European asset managers can look forward to a hectic year in terms of new regulations. Former Commissioner for Financial Services, Jonathan Hill, was an outspoken advocate of imposing a regulation hiatus, but that is now nowhere in sight.
On the contrary, there are a number of new legislative measures on the way which could affect European asset managers.
Anders Klinkby, CEO of the Danish Investment Fund Association (IFB), explains that their members have yet to feel the impact of a break in new regulations.
"When you look at some of the initiatives that we as an organization consult on and have to address, the amount of legislation is still rapidly increasing. So we haven't seen any signs that there's a pause in regulations on the way, but I hope we will during 2017," he says in an interview with FW Asset Management.
There are three major pieces of regulation being evaluated in the EU, which could have a particularly large impact on the asset management industry.
The first is MIFID II, a major regulation meant to ensure better protection for consumers, to reinforce financial markets, and to increase transparency for investors.
The work on MIFID II has been ongoing for a while, and asset managers have to pay heed to it as of January 1, 2018. The rough draft of the regulation has been green-lighted, but the precise framing of the rules will not be determined until some time during this year.
One of the most controversial aspects of MIFID II is that it will become illegal to charge a brokerage fee if an investment is made through a portfolio management agreement. That rule will come into effect in Denmark as early as July this year, which means there is a risk that Denmark will do things differently from the rest of Europe, Anders Klinkby cautions.
"There are still some unanswered questions about how MIFID II will be specifically implemented. That might be made clearer by ESMA (the European Securities and Markets Authority, ed.) in a common European Q&A session, or perhaps more realistically by looking at how it's implemented in other countries we usually compare ourselves to, and which form a European norm," he says, adding:
"We are a bit exposed in Denmark in that regard, as we implement the partial ban on brokerage fees six months before [the rest of Europe], and we probably have to be extra careful that we don’t implement bad solutions."
With the new directive, recipients of brokerage fees, usually banks, have to document that they offer counselling services that add additional value for their clients. Moreover, there will be a common European system for how to gauge costs of investment products.
Asset managers have also been met with a requirement to separate costs for research and analysis from the combined costs. Managers are in turn given two options for how to fund the analyses. They have to either pay for it out of their own pockets or charge a separate fee.
According to a Financial Times article, half of 220 surveyed asset managers last year said that they did not know how they would finance the analyses once MIFID II takes effect.
While those in favour of the initiative laud it for increasing transparency and the right to choose, critics say that it will push up prices due to the new requirement.
Many players in the asset management industry have also been awaiting the new PRIIPS directive.
It has been a long time coming and has been delayed to such an extent that a prominent Swedish member of the European Parliament has warned it will be difficult for companies to implement the rule changes by the January 2018 deadline.
"We are losing time. It means the industry will have less time to adjust. It’s not a good legislation process," Sven Giegold told Financial Times in early January.
PRIIPS, or Packaged Retail Investment and Insurance Products, is a directive meant to make it easier for investors to obtain information about their investments, just as they have to be able to compare investments across asset classes.
But EU legislators have not been able to find common ground on the framing of PRIIPS. The so-called Key Investor Document – usually referred to simply as KID – has been a particularly large source of disagreement, which has delayed the process.
The EU Commission passed the PRIIPS draft regulation to the European Parliament last year, but Parliament voted against it during the fall and sent it back to the Commission. The Commission then asked the common European financial watchdog to look at possible changes to the regulation, but they also failed to find common ground.
Discussions between the Commission and the financial supervisory authorities are now ongoing in a bid to reach a solution.
Shareholder Rights Directive
Last, but not least, the Shareholder Rights Directive will also play a role for asset managers. According to an analysis from law firm Kromann Reumert, it is expected to win approval during the spring.
That directive has two overall aims: to increase transparency in equity trading and to improve possibilities for active ownership.
The draft regulation also includes a requirement for institutional investors and asset managers to prepare a three-point report:
First, the report has to describe the connection between shareholder influence and the company’s investment strategy.
Secondly, it has to describe the considerations the company has had in regard to an investment’s social and environmental consequences. And last, it has to include information about possible conflicts of interest.
Anders Klinkby believes Danish investors are in a good position to navigate through the Shareholder Rights Directive, once it is implemented.
"From a Danish perspective, there’s plenty of reason to complement the Corporate Governance Committee for being ahead of the curve in this matter. It published seven ownership recommendations in November, all of them specifically aimed at Danish institutional investors and asset managers. So we are well-equipped in Denmark in that sense," he says.
But there might be additional new rules, directives and regulations on the way that could affect the industry in 2017. The EU Commission is, for example, currently working on an overhaul of rules for covered bonds, and the Commission’s focus on the digital inner market might also have an impact.