trading on the secondary market could be a preferable solution. Suggestions were also made to develop a European framework for retirement in parallel with the CMU in order to mobilize the large amounts of savings that exist in Europe towards more productive uses.
Loan origination funds are another option to be considered for supporting the funding of the economy. Many funds already have loans as part of their assets, which they manage. Funds have been allowed to originate loans in several member states (which involves stress testing and leverage conditions and requires that fund managers should acquire the appropriate credit assessment skills). The results so far are mixed. In Ireland for example, which was a leading country in this field, volumes are limited and the loans granted by investment funds are mainly club deals organised by large investors, which was not the original intention. Another potential issue is the difference in insolvency rules across the EU which could be a significant obstacle to the development of a pan-EU loan origination market for funds.
European Social Entrepreneurship Funds (EuSEF) and European Venture Capital Funds (EuVECA) are other types of funds that could contribute to funding the economy but their frameworks and the criteria used in the current legislation (e.g. access limited to smaller asset managers for EuVECA) need to be reviewed in the context of the CMU as they have not generated an important volume of activity so far.
Money Market Funds (MMFs) can be an important source of financing with an appropriate regulation
The MMF regulation proposal is awaiting a common position from the Council following the adoption of the EU Parliament’s report in April 2015. MMFs are complementary to the financial instruments proposed in the CMU. They have an important role to play in providing short term funding for actors of the real economy such as banks and non-financial institutions and they help many private and public institutions (e.g. charities, not-for-profit organisations, public authorities) to manage their short term cash.
In addition to the measures included in the initial Level 1 text to mitigate the systemic risks potentially posed by these products (e.g. stress tests, transparency and sponsor support rules…) and the preservation of Variable Net Asset Value MMFs (VNAV), the EU Parliament has proposed the creation of three categories1 of Constant NAV MMFs (CNAV): Public Debt MMFs, Retail MMFs and Low Volatility NAV MMFs (LVNAV). The range of products proposed in the EU Parliament report was welcomed by the majority of the panellists. A regulator expressed concern about the preservation of the CNAV MMF model in relation to financial stability. In addition, the “sunset clause” recommended for LVNAV (i.e. a review of their appropriateness 4 years after the entry into force of the regulation that could potentially lead to their discontinuation) was considered as a major obstacle to their development, some panellists favouring a less stringent review clause.
Some other concerns were raised regarding the limited range of investors allowed to subscribe to Retail CNAV MMFs which could lead to herding effects and the possible difficulty for Government MMFs to comply with the requirement to hold at least 80% of their assets in EU government debt by 2020, when 95% of the assets of existing government MMFs in the EU are in US dollars.
Streamlining and rationalising investment fund regulation was suggested to improve the competitiveness of the EU fund sector
Several speakers criticised the piling up of regulations in the asset management sector. Sixteen legislative texts impact the sector directly or indirectly leading to complexity and potential inconsistencies (e.g. between texts such as PRIIPs2 and UCITS, in the way transaction costs are taken into account in the overall costs). Reporting is an area where simplification would be particularly welcome, as each regulation has its own reporting generating a heavy workload for market participants. This regulatory burden is manageable for large asset managers, although at a significant cost, but may be impossible to handle for certain smaller players, potentially limiting competition and innovation in the market, some pointed out. Such a detailed rulebook is however the price to pay for achieving a more integrated EU market, making a real passport possible in Europe and limiting gold plating, a regulator remarked.
Suggestions were also made to further streamline EU fund regulation in order to reduce costs and facilitate the access of new entrants into the industry. Setting up a single European asset management rulebook that would include and integrate all existing texts was proposed, although it appears as a complex and ambitious task. A shorter term solution would be to build on adopted reforms and to favour as much as possible a review of existing regulations, rather than adding new texts.
Addressing the fragmentation of the EU investment fund sector is another important issue
There is much fragmentation at present in the EU investment fund market compared with the US. There are 4 times as many funds in the EU as in the US and EU funds are on average 8 times smaller than US ones. This increases costs and reduces returns for investors. The causes of this fragmentation need to be addressed as a priority, several panellists believed. These include gold plating by domestic regulators, which is frequent in the asset management sector and differing taxation across EU member states (e.g. local funds having a tax advantage in some countries over cross-border ones). More harmonisation and coordination are needed at the EU level when implementing legislative texts. Another reason for the multiplication of funds can be found in distribution models, a speaker pointed out, such as the vertical integration model, which may shelter some poorly performing funds from competition. The suggestion was made to make sure that such effects are assessed in regulatory initiatives in order to ensure the competitiveness of the European fund market.
1 Public Debt CNAV MMFs are largely focused on government debt (with an objective of having 99.50% of their assets in government or government owned assets by 2020 out of which 80% in EU debt). Retail CNAV MMFs are essential for charities, non-profit organisations, public authorities and public foundations which cannot invest in VNAVs. Low Volatility NAV MMFs (LVNAV) are a compromise between VNAV and CNAV. The key feature of these funds is that the quoted price of the fund would be maintained at par (1.0000) provided the market value of the share price should not drop below 99.8 cents.
2 Packaged Retail and Insurance-based Investment Products Directive
SummaryThe Chair outlined the current position of regulation in the asset management sector and the possible evolutions that could be envisaged and noted that in his view no further major evolutions appeared necessary for the regulation of asset managers at this stage, apart from those already underway. The UCITS directive has been a "clear success" both from a regulatory and a business perspective and has been completed by the Alternative Investment Fund Manager Directive (AIFMD), which is quite a "promising" framework. The Money Market Funds (MMFs) regulation, which is a key priority for investment product regulation in relation to financial stability, needs to be "urgently" adopted.
Questions are emerging in the context of the CMU debate regarding the role that asset managers may play in helping to better finance the European economy for the long term and diversify the financing of companies, particularly SMEs and new companies, throughout Europe. The European Venture Capital Fund (EuVECA) and the European Social Entrepreneurship Fund (EuSEF) product regulations launched two years ago have not been very successful so far. Assessments are under way in order to identify ways to improve these regulations. European Long Term Investment Funds (ELTIF) are another new product on which much hope is founded and which will come into effect at the beginning of 2016. ELTIF aims to better finance long term infrastructure and non-listed companies. A question is whether these products are the right ones to better finance the EU economy in the long term and whether developing specific European product labels is the right way forward as opposed to letting the industry develop new product categories within the general UCITS and AIFMD frameworks. A further issue is loan origination. Traditionally loan origination was reserved for banks, but under ELTIF, it will be open to asset managers and in some countries regulators are favourable to giving asset managers more opportunity to originate loans directly. This kind of innovation should be properly assessed and shall require an effective and harmonised implementation.
Asset managers will have to deal with many other new regulations, such as MIFID II, PRIIPs, SFTR and EMIR, covering product distribution, investor protection and the processing of transactions. There may be some other issues to address such as liquidity and supervisory convergence, which is in the remit of ESMA.
1. New fund products such as ELTIF and loan origination funds can support the financing of the economy provided some conditions are met
Conditions and possible actions to encourage the take up of ELTIFs
Update on the implementation of the ELTIF regulation
A policymaker gave an update on the ELTIF regulation. ELTIFs are an important element of the CMU as their aim is to encourage more private finance to flow into long term investments such as infrastructure and unlisted companies. The Level 1 ELTIF regulation is planned to "go live" on the 9th December 2015 and will be directly applicable to member states, which will not have to transpose it into national law. ESMA is currently consulting on the Level 2 rules and the consultation will end on the 14th October 2015. It is hoped that the Level 2 rules will be published and in place in the first half of 2016. At Level 2 a number of requirements need to be established relating to issues such as the use of derivatives and the marketing of ELTIFs to retail customers3. Another on-going development is adjusting Solvency II with a view to reduce capital requirements in relation to long term investment and ELTIFs in particular. That follows on from what has already been done for the EuSEF and EuVECA regulations. The EU Commission (EC) is also considering whether or not it will be necessary to carry out similar work to adjust requirements of the Capital Requirements Regulation (CRR).
Conditions for the success of ELTIFs
There is a limit to what can be done by the EU Commission beyond the actions already underway to support the take-off of ELTIFs, a policymaker stated. The Commission has put in place a framework that balances the needs of investors with the needs of the underlying companies or issuers. The success of ELTIF is now down to the industry and member states. It is up to asset managers to offer successful funds that fit in with the regulation. There is also a role for member states to consider extending fiscal advantages, notably those that are already available for existing funds, to these new regulatory structures. They might also consider using ELTIFs as vehicles for co-financing projects in their own country.
ELTIFs fit "squarely" with the objectives of the CMU project, an industry player emphasized. Such investments which are intrinsically long term in terms of risk and liquidity profiles should indeed be favoured to achieve the objectives of the CMU. The asset management industry however has three requirements with regard to ELTIF, the speaker explained: transparency, competition and scalability. If these three objectives can be achieved there will be competitively priced instruments. It is important for the ELTIF framework to be as pan-European as possible. Any attempt to favour a domestic dimension - e.g. using ELTIF to finance local infrastructure in single countries - should be rejected. One must be careful about domestic tax incentives also, because everything which fragments this market will ultimately undermine the success of the initiative.
Another issue with the ELTIF framework, an industry speaker added, is the requirement related to the minimum value of the physical assets such funds may invest in. In the current text ELTIFs can only invest in assets worth at least € 10 million. This could be an issue for small and medium funds which may not have the size and diversification potential needed to invest in assets of this magnitude.
Defining who will invest in the instruments related to the CMU, ELTIFs in particular, and how investment will be made is essential, an industry representative stressed. The main focus in the CMU has so far been put on the supply side. It is important that a framework for retirement should be developed on a pan-European basis in parallel with the CMU. Europe has a large amount of savings, the problem is that Europeans are not saving in the right way. There is too much money sitting un-productively in bank deposits, which are no longer wanted by banks anyway with the new capital requirements being applied. It is necessary to mobilise these savings towards more productive uses. This will need extensive financial education, which might take a whole generation.
An industry representative believed that the needs of retail investors should be more specifically taken into account and differentiated from those of institutional investors. The key elements are liquidity and valuation. Long-term products and infrastructure projects are usually illiquid, but at the same time retail investors are used to UCITS which are highly liquid at any time. Some work is still needed to define the conditions under which ELTIF can be made accessible for the wider public notably in terms of limiting liquidity. It should be clarified that ELTIF can be traded on the secondary market, the speaker believed. This seems preferable to having a 30% maximum investment in liquid assets which does not protect investors very much and makes ELTIF a less pure product combining liquidity features and a long term objective4. There is an appetite at present for pure products, the speaker believed.
A regulator emphasized that channelling the maximum amount of resources to long term investment projects is necessary in order to maximise the contribution of the asset management industry to economic growth. Investors will soon be able to take advantage of the ELTIF regulation, however, investments in long term projects are highly risky and illiquid. Some form of tax incentive should be provided by governments in order to attract investors into such products. For example, in the US significant tax relief has been introduced on capital gains and dividends for investors who hold equities for more than one year. This also has the positive effect of reducing short term volatility. The problem with domestic tax incentives is fragmentation. If member states introduce very different tax incentives on these new products, there will be a fragmented market. One solution would be a new legislation to harmonise the tax treatment of financial revenues in the EU. This is certainly very ambitious but it is a route worthwhile exploring, the speaker believed, because having the right incentives is essential for developing this kind of product.
A regulator agreed that tax incentives are essential for investment products such as ELTIF, particularly in the retail market. If some kind of convergence could be put in place in the fiscal treatment at the European level, this could foster the evolution of the European asset management industry.
An industry representative agreed that tax incentives are quite often a solution for long term investments which are intrinsically more risky. Another example where the issue of tax incentives is debated is pension products. Creating a European Personal Pension product (EPP) has been proposed5. There is certainly a market for such a product as pensions are a real issue in the EU, but the tax treatment remains problematic. Having a pan European Pillar III product such as the EPP without a pan European taxation system is possible but much more difficult to achieve. An alternative approach would be to align the taxation of the EPP in every member state with the most favourable level of other pension products available, using a sort of most-favoured-nation clause.
Loan origination funds are another opportunity for further assessment
A regulator was favourable to assessing the possibility for investment funds to access the loan market more broadly. Many funds already have loans as part of their assets and insurance companies in particular have loan funds on their balance sheets. Most of the time funds acquire loans that have already been originated by banks. Even if they have not originated the loans they have to take care of their management and servicing. These are very much banking activities which include the valuation of the loans (which is difficult because they are illiquid), the monitoring of their performance, their servicing (i.e. collecting the payments and engaging with the borrowers if these loans get into arrears) and in some cases the renegotiation of the loan terms. The only additional activity that a loan origination fund performs is the credit assessment of the borrower and the negotiation of the initial terms of the credit. This is a separate piece of work which requires specific skills. Such skills are important, but they are only a part of the wide range of skills needed to manage loans on the balance sheet of a fund.
Another element to be considered, the regulator emphasized, is that when funds are authorised to originate loans, these loans will add to the overall stock of loans in the economy. Unlike the simple acquisition of loans this has a macro-economic impact in increasing the stock of loans and may have financial stability effects. It is important not to open a loophole in regulation that may have a cyclical and macroprudential effect on the European economy. These effects have been investigated in Ireland, which was one of the first countries to introduce loan origination funds (with some guidance from the ESRB) and stress testing as well as quite strict leverage conditions have been imposed on these funds. Other countries have since introduced domestic legislation allowing loan origination funds. So far the success has been partial in Ireland and the way loans are originated is quite different from what was anticipated when drafting the regulation. Initially, the industry considered the conditions were too onerous, but after a few months loans started to be granted. The volume is still limited and these are mostly club deals. Fund managers have loan origination teams, but requests for loans are mainly coming from very large investors who are in contact with firms that want to borrow money and "pre-position" the loans themselves with the investment fund.
An industry player commented that the question of loan origination has not yet been addressed at the industry level but should be assessed, as the market may move in that direction in the future. Asset managers are quite happy so far to partner with banks that originate the loans and take them over once they have been granted. It is very important however to allow investment funds to buy loans.
An industry representative stressed that until Europe has a unified insolvency regime the loan market will never take off. No one will lend money in certain countries where it can take up to 15 years to get one’s money back after a "mind boggling" insolvency legal process. The objective of streamlining insolvency regimes is included in the Capital Market Union document and it should really be a priority even if it is very difficult to achieve due to the very sensitive national matters it touches upon.
A regulator agreed that insolvency laws, taxation and retirement questions are "really tricky issues" because there are huge differences across Europe, but they are important for achieving sufficient harmonisation and scalability in the asset management sector.
EuSEF and EuVECA fund frameworks need to be reviewed
A policymaker emphasized that while EuSEF has certainly not been the success it was hoped it would be, the amount of money that is so far being raised with EuVECA is broadly in line with the expectations of the impact assessment.
An industry representative noted that asset managers offer products that have a chance of success and that correspond to an investor need. The issue with EuSEF is that it is addressed to a very limited part of the investment community using strong social and ethical criteria in their investments. EuVECA has had a difficult start because it is limited so far to smaller asset managers.
2. Money Market Funds (MMFs) can be an important source of financing with an appropriate regulation
Update on the MMF regulation proposal
A public representative explained that there has been no further progress on the MMF regulation in the past six months, because it has not yet been possible to find a common position in the Council6. This issue is however due to be addressed by the end of the Luxembourg EU Presidency.
Concluding the MMF file is important for Europe and the single rulebook, a policymaker emphasized. Europe’s credibility is at stake. The FSB IOSCO peer review on the implementation of MMF regulation shows that reforms in Europe are still outstanding, contrary to the US. The Commission urges the Luxembourg EU Presidency to find a compromise in the Council and will provide any assistance that might be needed to move this proposal forward in a way that respects the intention of the original proposal.
The importance of MMFs for the financing of the economy
Most people recognise the importance of MMFs, a public representative stressed, first because of the large pool of assets they represent (around 1 trillion Euro assets under management) and also because of the critical role they may play in the Capital Markets Union in terms of linking investors with borrowers. MMFs are an additional way to get money into the real economy, complementary to the instruments proposed in the CMU. MMFs also play a key role in providing funding for governments and as a cash management tool. It is striking to see that despite difficult economic circumstances they are still registering very strong in-flows, e.g. € 27 billion in January 2015 alone, which is an "impressive" amount. MMFs can continue to play a key role in the economy once the systemic risks associated with these products have been addressed by increasing transparency and tackling sponsor support in particular, the speaker believed.
An industry representative stressed that the client base of the Constant Net Asset Value (CNAV) MMF business is extremely diversified at the moment in Europe. There are corporates, pension funds, and other financial institutions, as well as charities, public sector and not-for-profit organisations, that all use MMFs to provide a "safe home" for their short term cash. MMFs attract over a trillion Euros of both short and slightly medium term cash, most of which is used to fund the real economy, financing banks and other financial institutions, and also high quality corporates. The speaker agreed that most of the measures proposed by the EU Commission, introducing stress tests and ensuring sufficient liquidity are "very good things" and the sooner they could be put in place the better for ensuring an even playing field.
Creating a new range of CNAV MMF products is a key proposal of the EU Parliament’s report
Three types of Constant NAV MMFs (CNAV) have been proposed in the EU Parliament’s report, a public representative explained, in addition to Variable NAV MMFs (VNAV). It would only be possible to operate a CNAV in one of these three categories. The first ones are Public Debt CNAV MMFs which are largely focused on government debt (with an objective of having 99.5% of their assets in government assets by 2020, out of which 80% in EU debt). The second sort is Retail CNAV MMFs that are essential for charities, non-profit organisations, public authorities and public foundations which cannot invest in VNAVs. The most "radical" proposal is the introduction of Low Volatility NAV MMFs (LVNAV)7 which are a compromise between VNAV and CNAV. The key feature of these funds is that the quoted price of the fund would be maintained at par (1.0000) provided the market value of the share price should not drop below 99.8 cents.
The Parliament’s report with the different types of MMFs proposed provides a very good basis for discussion, a policymaker emphasized. It recognises that MMFs serve many purposes for a variety of different types of customers and that a one size fits all approach is not appropriate.
An industry representative expressed concern about the definition of retail CNAVs which may be "slightly too limited". If the range of investors who can access these funds is too limited, there is the risk that they might act as a herd. In addition local authorities have large natural flows of money at certain dates, so unless investors are sufficiently diversified it is difficult to run the fund in a normal way. The speaker had a further issue with Government MMFs which are supposed to hold at least 80% of EU debt in their assets by 2020. Achieving this objective is "physically" impossible in the relatively short term since at present 95% of government MMF funds in Europe are in US dollars.
It is important to be careful with the MMF rules not to needlessly deter investors or place onerous restrictions on fund managers, the industry representative argued. Otherwise "this will just act in the opposite way" of what is intended and potentially move resources from such funds into unregulated products or worse still, out of the EU altogether. In the US, although the MMF regulation is not actually going to be put in place for another thirteen months, there has already been an enormous outflow from prime CNAV MMFs8. This outflow of about $400 billion did not go into VNAV products, as was hoped and expected by the US regulators, but it moved into the Government MMF sector, taking money out of the real economy and of international and European bank funding at a time when there is a desperate need for such funding. If the CMU is to have a chance of success the building blocks that lead to supporting the funding of the economy must not be dismantled, the speaker emphasized.
A public representative stressed that flows into government debt tend to happen when there is no confidence in the other sectors. CNAVs then tend to gravitate towards government funds because there is a hope of better return and investors think that it is more secure. This is not necessarily related to regulation. The industry speaker disagreed. This is a very different scenario from the credit crisis in 2008/2009. At that time investors wanted to get out of banks because of the difficulties they were going through and move into government names. Now, the move is because they do not want to transfer from CNAV products to VNAV products.
A regulator expressed concern about the EU Parliament compromise in relation to MMFs and CNAVs and noted that in some countries VNAVs are very important. In France for example approximately 300 billion Euros are invested only in VNAV and there are practically no CNAVs. This situation is quite manageable and safer from a financial stability perspective, the regulator considered. This used to be a retail market but it is now an institutional-only business due to the very low interest rates. Some regulators have questions about financial stability, depending on what kind of compromise can be achieved with regard to CNAVs.
The LVNAV "sunset clause"9 is a controversial part of the MMF proposal
An industry representative was of the view that LVNAV MMFs are a very good idea and help to move on the debate. The "sunset clause" proposed in the EU Parliament’s report however would just mean that such funds would not take off. Investment managers will not devise a product that is only going to have a very limited "shelf life" and clients would be very reticent to invest in a product that might be discontinued after four or five years.
In order to preserve the diversity of choice proposed in the current text the preference would be to have a "review clause" rather than a sunset clause, a policymaker proposed. The original proposal of the EC was not to phase out CNAVs but to put in place an appropriate regime for these funds. So the important question is whether the LVNAV model addresses the risks appropriately and calibration will be the key here.
A regulator agreed that the sunset clause needs to be transformed into a "review" clause. There is a very important CNAV market in Ireland in US $ and this can continue if CNAV are transformed into LV NAV MMFs but the clause needs to be changed. What is striking is that those that have the most concerns about these funds are the regulators and governments of countries where they do not exist and who have no real experience of them, the regulator noted.
A public representative admitted that concerns have been expressed about the sunset clause. The compromise found in Parliament was very difficult and hard to achieve because there were very different views, but the compromise found is acceptable. LVNAVs are not hugely different from CNAVs and it will not be that difficult for the sector to adapt to them. The idea of the sunset clause is to be able to test the product and to see whether all the systemic risk issues have been addressed before launching it definitively. The Commission has the option to launch a review of the product or to launch it definitively if there are no risks. What the Parliament is trying to do is to find ways not to deter investors from investing in such products and to make sure that they are fully informed and protected.
3. Other regulatory evolutions that may be needed in the investment funds sector
Streamlining and rationalising investment fund regulation was suggested to improve the competitiveness of the fund sector
A regulator considered that there is some leeway in the EU for streamlining and rationalising investment fund regulation. There are at present a total of 16 pieces of EU regulation concerning asset management directly or indirectly, that account for almost 600 pages, when taking into account the existing directives and regulations and those in consultation. It would be advisable, the regulator believed, to put all these pieces of regulation into a more coherent framework by setting up a single European rulebook for asset management. Obviously, this is easier said than done, the regulator acknowledged. It is a very ambitious and complex task, but it could have quite a significant impact for the industry. First of all it could reduce compliance costs and facilitate the access of new entrants into the industry. A simplification of EU fund regulation could also reduce costs for investors. Ultimately, it could also make the EU a more competitive market than other areas such as the US or Japan. Before producing new regulations policymakers should evaluate whether existing regulations can be reviewed or rationalised to answer the same objectives.
An industry representative supported the idea of streamlining asset management regulation. Each individual regulation is not that complex but the piling up of different legislations leads to a rulebook that is too heavy in some areas.
A first area is reporting. This is a good example where simplification might be helpful, the industry speaker believed. There are many different reportings related to asset management which in total generate a heavy workload. Asset managers have to build infrastructures and databases for producing each reporting and have to clarify each field and check the information furnished as well as the reporting provided by intermediaries for the purpose of MiFID.
A second improvement area is to tackle the contradictions that exist between different rules and regulations at present. For example the CMU might not be totally convergent with some aspects of MiFID and there are differences also between PRIIPs (Packaged Retail and Insurance-based Investment Products Directive) and UCITS regarding the content of the KIID (Key Investor Information Document). It is apparent that the same issues have been discussed on several occasions and that answers given in the different legislative texts e.g. UCITS and PRIIPs are not the same. This is the case for example of the way transaction costs are taken into account in the overall costs; such costs are not costs per se but are part of the investment strategy and directly impact the gross return of the fund, the speaker argued.
The asset management sector is being "overwhelmed" by regulation, an industry player stated. Large asset management companies can "deal with a lot of regulation", but this is not the case of smaller players. Too much regulation is a threat to innovation and competition in the market place.
A regulator agreed that the European regulation of asset management is becoming very complicated but a comprehensive rulebook is necessary for achieving a more integrated European market. A precise set of regulation is necessary for a passport to be possible in Europe and to avoid gold plating. More precise European regulation is also needed for evolving towards greater supervisory convergence in the future, which is clearly an objective.
A policymaker stressed that the EU Commission is "walking not running" with the CMU. Inconsistencies or unintended interactions between regulations and directives will be examined. What is needed is clear evidence of the issues, which is different from lobbying.
Addressing the fragmentation of the EU investment fund sector is another important issue
There is real fragmentation in the investment fund industry across the EU and that is one of the biggest challenges compared with the US, a public representative emphasized. There are around 33,000 funds in the EU as opposed to 8,000 similar funds in the US and the average size of EU funds is € 200 million compared to $1,600 million in the US.
Unless the underlying issues which lead to such a fragmentation are addressed, the objective of the CMU which is to diversify the sources of financing of the EU economy will not be achieved, the public representative believed. There are several important issues to address, which should be on the agenda of the EU Parliament in the coming years. One is dealing with costs, which are one and a half times higher in Europe than in the US and reduce returns for investors. At the same time, the financial literacy of retail investors must be improved so that they know exactly what the risks and the returns are. This requires much stronger action and a specific framework. Moreover there are still regulatory fragmentation and taxation issues in the asset management sector and the role that asset management can play in the pensions context still needs defining.
Fragmentation of the EU investment fund industry is mainly due to gold plating and rules that differ across Europe, an industry representative claimed. This is why there is one third or one quarter as many mutual funds in the US compared to Europe. The gold plating of regulations at a local regulatory level is always well intended, but it results in fragmentation, more complexity, a lower ability to reduce costs and a reduced competitive space. There are "endless examples" of gold plating at a local level in the asset management industry. In Europe there is also fragmentation from the tax point of view. For example, in Denmark, local Danish mutual funds have a tax advantage over cross-border funds. There are probably hundreds, or maybe thousands, of local Danish funds which nobody else can buy. This reduces competitiveness in the market because many Danish investors will favour buying local funds rather than other funds available around Europe even if the performance of the latter ones is higher.
Another reason for the fragmentation of the EU asset management market is the level of competition, the industry speaker emphasized. In the US "competition works", so if a fund does not perform it is "weeded out" from the market. In Europe, at least in continental Europe, the market is dominated by vertical integration and captive distribution. This shelters expensive and poorly performing funds from competition and prevents these funds from being marginalised in the market. Unfortunately, the recent regulatory changes, for example in the field of inducements, are for the moment resulting in captive distribution increasing and in open architecture possibly "going away for good". Care must be taken to keep a thriving transparent and competitive market place in order to achieve appropriate costs and quality.
A public representative agreed that gold plating is a problem and is a reality in the asset management sector with the same directive being for example 4 pages long in one country and 150 pages in another. This cannot be justified. One of the biggest problems is that national regulators "like to put their own stamp on things". There is always a tendency for some countries to go their own way, as opposed to thinking through what would be the best for developing a common basis. More harmonisation and agreement at a European level would lead to greater effectiveness. There is also much fragmentation in the tax treatment of different financial instruments. More consistency will help the asset management sector to achieve economies of scale and to reduce inefficiencies.
3 The ELTIF regulation provides that ESMA shall develop draft regulatory technical standards (RTS) to determine the criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purposes, the circumstances in which the life of an ELTIF is considered sufficient in length, the criteria to be used for certain elements of the itemized schedule for the orderly disposal of the ELTIF assets, the cost disclosure and the facilities available to retail investors (for e.g. making subscriptions, payments).
4 The proposal allows the manager to invest up to 30% of the ELTIF's capital in liquid securities. This liquidity buffer has been conceived to allow the ELTIF to manage the cash flow that arises while the long-term portfolio is being constituted. It also allows the manager to place surplus cash that is achieved 'between investments' – that is when a long-term asset is sold in order to be replaced by another.
5 EFAMA has proposed the creation of a European brand of personal pension products. The creation of an EPP would help personal pension providers operating on a cross-border basis to centralize some functions, thereby achieving economies of scale, particularly in the areas of investment management and administration. According to EFAMA, an EPP would also open up the possibility for EU citizens to continue saving in the same product when moving from one country to another. Moreover an EU EPP framework with common product rules would facilitate capital flows across the EU and enhance cross-border competition in pension provision, thus contribution to a well-functioning CMU (source EFAMA).
6 The EU Commission published its proposal for the MMF regulation in September 2013.The Parliament adopted the ECON report in April 2015 and the Council has yet to agree on a common approach.
7 LVNAV might display a constant NAV but under strict conditions relating to valuation and the use of amortized cost and to the redemption or subscription conditions.
8 Prime money market funds are US funds that invest in high-quality commercial paper as well as Treasury and government securities.
9 LVNAV will only be authorised for a period of 5 years in the current proposal of the EU Parliament, after which authorisations will lapse. The EC shall review the appropriateness of LVNAV 4 years after the entry into force of the MMF regulation. The review should examine the possibility for LVNAV MMFs to be authorized beyond 5 years or of LVNAV MMFs being authorized indefinitely, and if so whether changes are required to the regime for LVNAV. The review should consider the impact and the implementation of the provisions concerning LVNAV, the risk to financial stability and the costs to the economy and the financial sector.
By N. Gill - MEP, Committee on Economic and Monetary Affairs, European Parliament
By D. Gepp - Senior Vice President, Managing Director and Chief Investment Officer, Cash, Federated Investors (UK) LLP
By F. Bompaire, Public Affairs Finance and Strategy, Amundi
By M. Rüdiger - Chief Executive Officer, DekaBank Deutsche Girozentrale
By M. Greco - Managing Director, Head of European Funds, J.P. Morgan Asset Management
By B. de Juvigny – Secretary General, Autorité des Marchés Financiers (AMF)
By G. Vegas – Chairman, Commissione nazionale per le società e la borsa (Consob)
By C. Roux - Deputy Governor, Financial Regulation, Central Bank of Ireland
By T. Lueder, Head of unit Asset Management, DG Financial Stability, Financial Services and Captial Markets Union, European Commission