With the deadline for AIFMD compliance less than six months away, a recent BNY Mellon survey shows that the vast majority of managers aren’t ready. The survey, BNY Mellon’ second in a three-part series, polled 52 managers from funds globally, collectively holding over $4 trillion in assets under management, of which over $20 billion fall under AIFMD. Paul North, head of product in Europe, the Middle East and Africa at BNY Mellon, led the survey and explains the findings to Global Custodian.
What surprised you most about the survey results?
PN: We conducted a survey in July 2013, the start date of the transition period for the AIFMD, to track how the industry has adopted the new regulation. The survey was aiming to take a snapshot at the start, in the middle, and we’ll do one at the end of the reporting deadline. Therefore the findings are reflective of the journey as well as the absolute results. One of the key findings from the survey in July is that managers were more optimistic about their plans for compliance. In the latest survey however 81% of respondents still have work to do to get their applications into the regulator. So we’re seeing a drift in the dates and the work being compressed into a smaller time scale, causing a backlog of work to build up with the deadline of July 22, 2014 looming.
Why do you think the plan has drifted to the point that so few managers have submitted applications?
PN: I think one reason is the complexity in the process. There are a number of provisions in the regulation in the first instance, and then underneath that is a layer of complexity in the interpretation and applying process. Another reason is that managers have their day-to-day business to run, the AIFMD and other regulations to work on in parallel. For example FATCA, the U.S. tax regulation, to deal with and the directive on derivatives are a priority for many clients, and then there are other local changes in each market that can add to the workload. Firms are also aware of the next wave of changes such as money market fund reforms, MiFID II and T2S, adding to the growing volume of regulatory work that people have to get through. Last year was pretty good for asset managers; net assets grew, and they’ve seen an increase in incomes. However, costs are also rising, and profitability is down from where it was five years ago, and so resource constraints within organizations are adding to the struggle too. Some firms are talking about closing down funds. For some organizations this directive has made them almost take a step back and think, “Hang on a minute, before we worry about how we comply, we should just ask ourselves do we still want to be in this business.” Obviously that then adds to the amount of work and analysis that has to go on before people move forward.
Why, though, did the percentage of managers thinking they would close funds go down significantly since July?
PN: It is possible we are not seeing the full impact yet because 40% of the people surveyed have yet to make their plans. This figure could well go up when we survey again in July this year.
Are managers cutting it too close in waiting to apply? What are some of the risks in doing so?
PN: There is a risk in these delays. One is that firms have to appoint a depositary, and there’s a risk they may not be able to get the depositary of their choice because of demand from others who have applied already. Service providers may have changes to make and might not be able to provide some of the data clients need to complete some of the changes on the side of the service provider. There’s also the risk that the regulators won’t get time to review and approve the submissions before the deadline. So overall there’s a risk that some funds may not be in compliance by the 22nd of July this year.
What do you think would happen if funds are not ready by July 22nd?
PN: There’s no firm statements on what will happen. Clearly the regulators expect everyone to be compliant and seem ready to be flexible in taking in applications as late as they can. However, when they get them they assume firms are doing everything to be ready. So I guess nothing will happen immediately, but if you can’t demonstrate compliance, there is a risk perhaps your investors may look at you and go, “Well can I invest in this fund if it’s not compliant?” So you may find investors’ honing their due diligence around funds just to make sure all is in order and therefore their assets are accessible, protected and they won’t face any unforeseen risks. Obviously one of the benefits of AIFMD is once you’re approved as an AIFM, you can sell your funds across Europe, using the passport for distribution. That’s meant to make it faster and cheaper to sell your funds into other European markets. Now if you’re not approved, you can’t use the passport, so maybe for some that may hold back revenue opportunities. Ultimately, the regulators may exercise some sanctions for those that haven’t submitted their applications or those that have but aren’t compliant. But that is currently unknown territory.
What do you hope to get out of your next survey in July?
PN: We want to try to get a sense of where the industry will end up at the end of July. I suspect most will get there at the end of the day, but what we may find is not everything is complete and there are some unresolved issues that need working out and questions from regulators that need to be answered as well.
Do you think there will be much of a change in what managers expect versus what will actually happen in terms of costs for technology, staffing, etc.?
PN: It’s interesting that the cost estimates we’re seeing are pretty much consistent with where they were six months ago ($305,000 in July 2013 vs. $300,000 in January 2014). If we see a compression of work into a smaller amount of time, firms may have to employ more money and resources for the task. In this survey we also gave focus to the risk and compliance requirements of the directive, and there are clients who have had to add staff and systems into their business to support these requirements too. Increasing transparency requirements, such as data sharing and reporting requirements may add further to costs. So that’s another area we’ll be interested to see how firms respond.
Next time around we may well give focus to the regulatory reporting, an area that’s been identified as a challenge for firms. The first reports aren’t due until firms are fully authorized so for most this will probably be the back end of 2014. Firms need to start getting ready for the first reporting period or they could see slippage in the completion of their project.
GC Friday Interview: Paul North, Head of Product, EMEA, BNY Mellon, on AIFMD Survey Results
With the deadline for AIFMD compliance less than six months away, a recent BNY Mellon survey shows that the vast majority of managers aren’t ready. The survey, BNY Mellon’ second in a three-part series, polled 52 managers from funds globally, collectively holding over $4 trillion in assets under management, of which over $20 billion fall under AIFMD. Paul North, head of product in Europe, the Middle East and Africa at BNY Mellon, led the survey and explains the findings to Global Custodian.