the changing landscape of european investment fund law: ucits, aifm and the like... dr. armin j....
TRANSCRIPT
The Changing Landscape of European Investment Fund
Law: UCITS, AIFM and the like...
Dr. Armin J. KAMMEL, LL.M. (London) (VÖIG)
Challenges of Collective Investment Business in CEE
Kyiv Workshop, 27.10.2011
Agenda
- It is all about regulation...
- Specific regulation for the fund business
- “Radiating” regulation for the fund business
- Regulatory “spill-over” effects for the fund business
- Foreign legislation and national initiatives
- Outlook
It is all about regulation...
Source: www.confusedbytheworld.com
It is all about regulation...(I)
Specific regulation for the fund business
Specific regulation for the fund business (I)
- UCITS framework
- UCITS IV
- UCITS V
- AIFM framework
UCITS framework
Specific regulation for the fund business(II)
• UCITS = Undertakings For Collective Investment in Transferable Securities (OGAW)
• European framework for investment funds
• Structure of the Framework:
• Directive 85/611/EEC (UCITS I) [Eligible Assets Directive 2007/16/EC]
• Directive 2001/107/EC and Directive 2001/108/EC (UCITS III)
• Directive 2009/65/EC (UCITS IV)
Specific regulation for the fund business(III)
• Types of UCITS:
UCITS: open-ended investment fund– contractual type funds (Sondervermögen)– corporate type funds (SICAV)– trust
• UCITS is a UCITS is a successful European framework for fundssuccessful European framework for funds• UCITS so far UCITS so far did not have any significant crisisdid not have any significant crisis• UCITS is considered as „UCITS is considered as „international gold standardinternational gold standard“ for “ for
investment funds – also of interest in Asia and Latin investment funds – also of interest in Asia and Latin AmericaAmerica
• NeverthelessNevertheless: industry call for „: industry call for „Economies of ScaleEconomies of Scale““
Specific regulation for the fund business(IV)
– Green Paper on the enhancement of the EU framework for investment funds (12 July 2005)(12 July 2005)
– Implementation of Implementation of two Expert Groups two Expert Groups (30 January 2006) that delivered (30 January 2006) that delivered so-called so-called Expert Group Reports Expert Group Reports (4 July 2006)(4 July 2006)
– WWhite Paper on Enhancing the Single Market Framework for Investment Funds (16 November 2006)(16 November 2006)
– Initial Orientations of Possible Adjustments to the UCITS Initial Orientations of Possible Adjustments to the UCITS Directive Directive (June 2007)(June 2007)
– Improved European framework for investment funds Improved European framework for investment funds (16 July (16 July 2008)2008)
– EP and EC adopted UCITS IV in spring 2009EP and EC adopted UCITS IV in spring 2009
Specific regulation for the fund business(V)
• Key Features of UCITS IVKey Features of UCITS IV
– Notification ProcedureNotification Procedure
– Management Company PassportManagement Company Passport
– Cross-Border Fund MergersCross-Border Fund Mergers
– Master-Feeder StrukturenMaster-Feeder Strukturen
– Key Investor Information (KID)Key Investor Information (KID)
– Supervisory CooperationSupervisory Cooperation
Specific regulation for the fund business(VI)
UCITS IV UCITS IV to be implemented into national law by 1 July to be implemented into national law by 1 July 20112011..
Various member states, among those Austria, implemented Various member states, among those Austria, implemented UCITS IV UCITS IV with a delaywith a delay: Austria i.e. : Austria i.e. 1 September 20111 September 2011
ESMA opinionESMA opinion: : Practical arrangements for the late Practical arrangements for the late transposition of the UCITS IV Directive transposition of the UCITS IV Directive (13 October 2011)(13 October 2011)
Specific regulation for the fund business(VII)
In parallel to UCITS IV, drafting of a „In parallel to UCITS IV, drafting of a „UCITS V“ package as a UCITS V“ package as a regulatory reaction regulatory reaction to the financial crisis:to the financial crisis:
Material Implications of UCITS V:Material Implications of UCITS V:-RemunerationRemuneration-Role of the Depositary within the UCITS frameworkRole of the Depositary within the UCITS framework-further organizational requirements? More sanctions? further organizational requirements? More sanctions?
Schedule:Schedule:likely Q1 2012likely Q1 2012
AIFM framework
Specific regulation for the fund business(VIII)
• Trigger: financial crisis• bailout of banks, speculation, role of hedge funds, Lehman Brothers, Madoff
• G-20 summit in London on 2 April 2009
• 30 April 2009 – Commission: Draft AIFM Directive
• Main Problem: draft itself
• 3 council presidencies• 1 Rapporteur, >1600 amendments
• 27 October 2010 – finalization of Trilogs
• Compromise: complex review process until 2018!
Specific regulation for the fund business(IX)
• General Principles: • no product directive but manager directive hybrid
construction• AIFM is regulatory contact:
– external manager– internal management
• AIF = non-UCITS:– no matter if open-ended oder closed-ended– no matter what legal structure– no matter if exchange-traded, what capital invested, number
of investors• AIFMD: focus on institutional investors but retail option• Introduction of a “European AIF passport”
Specific regulation for the fund business(X)
• 3 main categories covered:• all EU-AIFM, that manage either one or more EU-AIF or non-
EU-AIF• all non-EU-AIFM, that manage EU-AIF, no matter if they are
distributed within the EU• all non-EU-AIFM, that distribute either EU- or non-EU-AIF in
the EU
• few exemptions: holding companies, IORP institutions, supranational institutions, institutions for social insurance and pension systems
• thresholds: AIFM < EUR 100 Mio as well as AIFM with FC and no redemption within 5 years < EUR 500 Mio
Specific regulation for the fund business(XI)
• Principles: full authorization, if main activity is the management of investment portfolios
• facilitation for credit institutions with investment services and UCITS management companies
• competent authorities information to ESMA
• capital stock:• AIFM with internal nanagement: EUR 300.000,-- [+ value of portfolio]• AIFM mit external manager: EUR 125.000,-- [+ value of portfolio]
• Operating conditions: codes of conduct, conflict of interest principles remuneration, risk management, liquidity manafement, organizational aspects, valuation, role and function of the depository for each AIF, transparency,...
Specific regulation for the fund business(XII)
• Level ILevel I– 21 July 2011: entry into force of Level 121 July 2011: entry into force of Level 1
• Level II and IIILevel II and III– August / September 2011: consultations by ESMA on Implementing August / September 2011: consultations by ESMA on Implementing
Measures (general one and one on third countries)Measures (general one and one on third countries)– Early 2012: Commission proposal on Implementing Measures to the Early 2012: Commission proposal on Implementing Measures to the
EP and the ECEP and the EC– Mid 2012: adoption of Level II and partly Level IIIMid 2012: adoption of Level II and partly Level III
• Deadlines:Deadlines:– 22 July 2013: national implementation of AIFMD22 July 2013: national implementation of AIFMD– 22 July 2013: 22 July 2013: newnew AIFM and AIF have to comply with AIFMD AIFM and AIF have to comply with AIFMD– 22 July 2014: 22 July 2014: existingexisting AIFM must submit application for AIFM must submit application for
authorization and comply with AIFMDauthorization and comply with AIFMD
Specific regulation for the fund business(XIII)
• AIFMD and national law:• some countries anticipated AIFMD: AIF• broad range of “national” funds covered ...
• AIFMD: a framework full of challenges• clarifications/guidance on Level II• Which and how many fund structures are in scope?• crucial role for ESMA• the unknown: European politics – third country issue• ...
“Radiating” regulation for the fund business
“Radiating” regulation for the fund business(I)
- PRIPs / MiFID
- EMIR
- Financial Transaction Tax
PRIPs / MiFID
“Radiating” regulation for the fund business(II)
• Commission initiative “Packaged Retail Investment Products” (PRIPs)
• Idea: Creation of a Level Playing Fields at the point of sale in terms of transparency
• support for the initiative but highly diverging views and feedback to the Commission
• re-scheduled to Q1 2012• PRIPs is seen in the context of the MiFID review: MiFID II • MiFID Review: (independent) advice, periodic communication
with clients, complex vs. non-complex financial instruments (structured UCITS!), transparency requirements for ETFs as well as issues on corporate governance.
• fund business at least indirectly affected!
EMIR
“Radiating” regulation for the fund business(III)
• Proposal for a European Market Infrastructure Regulation (EMIR) in September 2010
• reporting requirements for OTC derivatives• clearing obligation for OTC derivatives• measures to reduce the counterparty risk as well as the
operational risk• general rules for the functioning of CCPs
• Challenges for the fund business at a very technical level; buy-side vs. sell-side etc.
Financial Transaction Tax
“Radiating” regulation for the fund business(IV)
• Commission consultation for a FTT (April 2011)• Commission proposal for a FTT (September 2011)
• budgetary constraints, “contribution” of the financial industry,...
• split between EU and MS?• tax: 0.01% on derivatives, units and bonds 0.1%
• Revenue: EUR 57 bn
• Fund business directly affected – danger of double taxation!
Regulatory “spill-over” effects for the fund
business
Regulatory “spill-over”effects for the fund business (I)
- Basel III
- Solvency II
Basel III
Regulatory “spill-over” effects for the fund business (II)
• Basel III – reform package to the already existing banking regulation Basel II and direct reaction to the financial crisis
• Implementation of Basel III in the EU with CRD in 2013• CRD III - Remuneration• CRD IV
– deals with:– increase of quality, consistency and transparency of own capital– strengthening of risk coverage– introduction of Leverage-Ratio, Liquidity Cover Ratio, Net Stable Funding Ratio– reduction of pro-cyclicality – monitoring of systemic risks
Basel III heavily criticized from both sides..
• Fund business affected either through national banking legislation but also indirectly in terms of remuneration (UCITS V, AIFMD).
Solvency II
Regulatory “spill-over” effects for the fund business (III)
• Solvency II – structural reform of the European insurance law with a specific focus on the capital requirements for insurance companies
• Implementation: Q1 2013• Structural analogy to Basel II• increased requirements for the risk management of insurance
companies
• Fund business affected at various levels, being there is a necessity to understand Solvency II, more reporting and calculations for insurance companies to ensure that investment funds remain attractive as well as technical challenges in terms of data exchange
Foreign legislation and national initiatives
Foreign legislation and national initiatives(I)
- Foreign legislation- i.e. FATCA
- National initiatives- i.e. short-selling restrictions / bans
FATCA
Foreign legislation and national initiatives(II)
- Foreign Account Tax Compliance Act (FATCA)- Idea: minimize tax avoidance of US citizens through foreign
financial institutions
- foreign FI have to sign a contract with IRS- identification of Non-US citizens in case of US tax obligations- Investments have to be reported to IRS (also non-exchange-
traded ones)- term “taxable revenue” widened
- fund specific issues: deemed compliant category, indirectly affected through bank distribution etc.
Short-selling restrictions / bans
Foreign legislation and national initiatives(III)
- Short-selling restrictions / bans- totally uncoordinated approaches- FRA/ITA/ESP/BEL caused irritations in August 2011- some MS such as CZE, LAT, LIT, SVK have no restrictions at
all- others continuously extend/amend them- Role of CESR/ESMA unfortunate
- Practical implications: additional requirements by brokers; not possible to have a clear overview and assess the implications
Outlook
Outlook (I) – General Considerations
• Regulatory challenges are significantRegulatory challenges are significant• AIFM framework as the new regime for investment AIFM framework as the new regime for investment
funds? How will the intended harmonization / funds? How will the intended harmonization / compatibility between UCITS and AIFM turn out?compatibility between UCITS and AIFM turn out?• Will Will PRIPs ensure the desired level-playing-PRIPs ensure the desired level-playing-field?field?• What will be the consequences of a future What will be the consequences of a future financial financial transaction tax? Why not working on a transaction tax? Why not working on a harmonized tax harmonized tax system? system? • What about the costs of regulation? What about the costs of regulation? Basically Basically there there are no cost-benefit-analyis anymore! are no cost-benefit-analyis anymore!
Outlook(II) – CEE
• Challenges for the CEE regionChallenges for the CEE region
• lack of consistencylack of consistency• different implementations / interpretations of legislationdifferent implementations / interpretations of legislation• national initiatives: i.e. taxation in HUNnational initiatives: i.e. taxation in HUN• not regarded as „a region“not regarded as „a region“• … …
Outlook(II) – Conclusions
• EU and certain member states as (fund) domiciles EU and certain member states as (fund) domiciles face face significant challengessignificant challenges. What are the incentives to . What are the incentives to remain in the remain in the EU?EU?• Outflows in AuM Outflows in AuM and and increased concentration increased concentration tendencies tendencies to to specific markets…specific markets…
• Regulation Regulation per se per se cannot be the answer!cannot be the answer!• Danger, that regulation itself becomes a „systemic Danger, that regulation itself becomes a „systemic
risk“, risk“, meaning a risk for specific markets but also meaning a risk for specific markets but also the Single the Single Market...Market...
Thank you very much for your attention!