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June 23, 2013 5:04 am
Scores of asset managers are being blocked from easily selling investment products into new markets after being hit by a wave of “complex and often contradictory” regulations, a survey by KPMG, the financial services firm, suggests.
The governments around the world are imposing rigid rules on the asset management sector. These regulations vary widely from Europe and Asia to the US. And this throws a wrench into plans by fund houses to expand into Africa, the Middle East and other potentially lucrative regions, according to the report.
Tom Brown, global head of investment management with KPMG, says: “One of the big challenges is that we are operating in a world where there is a massive patchwork of different approaches. It’s incredibly difficult for asset managers to operate.”
New consumer-friendly regulations span the gamut ranging from South Africa’s introduction of rules that require its financial services companies to treat customers equitably, to China’s move to offer more protection for retail investors.
The Foreign Account Tax Compliance Act (Fatca) introduced in the US presents difficulties for fund houses the world over, meanwhile, as it requires them to report information about American clients to US tax authorities.
The impact of regulatory changes also looks cumbersome in Europe, where the rules span from the AIFMD, which aims to curb the risky behaviour of private equity funds, hedge funds and other alternative managers, to the latest iteration of Ucits legislation (Ucits V). Mifid II and the pending financial transactions tax are also on the table.
The aim of this tide of regulations is to scrub the financial services industry of its structural failings, safeguard market stability and to protect consumers.
Indeed, as a catch-all term, “regulation” is being replaced by “supervision” as governments focus attention on protecting retail investors from abuse. At the same time, they are offering incentives to encourage citizens to set aside money for retirement, which presents opportunities for investment managers.
“There is a disconnect between government encouragement to save and fear of mis-selling,” according to the KPMG report.
For their part, investment managers are scrambling to comply with new regulatory requirements, say industry analysts.
But, in many cases, the increased reporting and accountability requirements look expensive. For hedge funds, the compliance costs for meeting the AIFMD rules are estimated to be $6bn, according to KPMG. And the European Commission estimates the one-off cost for firms to comply with Mifid is €312m-€732m. It sets continuing compliance costs at €312m-€586m.
Andrew Shrimpton, a partner at Kinetic Partners, a regulatory consultancy, recognises the red tape that regulations create, adding that fund houses’ inability to market their wares is not new. US mutual funds, for example, cannot be sold in Europe while Ucits funds are not on offer in the US, a point of irritation for globe-trotting investors.
The KPMG report lays out a litany of pressing regulatory changes that will hit the asset management sector in a number of countries. The company’s partners noted the following in particular.
The Association for Savings and Investment South Africa no longer classifies funds according to investment styles such as growth and value. Funds are instead classified according to their so-called geographic exposure and underlying assets. Funds will first be classified as South African, worldwide, global or regional, and then be tagged as equity, multi-asset, interest-bearing or property portfolios.
The changes are set to simplify how South African investors select from the 967 local and 319 foreign collective investment schemes registered in the country.
The South African financial services board is also introducing a programme for regulating the market conduct of financial services firms, entitled “Treating Customers Fairly”.
Investment rules that the Central Bank of Bahrain introduced in May of last year, have brought two sorts of funds to the country’s maturing market. The first are Bahrain real estate investment trusts (B-Reits), which serve the needs of local and regional markets, and the second are the private investment undertakings, a new breed of more flexible mutual funds that facilitate private investments.
Regulations introduced late last year require the country’s three regulatory bodies – Qatar Central Bank, the Qatar Financial Centre Regulatory Authority (QFCRA) and the Qatar Financial Markets Authority to function under one umbrella. New rules on governance also come into effect next month. The QFCRA will set up a formal governance framework and a risk management framework, as well as a remuneration policy.
Foreign investors based outside the Gulf Cooperation Council (GCC) can only invest in the local Saudi market through equity swaps and exchange traded funds. But recent reports in the media suggest the country will gradually open up its market to outsiders. The growth in interest in sharia funds presents tremendous opportunities. KPMG estimates that more than a quarter (26 per cent) of the world’s population is Muslim, but less than 1 per cent of the world’s financial assets are sharia compliant.
Brazilians are becoming more interested in private credit, private equity, hedge funds and real estate funds. This trend will continue, especially as changes to regulations now allow clients to invest in funds outside Brazil.
The China Securities Regulatory Commission revealed last March that it would take a stab at improving protection for retail investors by widening the scope of the services of the current Investor Protection Bureau or creating a new institution.
Their efforts to guide retail investors who find it difficult to assess investment risks, though they account for a large share of all transactions in China’s equity markets.
Another advance is that China and Hong Kong have begun discussions regarding mutual recognition for the cross-border sale of collective investment funds. If plans are agreed, Hong Kong would be offered near-exclusive access to Chinese investors and become an even more important funds centre. Such a scheme, meanwhile, would provide Chinese investors with access to international investment products.
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