27 years later I can't help but draw parallels on the changes and ease of entry or launch into Europe for alternatives, and the changes and growing difficulties surrounding entry and exit within its borders.
In efforts to seek a streamlined Europe both on an economic scale and on a funds industry perspective, we are walking a difficult line between promoting business development and growth and the regulatory towers we have built in an effort to protect those behind its borders.
AIFMD was a significant step in that streamlining drive and I believe it is worthwhile focusing in on the impact of AIFMD and other legislative changes across the regulatory fabric of Europe.
Risk reporting and calculations
For any manager in Europe to gain the approval of the local regulatory authority it will need to demonstrate, through it’s POA (Programme of Activity) /application, that it has the necessary resources and technology to manage its business effectively. Managers that went through that process with their local regulator either had that capability in-house or out-sourced the function to a third party that did. Given the ongoing refinement and addition of new required controls and with an approximate 1,000 data points being required under ANNEX IV long form reports the right systems and resources to match are no longer enough. Software and technology need to be supported by a forensic knowledge and understanding of the ongoing regulatory changes and even with those resources the bills of ongoing legal advice and consulting fees continue to increase.
Whether it is UCITS or ANNEX IV effectively, for larger fund managers and strategies that engage any leverage or degree of derivatives, the time (and advice) being spent on correctly interpreting this information and verifying before submission is increasing. This is having both an influence on the choice of strategy being engaged and more importantly the decision as to whether the manager carries out the calculations in-house or outsources the function.
At the recent GAIM conference in Wicklow on October 20th-22nd I chaired a panel on the impact of ANNEX IV and other recent regulatory changes and it was an interesting insight. In the room was a mix of consultants, Irish and European lawyers and half a dozen investment managers all of which can remain blissfully anonymous for now. The key messages were clear however:
• The advent of AIFM and was a welcome progression forward broadly speaking
• Safeguarding the reputation of Europe as a safehouse for investors both European and international has to remain a key focus
• Costs of regulation and reporting have significantly increased more than any other time in the history of the regulated fund industry in Europe
• Increased need for big data and technology was part of the cost but the main increases in fees were related to legal and regulatory.
• Given the ongoing increase in costs there was increased concern with regard to the successful navigation of all new uncharted waters leading managers to rely more heavily on third parties outside of the organization
• The increased risk and reporting requirements have led to a growth spurt in regulated fund platforms and many managers under €100m consider this a more favourable route to enter into Europe to launch and market their product as opposed to a obtaining a full AIFM/UCITS license themselves.
Third party providers
For fund administrators, custodians, auditors and directors to the fund they too are dealing with a new wave of legislative and regulatory change which has internally required a significant increase in regulatory and compliance as well as technological investment. This latest wave of regulation has had a significant macro impact on the industry with some of the larger names completely closing doors to the sub-billion dollar funds and choosing to focus only on their larger clients. This has left many new opportunities for those administrators outside of that top 5 list. It has also meant that we are back to pre-crisis levels of M&A with Citigroup being one of the latest investment banks to exit the fund administration market. It is expected that this wave of activity will continue as those administrators with poor legacy systems or low margin business decide to exit. Apex Fund Services has seen the benefit of those changes with clients seeking providers with a global offering to suit larger managers' global business models, all the while requiring a technology-focused solution.
Likewise custodians and banks have narrowed their client base and those that they are willing to work with in an effort to reduce risk on a wider scale. Factors such as compatibility of systems, size of client, strategy and sophistication of offer are key.
The focus on greater regulation is coming at extensive cost and this fast-paced evolution is creating a European stronghold and bolstering the reputation of Europe. We all have a very key role to play in ensuring the cost of fortifying our offering does not outweigh the cost of entry.