APAC fund managers warned of EU fragmentation

Asia-Pacific (APAC) based fund managers looking to sell into the European Union (EU) have been warned that the market remains highly fragmented, according to panellists at Fund Forum Asia 2016 in Hong Kong.

A number of APAC fund managers are looking to diversify beyond their core regional markets. Some are exploring whether to launch UCITS products and a handful are assessing the viability of adopting alternative investment fund manager (AIFM) structures. However, some feel that APAC managers have underestimated the challenges and lack of uniformity in EU regulation and its implementation.

“The EU comprises of a number of markets and each has its own specificities. For example, distributing a fund into Italy is not the same to how one would distribute into Germany or Luxembourg. The sheer volume of regulation is high. It is not helped by the ongoing regulatory uncertainty. While the regulatory rules have been published on the Markets in Financial Instruments Directive II (MiFID II), for example, the finer details remain unknown despite being less than two years away from implementation,” said Richard Lepere, chief executive officer at Fund Channel, a fund distribution group.

The passage of UCITS IV in 2011 was supposed to eliminate discrepancies and inconsistencies in national regulators’ implementation of UCITS. While it has improved the ease of cross-border distribution, nuances across the EU remain visible with gold plating still apparent. A number of countries impose additional regulatory reporting requirements, tax transparency obligations and rules pertaining to the appointment of local agents. This all adds cost at a time when operational overheads are expanding at fund managers.

Rules including the AIFMD have a number of differences. Non-EU managers selling into Germany and Denmark must appoint a depositary-lite to provide safekeeping of assets, cash flow monitoring and oversight. The Annex IV report submitted to national regulators by non-EU managers marketing in those jurisdictions is not completely standardised. Some countries require firms to fill in voluntary sections. MiFID II inducement bans vary across the EU with some countries taking a tougher line than others.

This all requires managers looking at marketing into the EU to continually monitor for any changes that may impact their businesses. “Regulation ultimately increases costs for investors and this is counterproductive,” commented Lepere.