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IMA warns about potential pitfalls in forthcoming European regulation

Wednesday, May 12, 2010
Opalesque Industry Updates -

- UCITS IV package offers the funds industry less than it originally promised

- The Alternative Investment Fund Managers Directive (AIFMD) is much more than a hedge fund and private equity directive.

- Politicians need to differentiate more clearly between different parts of the financial services industry to avoid inflicting unnecessary damage

In a speech Jarkko Syyrilä, Director, International Relations at the Investment Management Association, warned of the danger that "policymakers' good intentions to protect the investors and financial markets can lead to a regulatory overkill with grave unintended consequences". He was speaking at the Association of the Luxembourg Fund Industry (ALFI) roadshow in London, on Tuesday 11 May.

Reflecting on the changes over the last year, Jarkko Syyrilä commented.

"The securities markets globally have rebounded significantly and people are saving again in investment funds. The first quarter of this year was the strongest for fund sales on record in the UK. Savings held in UK funds have topped 500 billion pounds for the first time. So the outlook is promising. We can only hope that the Greek or any other sovereign debt crisis will not stop the still slow economic recovery in Europe.

"Even if the markets have largely recovered, the regulatory reaction to the financial crisis is only gathering strength. This means also a completely new regulatory environment for asset managers."

He commented on the benefits that European regulation has brought to the industry, but expressed disappointment regarding the forthcoming UCITS IV.

"The last five years in terms of asset management regulation were about perfecting the single market to the benefit of the industry and investors. As a result, the coming months we will see the final form of the UCITS IV package. It provides restructuring and consolidation opportunities to asset managers even though the efficiency improvements seem to be much smaller than originally expected, as a result of overly detailed and burdensome rules and uncertainties on how the new rules interplay with Member States' tax legislation."

Whilst recognising the importance of implementing changes in regulation in order to avoid another financial crisis, he warned about potential pitfalls.

"The next few years the regulatory focus will be on trying to avoid another financial crisis of this magnitude. This is quite understandable, none of us as tax payers will want to foot the bill for another banking catastrophe. However, the pressure to regulate quickly and ignoring the processes of better regulation in the EU is about to cause major problems for the asset management industry with disproportionate and unworkable rules."

He stressed the importance of being clear about the impact of regulation.

"Politicians do not seem to be willing to differentiate between different parts of the financial services industry but we all carry the stigma of investment bankers.

Commenting on the Alternative Investment Fund Managers Directive (AIFMD) he pointed out that it is much broader in its scope than hedge funds and private equity firms.

"Though labelled as a hedge fund/private equity directive, it will complicate and add new burdens to the operations of all non-UCITS fund managers.

He went on to give some examples of the damage that may be inflicted.

"The European Parliament's ECON Committee is about to take an approach to third country funds which will significantly damage pension savings of all Europeans. European professional investors will only be able to invest in those third country funds whose manager and its regulator sign to apply the rules of the Directive. It is questionable whether any third country will want to or be able to sign up to these overly burdensome rules. Therefore European professional investors will no more be able to search from among best of breed products globally.

"How will our international trading partners react to this closing of the doors of Europe and will it lead to retaliation? The risks are evident and a big question is how will this impact the global distribution opportunities of European funds, including UCITS?"

He also spoke about the potential impact if these changes were carried over into the UCITS V work.

"UCITS V is scheduled in Commissioner Barnier's working programme for next year, apparently mainly to tackle issues regarding the depositary liability. We all agree clarifications to depositaries' tasks are welcome, but imposing a strict liability on UCITS would be end of the road for many emerging market UCITS and would deny European retail investors the opportunity to invest in the world's fastest growing economies in a risk diversified way, through investment funds."



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