Five things we learned at AIMA’s flagship regulatory forum
By Jiri Krol
Published: 10 May 2017
Representatives of more than 20 regulatory agencies as well as dozens of asset managers gathered in Paris in April 2017 for one of our flagship global events, the AIMA Global Policy and Regulatory Forum 2017, and affiliated workshops. The event came just days after the UK Government invoked Article 50, triggering the country’s long, two-year farewell to the European Union. It came only a few weeks before the French presidential elections, which could be as seismic as either the Brexit referendum in the UK last June or the US presidential elections last November. And the event also came during the extraordinary first 100 days of Donald Trump’s administration. All three events cast a long shadow over the proceedings.
The events over the two days were conducted under the Chatham House rule, meaning particular comments or opinions can’t be attributed to specific speakers. But I would like to reflect on some of the core themes.
Brexit cannot lead to a ‘race to the bottom’ in the EU 27
For the delegates from the UK, accustomed to a very UK-centric perspective on Brexit in the British media and at dinner parties, the conference provided a European and global view. A recurring message from the EU policymakers and regulators we heard from, and to whom we spoke, was that the “EU 27” – the post-Brexit European Union Member States – will need to work even harder in future to ensure a level playing field within the bloc. One speaker said that Brexit posed the 27 a profound challenge and one that the Member States needed to quickly face up to and prepare for. There was also general agreement that the EU’s capital markets union project will need to continue and possibly acquire a greater urgency given the relatively higher reliance on banking by the 27.
Speakers agreed that regulations will need to be implemented with greater consistency. Discussions touched on the AIFMD review and issues around delegation. More than one speaker referred explicitly to the threat of a “race to the bottom” as EU states compete over the City of London’s market share. There was also much talk of London’s importance to the EU economy, particularly in terms of asset management, and of the need to strengthen the already powerful partnership between the UK’s asset management sector and EU markets.
As AIMA sees this crucial issue, we believe there are currently four key unanswered questions:
- The willingness of UK legislators and regulators to place asset management at the front of their thinking as a UK growth industry post-Brexit;
- The willingness of the EU to grant equivalence and thus access to the UK as a third-country under various pieces of EU financial services legislation;
- The future of policy direction of existing and future EU financial services legislation, in particular the maintenance of private placement regimes under AIFMD and the Capital Markets Union project; and
- The degree of access in the UK to skilled employees from the EU and beyond.
The Trump administration may not deregulate the financial system
A number of speakers at the conference spoke about the inconsistency between political rhetoric in the US currently and the likelihood for substantial financial regulatory reform. There was a consensus among our panellists that much of the Dodd-Frank Act, including those aspects relating to reporting and swaps, will not be repealed. As one speaker put it, repealing the Act wholesale would severely damage US asset managers seeking access to the EU and other markets on the basis of regulatory equivalency.
Areas that our speakers felt might be looked at, however, include the Volcker rule – the post-crisis crackdown on prop trading and on banks owning stakes in alternative asset managers – and the role of the US in international regulatory and supervisory bodies.
Asset managers are helping to make markets more stable
A number of speakers reflected on the fact that the asset management industry has been relatively stable in the near-decade since the crisis. There clearly is now much more recognition than ever before in Europe of the usefulness of market finance and of the fundamental differences between banking and asset management. AuM is not a balance sheet and redemption requests to a fund are very different to a run on a bank, as one speaker noted.
A recurring theme was whether the huge volumes of data now being routinely disclosed to regulators by market participants around the world are helping regulators better understand risk concentrations. Some speakers clearly believe that regulators are swamped and still lack the tools to analyse the information accurately.
There was also a recognition that the large financial markets continue to be heavily influenced by the actions of central banks. Questions were posed as to whether these interventions were making markets more or less stable. One speaker acknowledged that Europe’s financial system may still be too fragile to withstand a major shock.
Costs of compliance will be thoroughly assessed
There were welcome utterances from several regulators on both sides of the Atlantic about the need for thorough impact assessments to be carried out into the costs of compliance and the unintended consequences brought by post-crisis regulatory reforms such as the AIFMD. Regulators said they will be seeking not only industry-wide views but feedback from individual firms.
In terms of reporting requirements, there were renewed promises by regulators in different jurisdictions to work together more closely in order to avoid unnecessary duplication and to seek to make the disclosure of data less burdensome. But regulators also spoke about the need to improve the quality of data they received from fund managers. As one put it, “the data is very messy, it’s incomplete and we’re still trying to fill in the gaps”.
Alignment of interests keeps growing
A new feature of the GPRF this year was a panel devoted to hearing from institutional investors in hedge funds. As we know, most investors in hedge funds and private credit funds today are institutions. More than half of all pensions, two-thirds of all foundations and four-in-five endowments allocate to hedge funds. Given the dominance now of this constituency, it is vital that their voice be heard more frequently in policy and regulatory discussions.
Speakers opined on the active/passive investing debate, on the differences between institutional and retail products, and, above all, on fees. There was general agreement that the days of “2&20” as a standard fee structure were numbered and that therefore the media narrative is increasingly divorced from reality. The panel also touched on the increasingly sophisticated and tailored structures designed to create ever-closer alignment between fund managers and investors.
Earlier, policymakers spoke about the need for costs to come down and for transparency, particularly around fees and expenses, to increase. AIFMD and MiFID in Europe and Dodd-Frank in the US have already substantially increased disclosure, but clearly additional policy prescriptions are being considered, in order both to increase investor protection and to increase the competitiveness of the EU asset management sector.