SEPTEMBER OCTOBER 2013 SUPPLEMENT
ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Luc Frieden
Minister of finance, Grand Duchy of Luxembourg
O E DI T
RIA
L A big year
Cross-border story
UCITS and ALFI mark their 25th anniversary with the industry seeing a record year in assets under management and a new EU fund passport coming into play. Text Luc Frieden Illustration Jocelyn Gravot
T
wo thousand and thirteen marks the 25th anniversary of three defining events in our fund management industry: the implementation of the UCITS directive in March 1988, the launch of the first UCITS umbrella funds in October the same year, and the creation of the investment fund association ALFI a month later. From the very beginning there was a feeling that this was the start of something big and the race to launch the first cross-border umbrella fund was intense. We had no idea, then, just how big the business would become. Today, Luxembourg financial regulator CSSF handles 47,000 cross-border distribution agreements and Luxembourg is the acknowledged leader in this field. Success is always the result of coordinated efforts. The fund industry developed within the context of a strategy aimed at strengthening and diversifying the financial sector in its entirety. Being one of the pillars of this sector, the fund industry both enriched and benefited from the other pillars, such as wealth management, insurance, structuration and international loan activities. The success of the fund industry is therefore
clearly embedded within a much larger vision and hence sustainable in its design. Two thousand and thirteen also marks two beginnings. Firstly, following the deepest financial crisis in a century and despite the erratic performance of financial markets, we have seen assets under management in regulated investment funds recover their ground to reach new all-time highs surpassing 2.5 trillion euros. This recovery has been assisted by a steady inflow of money from all over the world, reflecting the confidence that investors place in Luxembourg. The second is the new EU passport for alternative investment funds with the implementation of the Alternative Investment Fund Managers Directive, clearly representing another great opportunity for the fund sector. And we are not alone in considering it so. Luxembourg professionals will need to draw on all their savoir-faire and we, the authorities, must work hard in our roles, to make the most of this opportunity. In particular, we will work closely with the other regulatory bodies that today accept the distribution of Luxembourg retail funds.
To these I could add a third point. The European Commission has responded to widespread financial hardship by introducing two new vehicles designed to promote innovation and employment: the EU Venture Capital Fund and the EU Social Enterprise Fund. As alternative investment funds, both will be eligible for a passport for distribution to qualified investors. All these themes, and many others, will be tackled at the ALFI Global Distribution conference that opens on 12 September in Luxembourg. Held each September, in partnership with one or more sister associations, the conference has made an important contribution to the cross-border fund industry over many years by drawing the stakeholders together physically and intellectually. It is thus the perfect opportunity to further convey a positive image about Luxembourg, to learn from peers and more importantly to set new goals for the years to come. Excellence, resilience and expertise will be the key ingredients in the years to come in order to continue on the path of success within an economically difficult context. SEPTEMBER-OCTOBER 2013 —
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Contents ALFI Global Distribution Conference 2013
Editorial 3
Conference agenda
A BIG YEAR
Cross-border story UCITS and ALFI mark their 25th anniversary with the industry seeing a record year in assets under management and a new EU fund passport coming into play.
Leaders 6 MARC SALUZZI
ALFI looking ahead As Luxembourg’s fund industry association celebrates its silver jubilee, the newly re-elected ALFI chairman sets out five main objectives.
8 THERESA HAMACHER
What’s ahead for the US fund industry The American fund industry has moved past the crisis and is looking towards the future.
10 LIEVEN DEBRUYNE
Capitalising on China’s opportunities The future of Hong Kong’s investment fund industry lies in Hong Kong’s role as the premiere offshore renminbi centre.
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Straightforward innovation By Edith Magyarics
The whole programme at a glance.
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Contributors 20 CLIENT FOCUS
Distribution is dead By José-Benjamin Longrée
22 GLOBAL DISTRIBUTION
Strategies for the future By Martin Dobbins
24 TECHNOLOGY
Automatically fair By Melvin Jayawardana
28 BROAD VIEW
Regaining the trust of investors By Michael Ferguson
30 CULTURE SHIFT
Instigating innovation By Claude Kremer
32
Exhibitors plan
34 COMMUNICATIONS
ALPINE PERSPECTIVE
Navigating the Swiss regulatory landscape
US REGULATIONS
Paradigm shift By Gérard Laures
38 SOCIAL MEDIA
Positive cooperation By Troy Bankhead
40 MEET THE REGULATORS
Aren’t we fortunate? By Freddy Brausch
42 AIFMD
Getting organised By Thibaut Partsch
44 VIEW FROM BRAZIL
Increasing alternatives By José Carlos Doherty
Picture report 46 2012
Flashback The previous Global Distribution Conference took place on 18 and 19 September 2012 in the Centre de Conférences in Luxembourg-Kirchberg.
By Lou Kiesch
12 Who? Where? Here’s a practical guide.
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
25th anniversary
ALFI looking ahead As Luxembourg’s fund industry association celebrates its silver jubilee, the newly re-elected ALFI chairman sets out five main objectives. Text Marc Saluzzi Illustration Jocelyn Gravot
— SEPTEMBER-OCTOBER 2013
SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
T
wo thousand and thirteen is an important year for ALFI, as the association celebrates its 25th anniversary against the backdrop of record highs of assets under management by Luxembourg funds. Our industry had already recorded remarkably strong net inflows of 123 billion euros in 2012, therewith allowing Luxembourg to experience the strongest net sales in Europe. Altogether, Luxembourg funds finished the year 2012 up 13.7%, or 287.31 billion euros, by then already reaching a historic high of 2,383.83 billion euros of total assets under management. The trend was actually positive not only for Luxembourg, but for Europe as a whole. At 6.3 trillion euros, European mutual fund assets are back to precrisis levels, marking a full recovery and, hopefully, the return of investor confidence. In the first months of 2013, this encouraging tendency continued in Luxembourg, with an additional 7.61% increase of assets under management until the end of May 2013, reaching 2,584 billion euros in total. Two thousand and thirteen is also an important year for me personally. Indeed, in June of this year, the ALFI board of directors renewed my chairmanship of the association, thereby entrusting me with the very honourable mission to steer the Luxembourg investment fund industry through another two years. This second mandate will be marked by two dimensions: while on the one hand growth is back, and the near future of the industry looks promising, on the other hand challenges still lie in wait and we need to remain dedicated to managing them efficiently. In this context, the five priorities that ALFI has committed to still remain highly relevant. First, to explain the concept of regulated funds, especially UCITS, and defend it against the side effects of the regulatory agenda. As ALFI, it is our daily ambition to support better regulations; to educate, inform and support investors. We have noticed however, that UCITS, the flagship of the European fund industry, have come under pressure with regards to regulation that does not sufficiently take into account that they are already well and intensely regulated. Accordingly, we intend to ensure that regulation, while always in the maximum interest of the investor, remains businessenabling as well as fair in comparison to regulation affecting insurance or other savings products. This focus on better regulations should help us to bring back retail investors to our funds. Indeed, the times seem ripe for further growing the retail
market for investment funds. Investment funds should increasingly be considered by individuals as a home for their savings or a tool for their financial planning. According to a recent study commissioned by ALFI, over 40 percent of household financial assets in Europe are parked in deposit accounts, although some of this could benefit from the diversification and the potential for higher returns that can be offered by investment funds. In this context, the role of the investment fund industry in replying to the needs of successive generations of savers is indisputable. Second, to help alternative fund managers and institutional investors to leverage the concept of a regulated alternative investment fund introduced by the Alternative Investment Fund Management Directive. Alongside UCITS, 2013 is obviously also the year of alternative funds with the entry into force of the alternative investment fund managers directive. During this and the following years, ALFI will attach major importance to fostering a beneficial environment
“It is our daily ambition to support better regulations” Marc Saluzzi
Chairman, ALFI
for alternative investment funds in the framework of this new directive. Like for UCITS, one key measure of the AIFMD involves the introduction of a European passport for alternative investment fund managers who wish to access the entire European market. Given Luxembourg’s position as the European leader in the cross-border space, it is thus to be expected that the implementation of the AIFMD will further enhance Luxembourg as a leading domicile for fund and management companies in the alternative sector. Third, to innovate, with a special focus on responsible investing. Moreover, responsible investing is becoming increasingly important
and is likely to continue to grow. This is why ALFI has designated responsible investing as the “third pillar” of our activity. If we are to grow responsible investing from a niche market to a mainstream investment philosophy, it is important to clarify definitions, provide credible standards and help measuring its investment impacts. These issues are at the heart of our current affairs. Fourth, to facilitate cross-border distribution in existing and new distribution markets. For all of our priorities, it remains a priority to deepen and to further facilitate the cross-border distribution model in existing and new distribution markets. Since the passport for European funds, so far reserved for UCITS, has just been extended to alternative funds, a major opportunity for Europe resides in establishing a worldwide quality brand in the alternative sphere, just as it did for UCITS! At the same time, we also notice a growing interest from Asian and Latin American asset managers for our industry. The ALFI Global Distribution Conference this year will notably focus in more detail on the opportunities to extend the partnerships with increasingly sophisticated fund centres in these regions of the world. Finally, to remain the global fund management industry partner of choice. For 25 years now, ALFI has worked hand in hand with the industry to ensure that Luxembourg remains the global fund management industry’s partner of choice. Luxembourg has over the years moved from a fund domicile to a fund servicing centre offering excellence at every level of the fund value chain for funds domiciled in Luxembourg or abroad. The knowhow and expertise available in Luxembourg remains unequalled. It is our strong endeavour to further strengthen this enabling infrastructure for the continuous development of the financial centre. This year’s ALFI Global Distribution Conference will provide an excellent opportunity to look into all the current challenges and opportunities for the future direction of the industry. Organised in association with NICSA, the National Investment Company Service Association, and with HKIFA, the Hong Kong Investment Funds Association, and gathering around 800 asset managers, regulators and thought provokers from Luxembourg and all over the world, the conference has become a truly indispensable annual event for the investment fund industry. I am looking forward to the event and to the pragmatic solutions that are likely to be forwarded in the numerous topical panels on the agenda.
SEPTEMBER-OCTOBER 2013 —
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
“Regulation no longer dominates discussions” Theresa Hamacher
President, NICSA
funds. Investors have become disenchanted with the traditional asset classes and are instead demanding alternative approaches that offer the prospect of greater diversification and lower correlations. Investment managers are increasingly making these techniques available to individual investors of modest means through regulated “alternative mutual funds”. In other words, hedge funds are going mainstream.
Finding solutions View from Washington
What’s ahead for the US fund industry The American fund industry has moved past the crisis and looking towards the future. Text Theresa Hamacher Illustration Jocelyn Gravot
T
he US fund industry seems to have finally put the credit crisis behind it. For the first time in years, regulation no longer dominates discussions. Yes, there’s a drone of complaints about the costs of implementing all the new rules. But the broad outlines of Dodd-Frank, Foreign Account Tax Compliance Act and Alternative Investment Fund Managers Directive are in place – greatly reducing the regulatory uncertainty that prevailed in the years immediately after the crisis. The industry has turned its attention back to new products, marketing and sales – especially since the steady, if slow, economic recovery is making sustained growth realistic again. Here’s a quick guide to the six topics that we believe will take centre stage over the coming year.
Closure on money market funds Even one of the most protracted regulatory debates – over systemic risk in money market funds – may finally reach closure. The US Securities and Exchange Commission has floated two proposals for the “prime” money funds which — SEPTEMBER-OCTOBER 2013
invest in a wide range of securities. The first proposal would require that funds for large investors have a floating share price, rather than a constant one dollar value. The second would impose redemption restrictions in times of stress. While there’s considerable disagreement about which alternative is better, there is consensus that one – or both – will be adopted.
Rising interest rates Wrapping up the debate on money funds has taken on a new urgency, now that the long downtrend in interest rates appears to be over. Bond fund investors are ready to jump ship at the slightest hint of rising rates: witness the 60 billion US dollars that flowed out of these funds in June once tighter monetary policy seemed imminent. Money market funds are likely to serve as an important safe haven for these skittish dollars.
Looking for alternatives What’s less clear is whether the long-awaited “great rotation” out of bonds will benefit equity
The wider acceptance of alternative funds is part of a broader trend of focusing on outcomes rather than inputs, acknowledging that most investors are more interested in meeting their life goals than picking funds. To help them, investment managers are developing and refining options to make decision-making easier. Much of the effort to date has focused on target date funds, managed payout options and annuity choices that address the challenges of retirement planning, with its exceptionally long time horizon.
Achieving retirement security for all But no investment solution will avail if the retirement savings aren’t there to begin with – which is sadly the case for many Americans. Fortunately, the imbalances of the US private retirement system are being addressed at a national level. The discussion has three components: first, to make voluntary savings programmes available to all workers through payroll deduction individual retirement accounts, known as the “automatic Individual Retirement Account” approach. Second, to steer workers toward higher levels of savings in the plans they do have. And, finally, to pay for expanded coverage by limiting retirement savings tax deductions for the very wealthy.
Focus on fees Retirement plan fees – both at the plan level and the component fund level – have received much scrutiny as a result of this review. In general, fees on all investment funds are trending down as investors and their advisers continue to place a greater emphasis on cost.
Solutions to reach for the stars
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
“The Hong Kong fund industry is at a very important juncture” Lieven Debruyne
Chairman, HKIFA
View from Hong Kong
Capitalising on China’s opportunities The future of Hong Kong’s investment fund industry lies in Hong Kong’s role as the premiere offshore renminbi centre. Text Lieven Debruyne Illustration Jocelyn Gravot
T
he Hong Kong fund industry has built its reputation on having an open and accessible policy towards investment funds. Undertakings for Collective Investment in Transferable Securities has been a key part of this and continue to represent more than half the funds sold today. The success of UCITS was helped by the Hong Kong regulator accepting UCITS early on and Luxembourg’s leading position in the UCITS space has made it the jurisdiction of choice for the fund industry in Hong Kong. The growth of UCITS has remained impressive as overall fund sales continue to experience strong growth. The latest sales data compiled by the Hong Kong Investment Funds Association show the Hong Kong fund industry had a record year in 2012. The first five months of 2013 have continued this trend. The fund industry registered gross and net sales of $35.3 billion and $10.6 billion respectively which, compared with the corresponding period in 2012, means an increase of 76% in gross sales and 110% in net sales. — SEPTEMBER-OCTOBER 2013
However growing popularity of renminbi as a more internationally accepted and widely used currency has over the last few years kicked off a surge in launches of locally domiciled renminbi funds. According to the Hong Kong Monetary Authority, renminbi deposits in Hong Kong exceeded $100 billion at the end of 2012. This amount represents an increase of 86% from the deposit size as of the end of 2009. This sizeable liquidity pool has put Hong Kong, as the preeminent offshore renminbi centre, in a perfect position to develop domestic renminbi products. The impact on offshore funds has already been felt, with Luxembourg funds now representing 64% of industry assets, down from 74% in 2007.
“RQFII” schemes Stepping into 2013, the Hong Kong fund industry has witnessed additional developments that will have substantial further implications. In particular, the expansion of Renminbi Qualified Foreign Insti-
tutional Investor pilot schemes, as well as the proposed initiative of mutual recognition of fund products between Hong Kong and mainland China. The RQFII scheme has been of great significance to the Hong Kong fund industry. Since the launch of the RQFII scheme in December 2011 with an initial quota of $3.25 billion, the quota size has been expanded by $8 billion in April 2012 and an additional $32.5 billion in November 2012. The latest RQFII scheme covers more types of Hong Kong financial institutions that qualify and relaxes the investment restrictions. This will provide new opportunities to the industry as more fund managers that are registered with the Hong Kong Securities and Futures Commission will be able to enter the RQFII space with a wider array of products. Leveraging on the RQFII scheme, the SFC and the mainland Chinese authorities have formed a working group which focuses on the implementation of the mutual recognition and cross-border offering of funds between Hong Kong and the mainland. This initiative will undoubtedly bring a wider investment platform for both jurisdictions of increased product offerings and a larger investor base benefitting the fund management industry in Hong Kong as well as the mainland. Already complementary initiatives are being undertaken. In its 2013 budget speech, the Hong Kong Special Administrative Region government indicated that it will explore to introduce the open-ended investment company structure to encourage more funds to be domiciled and set up in Hong Kong. Clearly the Hong Kong fund industry is at a very important juncture given these many changes and initiatives. The HKIFA will continue to play its role to provide thought leadership and help the industry capitalise on these opportunities that lie ahead. In doing so we hope to contribute in ensuring Hong Kong will maintain its position as an international asset management centre.
t c e nn
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CENTRALIZED CONNEXION FOR FUND TRANSACTION AND INFORMATION
www.fundsquare.net
SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Exhibitors plan Here is a quick overview of the expositions at the New Conference Centre Kirchberg.
P
New Entrance Exit
1st Floor: Sponsors Lunch
ALFI Info & Speakers Desk Fast Track Registration
Lounge & Meeting Point
WC
WC
Permanent Bar
3
Hot Buffet
2
1
Onsite Registration
Speaker lounge
34 33 32
6
35
46 44 Permanent & Tea Bar
Lunch Breaks Buffet
8
40
Bag Booth
1st Floor: Press Area
24
Lounge & Meeting Point
25
12
26
11
10
41
9
42
Wardrobe
Lunch Breaks Buffet
5
31 30 29 28 27
4
7
23
13
bnp paribas Securities Services
caceis
cerulli associates
cFa Institute
confluence
credit Suisse Fund Services S.a.
Deloitte Luxembourg
Diamos
Ey
Eurizon capital S.a.
Euroclear
Funds Europe
Fundsquare S.a.
hSbc Securities Services S.a.
IDS Gmbh - analysis and reporting Services
IFbL
Ignites
KnEIp
KpmG Luxembourg S.a.
mDo Services S.a.
mEtRoSoFt
milestone Group
much-net Financial Software & Services S.à r.l
northern trust
phoenix Systems Inc.
portfolio Verlag
profidata Group
pwc
Rbc Investor Services
RR Donnelley
Seqvoia
Swiss & Global asset management Ltd.
the bank of new york mellon
UbS
massage zone
4
42
25
9
1
27
16
7
17
22
23
5
26
13
35
34
29
6
10
18
21
24
12
15
40
11
31
3
41
46
30
28
19
32
20
axiomSL
19
8
18
44
17
21
Lunch Breaks Buffet
Permanent Bar
16
22
15
How to find us?
altus Ltd.
arendt & medernach
atlantic Fund Services
2
20
By bus: With most bus lines to Kirchberg – stop at “Philharmonie/Mudam” – transit via Centre Aldringen, central train station and boulevard Royal. Further information can be obtained from the “Mobilitéitszentral” hotline (+352) 24 65 24 65 or www.mobiliteit.lu. By car: Direct and covered access from the “place de l’Europe” car park; entry on avenue John F. Kennedy. From the “Trois Glands” car park; via avenue John F. Kennedy and the place de l’Europe tunnel; or via rue du Fort Thüngen.
33
booth n° company
EXhIbItoRS
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— SEPTEMBER-OCTOBER 2013
SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
COMPANY Altus
Booth number 33
COMPANY
Booth number
COMPANY
Booth number 15
Euroclear
22
Phoenix Systems
Funds Europe
23
Portfolio Verlag
40
5
Profidata Group
11 31
Arendt & Medernach
2
Atlantic Fund Service
20
Fundsquare
AxiomSL
44
HSBC Securities Services
26
PwC
IDS – Analysis and Reporting Services
13
RBC Investor Services
IFBL
35
Ignites
34
KNEIP
29
BNP Paribas Securities Services
8
Caceis
4
Cerulli Associates
42
CFA Institute
25
Confluence
9
Credit Suisse Fund Services
1
KPMG Luxembourg
6
46
Swiss & Global Asset Management
30
The Bank of New York Mellon
28 19
Massage Zone
32
18
Diamos
16
Milestone Group
21
Much-net Financial Software & Services
24
Northern Trust
12
17
Seqvoia
UBS
METROSOFT
Eurizon Capital
41
10
27
7
RR Donnelley
MDO Services
Deloitte Luxembourg
EY Luxembourg
3
ext at the n portunity h t o o b op ion exhibit you a unique d area, n a e v a r or h offe nt fun ponsor he forum will the investme nals in a single s a e b u T io in ibility ould yo r 2014? profess player Why sh -24 Septembe ny as a major und industry ease brand vis 3 a cr ff event, 2 n your comp ive number o t not least, in u s io b s it t e s r s o p la p , to nd n im eriod a t with a to mee r a two-day p akers. m ve place o key-decision t s g n o am ion on format More in lu lfi. www.a
SEPTEMBER-OCTOBER 2013 —
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Agenda Programme day 1 – Tuesday 12 September 2013 Day 1 Registration 08.00 – 08.45
Welcome 08.45 – 09.00 Theresa Hamacher, CFA, President, NICSA, Boston Lieven Debruyne, Chairman, Hong Kong Investment Funds Association (HKIFA), Hong Kong Marc Saluzzi, Chairman, Association of the Luxembourg Fund Industry (ALFI), Luxembourg
Chairperson’s introduction 09.00 – 09.10 Thomas Seale, CEO, European Fund Administration, Luxembourg
Letter from America 09.10 – 09.40 Jerry Webman, Chief Economist, OppenheimerFunds, New York
Present and future challenges facing our industry 09.40 – 10.10 Massimo Tosato, Chief Executive, Schroder Investment Management, London Interviewed by: Rafik Fischer, General Manager, Group Head of Global Investor Services, KBL European Private Bankers, Luxembourg
Refreshment break and visit of the exhibition area 10.10 – 10.40
Keynote speech 10.40 – 11.25 Carla Harris, Managing Director, Emerging Managers Program, Morgan Stanley Investment Management, New York
Regaining the trust of investors – implications for the asset management industry 11.25 – 12.15 Moderator: Michael Ferguson, Partner, Asset Management Leader, EY Luxembourg Panelists: Diana Mackay Williams, CEO, Mackay Williams, London
15.15 – 15.45
Pension funds: is there appetite for innovation ? 15.45 – 16.35 Moderator: Claude Kremer, Partner, Arendt & Medernach, Luxembourg Panelists: Allan Polack, Chairman, CEO Asset Management, Head of Investment Management, AB Nordea, Copenhagen
Denise Voss, Conducting Officer, Franklin Templeton Investments, Luxembourg Lieven Debruyne, Chairman, HKIFA, Hong Kong
Andrés Trivelli González, Managing Partner, Larrain Vial, Santiago de Chile
Alex Hoctor-Duncan, Managing Director, BlackRock, London
Freddy Van den Spiegel, Professor Université de Bruxelles (VUB) and Vlerick Business School, Brussels
Guillaume Prache, Managing Director, The European Federation of Financial Service Users, Brussels
Chairperson’s wrap up 12.15 – 12.20
Social media: a splendid opportunity for fund promoters 16.35 – 17.20 Moderator: Troy Bankhead, Head of Marketing & Communication, Kneip, Luxembourg
Lunch hosted by 12.20 – 14.20 Crédit Suisse, EY Luxembourg
Panelists: Theresa Hamacher, CFA, President, NICSA, Boston
Chairperson’s introduction 14.20 – 14.25 Geoffrey Cook, Partner, Brown Brothers Harriman, Luxembourg
Mary Hunter Hieronimus, EMEA Regional Business Manager, Thomson Reuters, Luxembourg
Meet the regulators
Baldwin Berges, Managing Partner, Silk Invest, London
14.25 – 15.15 Moderator: Freddy Brausch, Partner, Linklaters, Luxembourg
Tom Laranjo, Managing Director, Total Media International, London
Panelists: Jean Guill, Director General, CSSF, Luxembourg Daniel Walter Maeda Bernardo, Assistant Director, Registration and Authorisation Division, Collective Investment Schemes Department, Comissão de Valores Mobiliarios - CVM, Rio de Janeiro Edouard Vieillefond, Deputy Secretary General, Regulation and International Affairs Directorate, Autorité des Marchés Financiers, Paris
— SEPTEMBER-OCTOBER 2013
Refreshment break and visit of the exhibition area
Chairperson’s wrap up 17.20 – 17.25
Cocktail 17.25
Sponsored by PwC
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Agenda Programme day 2 – Wednesday 13 September 2013
Day 2 Addressing the challenges of today’s global distribution model
Registration & breakfast 08.15 – 09.00
11.15 – 11.55
Chairperson’s introduction 09.00 – 09.05 Sébastien Danloy, Head of Investor Services, Europe & Offshore, Managing Director, RBC Investor Services, Luxembourg
Coming of Age: Asia’s role in Global Asset Management 09.05 – 09.35 Shiv Taneja, Managing Director, Cerulli Associates, London
Investing in China – how to navigate through regulations 09.35 – 10.10 Peng Wah Choy, CEO, Harvest Global Investments, Hong Kong
Moderator: Marty Dobbins, Senior Vice President, Managing Director, State Street Bank Luxembourg, Luxembourg Panelists: Lina Medeiros, President, MFS International, London Grant Cameron, Managing Director – Investment Funds, Investec Asset Management, London Johannes Höring, General Manager, Universal-InvestmentLuxembourg, Luxembourg
Chairperson’s wrap up 11.55 – 12.00
Lunch hosted by 12.00 - 14.00 BNP Paribas, Deloitte
Refreshment break and visit of the exhibition area 10.10 – 10.40
The Brazilian Investment Fund Industry – recent trends and challenges 10.40 – 11.15 José Carlos Doherty, Chief Executive Officer, Brazilian Financial and Capital Markets Association (ANBIMA), São Paulo
"Sécurisez vos systèmes avec l'intégration sur IP" Security & Building Technologies
— SEPTEMBER-OCTOBER 2013
www.cel.lu
Kurt Salmon, signe de différence Trouver la différenciation compétitive pour atteindre le leadership Kurt Salmon accompagne les dirigeants dans l’exploration de nouvelles voies pour les entreprises. Les équipes de conseil en stratégie du cabinet interviennent à leurs côtés pour mieux comprendre les attentes du marché, pour les aider à discerner les facteurs d’évolution de leur secteur d’activité et à trouver la différenciation compétitive qui leur permettra d’exprimer leur leadership. Kurt Salmon est un cabinet de conseil en transformation des entreprises La vocation des 1 400 consultants de Kurt Salmon est d’apporter aux dirigeants des entreprises le conseil et les idées originales qui ont un impact direct et concret sur la réussite de leurs projets et, en particulier, sur leurs projets de transformation. Kurt Salmon, signe d’excellence depuis 1935 - www.kurtsalmon.com
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Agenda Programme day 2 – Wednesday 13 September 2013
Day 2 Chairperson’s introduction 14.00 – 14.05 José-Benjamin Longrée, Asset Management Business Development Leader PwC, Luxembourg
Navigating the Swiss regulatory landscape for effective distribution 14.05 – 14.55 Moderator: Lou Kiesch, Partner, Deloitte, Luxembourg Panelists: Anton Commissaris, Head of Wholesale Distribution Switzerland & EMEA, Credit Suisse Core Investments, Zurich Martin Jufer, Member of the Group Management Board, Head of Operations, Swiss & Global Asset Management, Zurich Alexandre Meyer, General Counsel of Lombard Odier Investment Managers, Geneva and Board Member of the Swiss Funds Association (SFA) Martin Thommen, President, Swiss Funds Association, Basel
Refreshment break and visit of the exhibition area
Luxembourg’s IGA on FATCA – the practitioners’ view 15.35– 16.15 Moderator: Gérard Laures, Partner Banking and Finance, KPMG, Luxembourg Panelists: Gudrun Göbel, COO Cross Border FPS, Société Générale Securities Services, Luxembourg Frederic Batardy, Senior Tax Manager, KBL European Private Bankers, Luxembourg Jon Griffin, Managing Director, JP Morgan Asset Management, Luxembourg
Distribution of UCITS & non-UCITS funds going forward 16.15 – 16.45 Jacques Elvinger, Partner, Elvinger Hoss & Prussen, Luxembourg José-Benjamin Longrée, Asset Management Business Development Leader, PwC, Luxembourg
Chairperson’s closing remarks 16.45 – 16.50
14.55 – 15.25
Luxembourg’s IGA on FATCA – the negotiator’s view 15.25 – 15.35 Alphonse Berns, Negotiator of the Luxembourg Inter-Governmental Agreement with the USA, Luxembourg
Global Solutions : Electrical Energy - Communications - Security
— SEPTEMBER-OCTOBER 2013
www.cel.lu
Are you ready for AIFMD? With ALFI, the IFBL has built a comprehensive range of modules to accompany the implementation of the Alternative Investment Fund Managers Directive (AIFMD).The module “Understanding AIFMD” provides a fundamental understanding of the directive before other modules go deeper into functional specifics. The IFBL’s AIFMD courses stand out by their form and positioning, providing those who need to “do” with the next level of detail that cannot be provided in either conferences or briefings. In these and other courses the IFBL is able to provide varied perspectives (legal, operational, advisory, … ) and stimulate learning through practical, interactive discussions. Understanding AIFMD: 27th September 2013 (8 hours) This training provides an understanding of the AIFMD, its political environment, objectives and impact; the regulatory process; scope; passports, marketing and management; authorization; conduct of business; functions and service providers; transparency; specific provisions and implementation aspects of the AIFMD. AIFMD for Fund Administrators: 14th October 2013 (4 hours) Within the context of a Fund Administrator, this module offers three perspectives on the key issues and concerns (legal, operational and advisory). Interactive discussions are promoted and focus upon how the directive is being applied in practice. AIFMD for Alternative Investment Fund Managers: 18th October 2013 (4 hours) This module offers Legal, Advisory and Risk perspectives on the materials as relevant to AIFMs themselves. Concise presentations are followed by interactive discussions providing practical answers to implementation questions. AIFMD for Depositaries: To be confirmed. For further information, please contact the IFBL T. : +352 46 50 16-1 customer@ifbl.lu | www.ifbl.lu
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
Client focus
Distribution is dead Asset management firms need to think of distribution as a two-way street. Text José-Benjamin Longrée Illustration Jocelyn Gravot
T
he asset management industry has achieved lasting success for many years by developing and pushing products to distributors. The assets under management by the European asset management industry have doubled since the beginning of the century. The recipe for success with this model is deceptively simple: if you develop products that are consistent with current trends (such as emerging markets and gold) and incentivise the distributor with an attractive share of the fees, you will see your AUM grow. In this industry, distributors have never questioned the investment authority of asset managers, who enjoy a god-like status. At the start of the 20th century, their roles were as clearly defined as a Victorian marriage – asset managers produced products, distributors sold them, and nobody questioned or challenged the status quo. Whatever image this relationship portrayed, however, the success of the asset management industry was based entirely on outperformance. The asset management industry saw a dip during the recent financial crisis – an analysis done by IESE Business School in 2009 found that only 18 of the 1,025 funds in Spain with more than 10 years of history outperformed their benchmarks, and other examples may be found elsewhere. That said, it seems the industry has weathered the storm well. Assets under management have reached and surpassed the all-time highs achieved shortly before the crisis. Does this mean we are back to business as usual? Do we merely have to adapt our organisations to the new regulatory inflation and move on? Let’s have a closer look.
Poor performance The rise in AUM within the industry can be largely attributed to the impact of the market rise rather than fresh money. Distributors who are incentivised through fee sharing have often been blamed for placing more emphasis on pushing high margin products rather than those which best suit their client’s needs and, hence, having a negative impact on investor’s trust over the long term. Therefore, it should not come as a surprise that poor performance coupled with lack of trust and market risk are seen as key drivers in the drop in household financial assets (demonstrated by the results of a European Fund and Asset Management Association member survey, see chart on right). This decline can also be seen in invest— SEPTEMBER-OCTOBER 2013
ment fund ownership by households in Europe. This loss of trust means that investors will be more cautious and more likely to challenge the investment recommendations of distributors of mutual funds in the future. And the ease with which investors can exchange information with one another through social media platforms will only exacerbate the trend. In addition, regulatory bodies seeking to restore confidence in the financial sector have introduced a number of regulations aimed at enhancing investor protection, including a ban on commissions through the Retail Distribution Review in the UK. Other countries such as Sweden and the Netherlands, who are heralding the shift in the long prevailing distribution model within the industry, aren’t far behind. The distribution of mutual funds as we know it is in danger of extinction, and with it the “twilight of the Gods.” However, those asset managers who are able to adapt themselves to an ever changing environment will be the winners of the future. As Charles Darwin once said, “In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment.” What does this mean for the industry and the future of distribution?
Two-way street Distribution is no longer a one-way road. Asset managers need to develop partnerships with their distributors, providing them with in-depth understanding of their products and the services they require to best advise their clients. In the absence of commissions, those asset managers will be able to win market share and succeed in distribution that excels in providing the best suited products for client needs and transparent, comparable and easy to understand information for investors. Client focus is no longer lip service, but is essential for success. Asset managers need to develop a customer-centric organisation with on-going evaluation of customer needs and sales force feedback, and adapt their products and organisation respectively. Strong investment performance and client service teams will be the key ingredients for a sustainable business model. The successful asset management firm will not only rely on its distributor to push its products toward investors, but will engage in a proactive dia-
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“We all have to take more responsibility” José-Benjamin Longrée
Global fund distribution partner, PwC
Factors responsible for drop in household financial assets 65%
65%
65%
40%
SEPTEMBER-OCTOBER 2013 —
Source: EFAMA
s Fe e
La ad ck vi of ce a at ppr th op e ri of poi ate sa nt le
rm P an oo ce r pe
rfo
ar M
ck
of
ke t
tru
ris
k
st
9%
La
logue with end investors to understand their needs and provide them with relevant information so that the client will ask his or her adviser for the asset manager’s product. We have to move from a push to a pull model of distribution. This is especially true for asset managers that are not part of large financial groups with access to a captive clientele. All of this means essentially one thing: distribution as we knew it is dead… to a certain extent. “Mechanical” or “quantitative” distribution is certainly going to disappear. At a time when everyone in the financial sector is seeking to understand the origins of products and getting closer to the real economy, one has to be competent to be convincing. With regulators shifting their attention away from products and toward actors (for example, UCITS management companies and alternative investment fund managers), we all have to take more responsibility. And if we are intelligent and share that intelligence with our clients, we can be confident that the asset management and fund industries’ best days are still ahead.
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Global distribution
Strategies for the future Even with the growth in cross-border rules, fund firms still need to focus on each national market individually. Text Martin Dobbins Illustration Jocelyn Gravot
E
ntering new markets amid muted growth prospects in Europe is critical for asset managers, but doing so successfully brings significant challenges. As asset managers seek new markets and investors, they must ensure their products and servicing structures support their ambitions. One of the biggest challenges for asset managers is to develop a deep understanding of market mechanics in each national market they target. They also need to develop a working knowledge of the local regulatory environments, the products that are likely to be viable in each market, and particular local distribution models. Given the varied challenges to tackle, many asset managers will look towards their service partners for insight and guidance in these areas.
Mastering market mechanics
Whether the focus is Asia, Europe or the Americas, no single strategy can accommodate the formidable diversity that distinguishes today’s asset management markets. There are fundamental differences in regulation and legal frameworks, language and cultural values. In addition, markets not only present strikingly varied investor profiles, but also different distribution models. In Germany and the Netherlands for example, banks are the predominant distribution channel for investment products, while independent financial advisers have tended to be a primary channel in the UK. Meanwhile, in France and Italy there is growing use of new fund platforms. So, each market calls for a customised strategy.
“No single strategy can accommodate the formidable diversity”
Riding the regulatory wave
The second factor that increases operational complexity is regulation. Asset managers face a rising wave of regulatory and tax regime reforms adopted in the wake of the financial crisis. Notably, the Alternative Investment Fund Managers Directive, together with the Undertakings for Collective Investment in Transferable Securities IV and V directives, introduces new reporting and disclosure requirements across the European Union. In the United States, meanwhile, the Foreign Account Tax Compliance Act, which imposes stringent reporting rules governing US investors holding overseas assets, may have far-reaching consequences for asset managers both within and outside the US. These new regulatory developments, and the need to comply with them, present important considerations for all global distribution initiatives. — SEPTEMBER-OCTOBER 2013
Martin Dobbins
Managing director and head of State Street in Luxembourg
be actively discouraged due to their complexity. Nevertheless, innovative fund managers will want to be first to market with a particular product. With access to the information and advice to refine their approach appropriately, they will increase their chances of success. At State Street, we recently worked with a client that was looking to expand its distribution in Asia and we leveraged our local knowledge to advise them on several challenges, including the opportunities emerging in China. We also recently advised on the evolving trend of Asian asset managers looking to distribute their funds into new markets, including Europe. Challenging the model
Country-by-country strategies
Third, to expand into new markets, asset managers must ensure alignment of their product and servicing strategies on a country-bycountry basis to achieve the best possible efficiencies. This requires a keen understanding of how best to tailor strategies according to the market. For example, a particular market may favour some asset classes or complex products over others. Indeed, some product types might
Under pressure to succeed in new markets, asset managers need to form the right partnerships to ensure their distribution model is correct. Indeed, over and above the provision of core activities such as fund accounting, custody and transfer agency, the right service provider can offer the specialist insight and local knowledge required. Packaged into a single solution, it can enable an asset manager to launch successfully in new markets.
We are your leading independent Fund Administration specialist. European Fund Administration S.A. (EFA) is an independent and highly specialised company offering a complete range of innovative middle and back office outsourcing solutions, delivered with a personal touch to the most exacting clients in the global fund industry. EFA offers focused fund administration services combined with first-class custodians and prime brokers. This unique business model means that EFA never competes with its clients in any of their core businesses. EFA’s model also ensures higher standards of corporate governance and investor protection, in line with the industry best practices concerning separation of portfolio management, valuation & administration and custody functions.
European Fund Administration
www.efa.eu
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“T he fewer hands involved in delivering investment data the faster it will move and the more investors will trust its integrity” Melvin Jayawardana
European market manager, Confluence
Technology
Automatically fair Expense processing software for regulated funds comes of age. Text Melvin Jayawardana Illustration Jocelyn Gravot
A
sset management companies around the world are being held accountable to higher levels of transparency. In this highly regulated environment, the best practice for funds expense processing is to automate invoice processing, budgeting, payments and oversight reporting. Automated expense tracking can take the risk out of manual processing by providing speed, accuracy and cost-efficiencies. The value delivered by automating funds expense process is, first, to standardise, functionalise and centralise expense processing activity; second, to eliminate 95 percent of the end-user checks used in expense processing, and third a 50 percent reduction in effort to produce the same result, a metric of 100 funds per full-time employee. Fair allocation calculation
Today, many fund managers and administrators use spreadsheets and manual processes to track expenses for umbrella funds of upward of
— SEPTEMBER-OCTOBER 2013
70 sub-funds with 25 or more share classes. The challenge: numerous complex payment-related budget decisions must be managed, tracked and reported accurately on a day-to-day basis. For global asset managers dealing with countryspecific regulations, the challenge is particularly daunting. Should a non-German distributing share class, for example, pay German tax related audit fees? To allocate fund expenses accurately, asset managers must adhere to the best practice of fair allocation calculation. We believe the use of automated self-administered software helps firms manage the complexity of fair allocation calculations. Risk factors
In addition to being slow and error-prone, manual processes and spreadsheets potentially expose asset managers and fund administrators to several risk factors, including: NAV calculation errors resulting from various levels of reporting and recording; unavailable granular fee schedule
data; breakdowns in authorisation and validation processes; and longer time spent proving accuracy to the funds auditor. Instead of labouring over spreadsheets, we have seen many in the fund industry turning to self-administered expense processing software. These automated solutions maximise efficiency, reduce errors and provide control over expense processing operations. The software allows transparent budgeting across funds whilst building a calendar of payments. Additionally, the reporting suite provides administrators, fund promoters and the management company accurate and timely reporting along with a precise calculation of the on-going charges figure. Available technology
In the age of tablets and smartphones, many fund administrators are still processing data manually. But in our view, the fewer hands involved in delivering investment data the faster it will move and the more investors will trust its integrity. Fund data is digital and can be represented and managed accurately and instantaneously through automation. In addition to risk mitigation, automated expense processing systems provide speed, accuracy, cost efficiencies and increase agility, flexibility and scalability. When large fund administrators automate workflow and data, they may be able to process twice as many funds with the same employee cost. In short, today’s technology can help organisations improve data transparency for investors, adherence to industry best practices of fair allocation calculations, as well as internal efficiency.
A new way to serve clients.
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Broad view
Regaining the trust of investors What can be done to restore investors’ confidence in the asset management industry? Text Michael Ferguson Illustration Jocelyn Gravot
R
egaining the trust of investors” has been a constant topic of discussion and debate since the financial crisis began back in 2008. The call to “restore investor confidence” has often come from global asset managers; such calls are generally focused on restoring confidence in the broad financial markets. The banking sector has been of particular focus given the financial bail-outs, mis-selling of products, substantial remuneration packages for its senior executives and scandals such as those relating to the fixing of the inter-bank lending rate. Recently, there have been moves in the US Congress to introduce a new version of the Glass-Steagall act, splitting investment and retail banking activities. The asset management industry, including the investment fund sector, has been, fairly or unfairly (depending on one’s point of view), swept into this discussion and many see more regulation as the key way to restore confidence. Some will point to the fact that investment funds experienced very high outflows and low inflows during the crisis, suggesting that investor trust in investment funds was also severely shaken by the financial crisis and therefore justifying the need for more regulation of this sector. In this article, I look at what has been done to date to restore, or enhance, investor trust or confidence, and what can be done going forward.
Enhanced regulation Recent regulatory initiatives directly or indirectly impacting the asset management industry may help to restore investor confidence. Key initiatives include the Alternative Investment Fund Managers Directive and proposed updates to the Undertakings for Collective Investment in Transferable Securities directive on depositaries and on the remuneration of managers (UCITS V), aim, inter alia, to increase the level of protection of investors. The remuneration provisions of — SEPTEMBER-OCTOBER 2013
both directives can also be seen as an attempt to align the interests of managers and investors in a more balanced way. AIFMD and UCITS V are just two examples from a plethora of over 30 regulatory initiatives impacting the asset management industry in recent years. There are many more to come. Many will highlight the over-regulation of investment funds in comparison to competing savings products, the related cost of compliance, and argue for a “level playing field.”
Leading practices Leading practices may complement enhanced regulation, with the objective of restoring and enhancing investor trust. These may include: enhanced governance practices, including the use of effective independent directors; strengthened of internal and external control environment, specifically those designed to focus on achieving investor protection objectives; a riskbased approach to supervision of compliance with regulatory requirements; greater alignment of managers and investors interests especially around those issues such as risks and rewards; clear identification and management of all conflicts of interest; greater levels of education and engagement, of and with all stakeholders, including both investors and those manufacturing and selling the products; living a “know your client” policy that ensures that the product is suitable for the investor, and enables investor side liquidity management; clearer policies and operational guidelines on “acting in the best interests of investors” and improved transparency, including on remuneration and fees. Most countries already subject managers or investment funds to minimum regulatory requirements covering many of these aspects while some market participants voluntarily implement good practices and standards going beyond the minimum regulatory requirements.
Refocusing and simplifying Apart from more regulation and voluntary industry practices, a number of managers are attempting to enhance investor confidence by refocusing the products they offer to better meet investor requirements. Firstly, managers are simplifying their products. Simplification may mean implementing a simpler and more transparent investment strategy, for example, by limiting investment in complex opaque financial instruments. Secondly, they are implementing easy to explain, easy to understand investment strategies. Examples include investment strategies investing in only one asset class, or offering capital protection or income preservation. Thirdly, they are customising their products to meet specific investor demand. For example, there are offering products for investors which have become more risk averse and wish to put more emphasis on preserving wealth, and products which are aligned with investors’ changing life circumstances (“lifecycle funds”). Fourthly, they are increasing the role of passive management, and reducing the level of fees. For example, exchange traded funds offer investors returns which track a market at low cost. Fifthly, asset management groups are introducing new forms of communication, with growing focus on social media. Finally, going forward, manager compensation models need to be better aligned with the ultimate outcome for investors; although hotly debated, performance fees, if properly designed, may very well achieve this objective. In his Wall Street Journal article of October 2012, on How to Restore Confidence in the Financial Markets, Laurence Fink, chairman and CEO of BlackRock noted, “financial education and transparent investment products that are easy to understand and apply can allow investors to capture market opportunities and achieve the returns they need to
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“Investor education clearly has a bigger role to play, and so does legislation” Michael Ferguson
Asset management leader, EY Luxembourg
to industry insiders will daunt and deter most consumers who have neither the time nor the inclination to become investment specialists.” Investor education clearly has a bigger role to play, and so does legislation. An appropriate balance needs to be found between offering individuals free choice and protecting them.
Conclusion
achieve their objectives even in a complex and challenging new world. This too will help restore trust in the markets, and help those who doubt in the future today take their first steps back to being investors again.”
Role in society Restoring investor confidence inevitably leads us to the topic of the role of investment funds in society, and how that role should evolve in the future. Investment funds may play short, medium and long-term roles, as illustrated by money market funds, hedge funds, private equity funds and life cycle funds.
While each type of product has a role to play, there is a consensus building that at least retail investors should take a medium to long-term perspective in their investments into savings products, primarily to meet their retirement needs in the context of ageing populations in major markets Mackay Williams LLP wrote in their report, The case for enlarging the pool of retail investors in Europe’s investment fund, commissioned by ALFI on the occasion of its 25th anniversary: “Little is done to explain to retail clients who have not invested before what a fund is, how it works and how it fits into their life and savings goals. A wall of acronyms and specialist terms that are meaningful
In conclusion, restoring investor trust and confidence may be seen in many different ways, including: setting regulatory requirements; commitment by investment managers to leading practices and standards going beyond regulatory requirements; increasing transparency; refocusing products to better meet the specific demands and needs of investors; increasing investor education; and communicating in innovative ways, with technology and information savvy investors, to gain and retain their trust. The future of investment funds is in our hands: to explain, educate, customise, and create fair and transparent structures in order to regain trust and open the market to a broader public base to ensure investment funds are the savings product of choice for future generations. SEPTEMBER-OCTOBER 2013 —
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“Let’s build a more entrepreneurial fund industry” Claude Kremer
Partner and head of investment management, Arendt & Medernach
Culture shift
Instigating innovation Fund management entrepreneurs can take long-term opportunities from theory to reality. Text Claude Kremer Illustration Jocelyn Gravot
I
n many ways the investment industry is highly entrepreneurial. As markets expand and investment instruments proliferate, it has proved adept at seizing opportunities and developing new products and services. In other ways, though, the industry has been overly conservative, particularly in addressing the rapidly growing need for long-term investments. Taking a different approach is always risky, but the current focus on short-term outcomes is not sustainable. Many investment firms could serve their clients better by developing long-term investment models that truly mirror their clients’ needs. Many investors seek short-term performance but they often end up disappointed. A long-term investment approach would lead to better investment outcomes for individual investors and thereby improve investor trust in the fund management industry. In the current context of an ageing population and state systems that are unable to provide adequate pensions, finding alternative solutions is
— SEPTEMBER-OCTOBER 2013
essential. Investors need to increase their longterm savings to address this shortfall. Concerns about how Europeans will finance their retirement are reflected in a growing number of regulatory and policy proposals, such as the European Commission’s white paper on pensions and a recent proposal for European Long-Term Investment Funds that urge a shift towards a longterm savings and investment culture. These policies and the discussions around them are very welcome. However, while policymakers can help identify and outline needs, they cannot fulfil them. They lack the skills, resources and motivation to put their ideas into action. The industry must help turn the idea of a long-term savings culture into reality. The will is there. Industry initiatives, like European Fund and Asset Management Association’s proposal for Officially Certified European Retirement Plans and the Centre for European Policy Studies/European Capital Markets Institute taskforce on long-term investments and retirement savings aim to support policymakers.
But more is needed. The industry needs to review the way it does business, following a more entrepreneurial path. Over the past two years I have seen increasing recognition of the need for transformation. This can be achieved by combining the opportunities linked to long-term savings and investment with a focus on the investor. Only by focusing on the investor will we be able to rebuild confidence and set the scene for sustainable growth. As an industry, we should show that we care about investors. Capital preservation and strong risk management should become core components of all long-term savings products in order to create more predictability in the outcome of the product and restore the confidence of investors. Best practice will be achieved through a variety of structures and approaches such as dedicated funds, specialised investment boutiques, a greater emphasis on socially responsible investments using environmental, social and governance criteria, innovative investor education, and developing and championing investment professionals. Many industry players see regulatory changes and related compliance or risk management procedures as just a mountain of constraints and costs. I believe we should seek opportunity in every challenge. As a lawyer, I help pioneering fund professionals turn regulation to their advantage, creating new products and services or opening up new markets. After all, regulation reflects policymakers’ insights into changing needs in society. In the future, safety in numbers will no longer suffice. Firms with “me-too” models and copycat products are likely to see their market share decline. Only those who think creatively, focus on investors’ real needs rather than on the products and services that strive for the highest assets under management will achieve success. In short, let’s build a more entrepreneurial fund industry. This industry will make smarter choices for investors, demonstrating the true value of funds to them and to the revival of the European economy.
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Alpine perspective
Navigating the Swiss regulatory landscape Funds should take note of recent changes by Switzerland’s financial authority. Text Lou Kiesch Illustration Jocelyn Gravot
“Luxembourg’s fund industry needs to adapt to the new environment” Lou Kiesch
Partner, Deloitte Tax & Consulting
S
witzerland and Luxembourg have grown in parallel as key centres for wealth management over the past 20 years and more. Switzerland’s wealth managers have often sought to domicile funds in Luxembourg for distribution back to Switzerland and further afield. Meanwhile Luxembourg funds have successfully sought over the years to access to the many wealth managers in Switzerland. What evolutions can we foresee in the coming years? Switzerland is currently the sixth largest domicile of investment funds in Europe and an attractive market for cross border distribution from other product domiciles, especially Luxembourg. However, over recent months the regulatory landscape applicable to funds in Switzerland has undergone significant changes, notably with the revised Collective Investment Schemes Act and the revised Collective Investment Ordinance which both entered into force as of 1 March 2013. As part of this revision some new rules applicable — SEPTEMBER-OCTOBER 2013
to the marketing of foreign collective investment schemes have been implemented and the private placement regime has been restricted slightly. Fund distributors should now be mindful that any form of advertising or offering of collective investment schemes is considered going forward as distribution, with the exception of marketing to supervised financial intermediaries – banks, securities dealers, fund management companies, asset managers and central banks – and insurance companies. Alongside the aforementioned exceptions the publication of prices and similar figures by regulated financial intermediaries (provided that such publication does not contain any contact information), the use of collective investments schemes for employee participation plans as well as reverse solicitation or discretionary clients are not considered as distribution and therefore qualify as private placement. These private placement activities do not fall within the scope of the CISA and no additional requirements such as appointment of a Swiss representative and
paying agent or Swiss Financial Market Supervisory Authority (FINMA) authorisation of the collective investment scheme are required. Another recent development relates to marketing funds to public entities and pension schemes with professional treasury operations, companies with professional treasury operations and high net worth individuals (if they opted-in to be considered as a qualified investor); these will also now qualify as distribution in Switzerland and require the appointment of a Swiss representative and paying agent. Although this might be good news for local representatives and paying agents, it will result in more costs for fund managers. The previously established concept of public marketing of collective investment schemes to non-qualified investors (or “retail investors”) remains largely the same as distribution to retail investors under the revised CISA. As part of the new distribution requirements, any type of “distribution” will now require the appointment of a Swiss representative and paying agent; however, if distribution is limited to qualified investors only then no authorisation of the fund documents prior to their distribution in Switzerland is required. The illustration on the next page reflects the new concept of distribution and requirements for each of the four categories. As a result of these changes in the Swiss regulations fund distribu-
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Quick guide to new Swiss regime
FINMA fund approval required
Swiss Swiss paying representative agent agent required? required?
– Public entities and pension schemes with professional treasury operations – Companies with professional treasury operations – High net worth individuals (if opted-in)
No Distribution
High number of non-qualified investors Rules after 1 March 2013
Rules prior to 1 March 2013
tors targeting Switzerland will need to check which client segment they intend to use and validate that legacy clients are grouped into the appropriate classification. Two issues stand out and will hopefully be addressed by FINMA in the near future. First, if paying and representative agents will need to be appointed in circumstances where no offer is made to legacy nonregulated qualified investors. Second, if legacy high net worth investors should be contacted to formally opt-in to the qualified investor classification. While the private placement regime has tightened in Switzerland with the introduction of the new CISA rules, we have also witnessed a more cautious approach from the FINMA when reviewing applications for full public distribution. According to FINMA statistics as of 30 June 2013, out of a total of 6,106 foreign funds registered with the FINMA for public distribution 4,117 are Luxembourg-domiciled. Luxembourg funds benefit most from Switzerland acceptance of foreign funds. However, there are obstacles encountered in the process which on occasion has led to unforeseen delays of up to 18 months. Fund managers of foreign funds welcome the recently published template letter for the registration of funds and additional sub-funds as well as for the notifica-
tion of updated documents to the FINMA. However, both processes currently remain onerous and administrative. Another significant change implemented by the revised CISA relates to the management of collective investment schemes. Under new regulations, applicable from 1 March 2013, the CISA now also applies to any entity managing foreign collective investment schemes from Switzerland. These entities now require FINMA authorisation and will be subject to supervision whereas previously this was only required for investment managers of Swiss collective investment schemes. The requirement that any investment manager of foreign collective investment schemes operating from Switzerland is to be authorised, is of significant importance in light of the implementation of Alternative Investment Fund Managers Directive. From 23 July 2013 the management of EU alternative investment funds can only be delegated to a non-EU country on the condition that the investment manager is subject to a level of supervision which is comparable to that introduced by the AIFMD. FINMA authorisation is required for the entities performing asset management tasks; those entities only performing advisory activities are out of scope. The lines are somewhat blurred between what is effectively classed as being management and what is con-
Source: Deloitte
Public advertising
– Regulated financial intermediaries such as banks, securities dealers, fund management companies, asset managers of collective investment schemes as well as central banks – Supervised insurance companies – Clients of discretionary asset management with regulated financial intermediaries – Clients of discretionary asset management with independent asset managers (under certain additional conditions)
Distribution
“Qualified investors” under CISA
No public advertising
– Publication of prices and similar figures by regulated financial intermediaries – Employee participation plans – Reverse solicitation exemption (including advisory client and execution-only exemptions)
sidered as advice. The general consensus so far is that this should be determined by questioning which entity has the power to decide on the investments of the fund. Further guidance on the latter is expected to be issued by FINMA, which will ideally provide clear definitions on this critical point of law which would hereby reduce the current grey areas. As a last point, many asset management firms are keenly watching how regulators will treat inducements, such as trailer fees paid by fund managers to fund distributors. The regulators in the UK, Netherlands and Sweden are earlier movers to tighten rules and the EU is considering the issue within the draft Markets in Financial Instrument Directive (MiFID II) legislation. In Switzerland the topic is also watched keenly by the regulator. In a recent case the Swiss court ruled that all trailer fees received by Swiss wealth managers based on assets managed in discretionary portfolio accounts should be paid to the client and not held by the wealth manager. These emerging rules on trailer fees could significantly change the landscape of how funds are distributed. The regulations are changing on both sides of the Swiss-EU border and Luxembourg’s fund industry needs to adapt to the new environment in order to benefit from the historic access available to Swiss investors; the challenge is set. SEPTEMBER-OCTOBER 2013 —
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Communications
Straightforward innovation Dematerialisation is an opportunity to effectively face business and regulatory challenges. Text Edith Magyarics Illustration Jocelyn Gravot
“Does anyone have an idea of the total number of reports and data required?” Edith Magyarics
CEO, Victor Buck Services
L
ooking back at the last few years we cannot deny that challenges facing the fund industry have emerged from various angles. Communication has not been left out. The points of attention arise from changes in regulatory landscape but also from the need for flexibility, quality, clarity and time to market delivery. Does anyone have an idea of the total number of reports and data required by the various regulators from the various client types in all the existing jurisdictions? Today the market is in need of aggregated solutions because reporting is a key element of governance, control and assessment of the industry, whether quantitatively or qualitatively. This has resulted in a new and growing need for further communications and for more transparent reporting. These obligations – as well as the strong framework set around the identification requirements – bring opportunities for market players, as we will all need to come out with straightforward, but nevertheless innovative, solutions. We see the pre-requisites and provision of communication at different levels: geographically to support the international and local regulations which are and will remain key for all industry mak— SEPTEMBER-OCTOBER 2013
ers and actors; and managerial, to sustain a strong governance model for our clients and their customers. While approaching the challenges brought by the Alternative Investment Fund Managers Directive, European Market Infrastructure Regulation, Markets in Financial Instruments Directive and other upcoming rules, we need to continue supporting our customers by striving for excellence, and focusing on results and a high standard around data protection, as well as flexibility. The relevant level of communication is intrinsically linked with the importance of the oversight performed on delegated functions and the need for targeted reporting.
Means for a message Where communication in the fund industry may have been, in the early days, translated in standard reporting towards end customers, it is today a real tool or asset that brings business a different dimension. Communication is the transmission of information, the means to transfer a message, and this message needs to be accurate, complete,
secured and answer the challenges faced by the industry. One of the pre-requisites is time to market and access to the format the communication takes. The customer needs to securely receive the required customised message anywhere, at any time, on any type of device. Dematerialisation – encompassing scanning, secure emailing, legal archiving, B2B and B2C solutions, with the transfer and access of reports via a secure web – can offer a cost effective approach. The media available to allow our clients to communicate with their customers are driven by the search for a high level of confidentiality, accuracy and timeliness, and improving their document management and communication effectiveness, should it be with their customers or with the different authorities. These changes represent a huge opportunity for Luxembourg service providers such as our firm. We can be sure that challenges in the communication for the fund industry will continue for many years to come, as the requirements continually evolve and require us jointly to swiftly adapt and shift priorities while continuing to deliver quality services. The changes forced on the industry cannot let us lose sight of investors and underlying participants “wishes and needs” for information access and availability. Either in growing Asian countries or in the mature and demanding regions where technologies and requests for dematerialisation are not anymore wishful thinking, but a reality, the industry needs to be ready.
a leading, independent Luxembourg law firm committed to personalised legal services in a global setting Our attorneys are experienced practitioners in the Luxembourg legal environment and present a unique combination of expertise allowing us to deliver unrivalled legal solutions in one of Europe’s leading financial centres. BONN & SCHMITT has established strong working relationships with leading law firms throughout Europe and in the international community with whom we interact closely and collaboratively to provide our clients with innovative and integrated solutions to multi-jurisdictional matters. Our global client base stretches through Europe, to Russia, the U.S., South America, South Africa and Asia. We are the trusted legal partner of leading international financial institutions, industrial corporations, national governments as well as media companies, pharmaceutical groups and food and beverage groups listed on the Forbes The Global 2000 List. The firm regularly advises Luxembourg state, local and regulatory authorities on a wide range of legal matters. BONN & SCHMITT ‘s lawyers are registered with the Luxembourg Bar and many are members of several international legal organisations, including the International Bar Association, the Union Internationale des Avocats and the International Fiscal Association. BONN & SCHMITT is the editor of the Luxembourg Law Digest for the Martindale Hubbell Directory.
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
US regulations
Paradigm shift How to surf the FATCA wave as it hits Luxembourg’s investment funds. Text Gérard Laures Illustration Jocelyn Gravot
S
ince its enactment into law on 18 March 2010, the Foreign Account Tax Compliance Act has come a long way. Following a series of draft notes and regulations, today’s FATCA is a set of regulations comprising over 500 pages and numerous Inter-Governmental Agreements signed between the US and countries from all continents. The act’s main aim is to tackle US offshore tax evasion through the reporting of US investors around the world. Even though FATCA has been met with much scepticism, with many believing it would never actually be enforced, over the last few months the opposite has proven to be true: an increasing number of political decision-makers outside the US have begun to view FATCA as a new way of approaching transparency in tax matters. Not so long ago, in April of 2013, a group of EU member states submitted a letter to the European Commission, committing to develop a pilot multilateral exchange facility to facilitate the automatic information exchange. Of even greater significance, on 12 June 2013, the commission proposed extending the scope of the automatic exchange of information between EU member states (as defined in the EU directive on administrative cooperation in tax matters). The proposed plans would cover dividends, capital gains and all other forms of financial income and account balance, thus going even further than FATCA in terms of scope. Looking beyond Europe and the US, an increasing number of other jurisdictions have also begun making similar commitments to automatically share information in accordance with OECD standards. Choosing the best status
Given that Luxembourg intends to sign an IGA with the US, all Luxemburg funds will have to comply with FATCA rules. This is irrespective of whether they have US investors or no US inves— SEPTEMBER-OCTOBER 2013
tors, and whether they have US or only non-US investments. Unlike for the banking sector, US tax principles are unfamiliar territory for the vast majority of Luxembourg fund industry players, as up until now they have never been subject to US tax reporting obligations. Implementing FATCA for funds will therefore most likely translate into a relatively complex and costly process. Choosing the best possible FATCA status for each investment fund, as well as choosing the most suitable FATCA service offering from service providers, will be key elements in the successful implementation of the regulation. With at least seven FATCA statuses to choose from, identifying the best possible FATCA status may not prove to be quite as straightforward an exercise as one may think, often requiring some strategic thinking. The most obvious option would be to go for a “fully compliant status”, such as the “reporting financial institution” status, where funds have to both register themselves with the US authorities and fully comply with the entirety of the FATCA rules set out under the IGA. An alternative option for a Luxembourg fund would be to choose one of the “deemed compliant” (also called “non-reporting”) statuses for funds with a low risk of US tax evasion. This status has numerous advantages: in short, the fund would neither have to register with the IRS, nor report to the Luxembourg tax authorities in the context of the FATCA framework in subsequent years. Each deemed-compliant status is aimed at a specific category of funds which, according to the IRS, pose a low risk of tax evasion. The “qualified collective investment vehicle” is a status for funds that have no direct individual investors and that is solely distributed through FATCA-compliant financial institutions. This status may prove to be efficient for funds that have
no direct distribution, but are exclusively distributed through nominees or a global certificate. A “restricted fund” is the status for a fund that excludes US investors. This fund can be distributed either to individual or to institutional investors. To qualify for this status, a fund may have to update its sales and marketing documents, such as the fund’s prospectus and distribution agreements, to include sales restrictions to US investors under the new, broader FATCA definition of a US person. In an “investment entity wholly owned by exempt beneficial owners” fund, all investors are considered so-called exempt beneficial owners under FATCA. This includes governments, international organisations and certain pension funds. Under the “sponsored investment entity” status, another entity called the “sponsoring entity”, such as the management company, agrees to fulfil the FATCA obligations on behalf of the fund. The sponsoring entity would need to register as such with the IRS; however it would not be required to register the investment funds it sponsors, unless the fund has US investors. A “sponsored, closely held investment vehicle” is similar to a sponsored investment entity, except that it is limited to individual investors and the maximum number of such investors is 20. A registration of the funds, however, is not required, even if it has US investors. In the case of an “owner-documented foreign financial institution”, the fund would outsource its FATCA obligations to its custody bank. Getting it done
The trade-off for choosing a deemed-compliant status compared to the full FATCA compliance status, such as the “reporting financial institution status”, is that funds have to cope with
SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
“Ignoring FATCA is not an option” Gérard Laures
Tax partner and head of financial services tax, KPMG in Luxembourg
restrictions and thus they may lose a certain degree of flexibility. For example, funds which have chosen the restricted fund status will have to update their fund prospectus, or in some cases the distribution agreements, to exclude US investors. Another example is the “qualified collective investment vehicle”, which requires individual investors to only invest in the fund through compliant nominees. Another strategic consideration for funds to bear in mind when deciding on their FATCA status is that a
deemed-compliant status may, depending on the situation, prove to be more burdensome during the implementation phase than the fully compliant FATCA status. However, in the long run, this status may yield a less burdensome process. In addition to choosing the appropriate FATCA status, correctly mapping the service offering needed for FATCA purposes should be a primary “to do”. Defining the role and obligations of the different service providers such as the management
company, the transfer agent and the registrar of a fund will be key to ensuring a smooth FATCA implementation. As an example, a fund’s management company may assist in determining and maintaining a funds’ FATCA status. The management company can also act as a sponsoring entity for funds that do not fit into one of the deemedcompliant categories or for those desiring maximum flexibility. Transfer agents and registrars should be key actors in the FATCA service offering, as these service providers generally have the information needed to perform FATCA due diligence and reporting obligations. FATCA represents another significant piece of the regulatory shake-up Luxemburg funds are currently facing. Ignoring FATCA is not an option, as it will be transposed into national law. As a result, funds have their work cut out for the months to come, as determining the right FATCA status, defining the role of the service providers in the FATCA process and adapting processes and IT systems constitute tasks that are not to be underestimated. The postponement of the start of FATCA to 1 July 2014 announced mid-July is more than welcome! SEPTEMBER-OCTOBER 2013 —
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
“You have to be where your audience is” Troy Bankhead
Head of marketing and communication, Kneip
Social media
Positive cooperation Some financial institutions are finding their investment in social media is paying dividends.
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Text Troy Bankhead Illustration Jocelyn Gravot
ocial media is one of today’s favourite buzzwords. But it’s nothing new to the fund industry. Veterans may recall what could be considered the most expensive social network of all time, Bloomberg, with their terminal-based social network of young traders, brokers, and advisors, proudly touting their terminal addresses as a sort of membership card in an elite social circle. Much has changed in a few short years. One of the basic rules of marketing is that you have to be where your audience is. A Fidelity Investments survey in 2011 of high net worth investors revealed that 85% of the respondents used social media, one-third of them professionally… and in case you were wondering, the average age of respondents was 56! And The Wall Street Journal reported that nearly half (46%) of asset management firms polled are now communicating via social channels. Social media is a very powerful way to connect with investors in a very direct, intimate way. And with the proliferation of tablets, smartphones, netbooks and other mobile — SEPTEMBER-OCTOBER 2013
devices, it will only increase, as its use is particularly adapted to the medium. On the distribution end, asset managers face the reality that the funnel process is all but obsolete for customer acquisition. Traditionally, marketing campaigns built awareness, which led to interest and evaluation, then commitment, to referral, to repeating the process. This process creates inertia and even leaks prospects to social media. Case and point: the average click-through rate for traditional advertising is 0.2%. For Google AdWords, it’s 2%. One Morgan Stanley financial advisor has used LinkedIn to generate $70 million in investable assets through networking and referrals. Even monitoring life changes is a valuable source for financial advisors. In 2011, more than 1.2 million LinkedIn users changed jobs, which equates to $40 billion in rollover funds. The next reason is to build credibility both from a marketing standpoint and showing expertise and leadership. More than ever today, people look for authenticity, people they can trust.
Whether it be in the reviews of products, or the opinions of peers, they seek for advice, assistance and openness rather than one-way sales pitches and closed doors. Social media provides a platform to engage with investors, employees and stakeholders at a level that has never been possible before. In an era where “me me me” marketing is completely ineffective, it is essential that companies open up and engage with the people who come into contact with them. One of the most promising areas where asset managers should be not just active, but proactive, is in serving their clients. Social media is an invaluable listening device. If nothing else, it should be regarded as a tool for keeping in touch with one’s clients, and even detecting market trends, overall industry dynamics and competitor activity. Newsfeeds on LinkedIn reflect the most important topics to the people who are most important to you, and trending on Twitter provides a realtime barometer of the topics that are top-ofmind to their network and industry. And it doesn’t end there. Citigroup recently created Connect, a LinkedIn group for female professionals that crowdsources ideas on work/ life balance, divorce and late entrepreneurship to name a few. Within the first year, it gathered over 130,000 members, and is today one of their most active groups, using advocacy to create community. And using social media as inter-group platforms for many business functions takes collaboration and information sharing to levels that the first Bloomberg terminal networks would never have dreamed of. The true power of social media lies in the fundamental way that it enables us to connect. The day we stop thinking about social media as the end destination, and begin serving rather than selling, is the day that we will begin to tap into its true potential to enable greater operational efficiencies, increase customer loyalty, improve risk management, and take its place in our companies’ underlying ethos.
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Meet the regulators
Aren’t we fortunate? During the ALFI Global Distribution Conference, I will be publicly meeting the regulators and discuss with them topical issues of interest to the larger asset management community. Text Freddy Brausch Illustration Jocelyn Gravot
O
ver the many years I have been in practice I was often given the opportunity to meet regulators, both nationally and internationally, both publicly and privately, with or without clients, alone and with others. What is it I have learned from these gatherings? What is it the asset management community should have very much in mind when meeting the regulators? What is it the regulators have in mind when meeting the industry and different parts of it? These are several, among the many, questions that cross my mind at the time of writing. However, a question that does probably prevail over all the others is: “aren’t we fortunate?” Aren’t we fortunate to have the Commission de Surveillance du Secteur Financier (and its predecessors) as funds and, more generally, as the regulator of the Luxembourg asset management industry?
The mission and powers of the CSSF The CSSF is responsible for the prudential supervision of credit institutions, of professionals of the financial sector other than credit institutions, of undertakings for collective investment, of “SICAR” funds, of securitisation undertakings, of regulated markets and their operators, of multilateral trading facilities, of payment institutions and of electronic money institutions. The CSSF also supervises the securities and markets, including their operators. How crucial the CSSF is to the funds industry was stressed – was there any need for it – by the CEOs and main players of the asset management industry when, a few years ago, under the auspices of ALFI they gathered in Luxembourg to participate in the so-called “CEO Summit”. What did the CEOs conclude? They told us that what the industry was particularly in need of is a regulator who knows and understands the business of asset management, a regulator who, while respected and uncompromising on values and fundamentals of financial supervision, is open to dialogue and fast to act. These are all characteristics of which one would admit characterise the CSSF and the way in which the CSSF operates. Nowadays, the exercise by the CSSF of its missions is however not without challenge. In no — SEPTEMBER-OCTOBER 2013
particular order and without wanting to be exhaustive, they are: the wall of new regulation and the ever changing regulatory landscape, complexity and volume (induced by increased business levels); and enhanced international competition, meaning enhanced pressure and the need for the CSSF increasingly to explain and justify its policy, its position, its actions. This short note does not allow me to deal with all these challenges one by one. Whereas the CSSF’s role is crucially important to the integrity of the business and the market, the CSSF remains equally critical to the further development of the market and to the development of new market segments that constitute as many opportunities, however also as many challenges for Luxembourg. Continued success of the Luxembourg funds centre, as well as the development of new segments of the market requires constant change, including at the CSSF, while at the same time maintaining the characteristics and qualities praised by the industry is required. An all but easy challenge for the regulator however also for the financial community at large who has, where needed, to adapt to new constraints and, at all times, to be mindful of the challenges faced by all, including the CSSF.
Consultation committees at the CSSF For many years “consultation committees” at the CSSF have existed, consisting of CSSF representatives, industry representatives and their advisers who work on legislation in progress as well as on interpretations of the law and regulations. They are a useful, and actually an essential, forum where the regulator can explain its policies to the industry and where the industry can bring forward to the regulator its ambitions, as well as its worries. Over the years, these committees have been an essential part of the Luxembourg set-up. They have been, and continue to be, an important link in the chain towards success and towards maintained success. There is nothing secret about these committees. They are listed, as are their members, in the CSSF’s annual report, as well as on the CSSF’s website. One or the other international organisations with jurisdiction over Luxembourg’s affairs may, at times, have queried whether these committees
SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
“The CSSF’s role… is often ignored and deserves to be better known” Freddy Brausch
Partner, investment management group, Linklaters
are in line with healthy governance and whether there isn’t too much proximity among public and private market participants? These concerns are not justified. They are not as long as the regulator is inflexible on values and on integrity, notably of the markets – and the CSSF is. They are not as long as the common and over-arching aim is the protection of the investor – and it is. The readiness and openness of the CSSF towards a healthy and necessary dialogue with the industry, apart from being key to the integrity of the markets and of the actors on those markets, is key to the success of the Luxembourg funds centre. Never has the CSSF’s independence be at stake or at risk. It is not the consultation committees where regulator and market participants can meet and exchange views that will endanger the regulator’s necessary independence. Doing the right things, and doing the right things together – one of the Luxembourg characteristics and assets – is not a question of principle, it is a
question of balance. In the past, it was possible to strike the right balance. In the future it will, though in a changed environment, continue to be.
The CSSF in the international environment The law establishing the CSSF conferred on it the task of representing Luxembourg at EU and international level with respect to issues and negotiations concerning the financial sector. Hence, the CSSF is a member and participates in European institutions including, but not limited to, the European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority. It also participates in, among others, various working groups of the European Central Bank, International Organisation of Securities Commissions, and Bank for International Settlements. Finally, the CSSF is in charge of discussing and agreeing memoranda of understanding between
financial supervisory authorities, central banks and finance ministers. The CSSF’s role as one of the main ambassadors of Luxembourg in international fora has always been important. Today, it has become critically important. It is, in the context of the enhanced dialogue among European regulators. For example, there is not one actor in the asset management industry that nowadays ignores the role and the importance of ESMA. The CSSF has the (heavy) responsibility to actively participate in the European dialogue among regulators – and notably within ESMA – in the European lawmaking process, however also in making its, and where applicable, the Luxembourg industry’s position and needs known. The CSSF’s (along the government’s) role in finding the appropriate arrangements and in concluding appropriate MOUs in and outside the EU are equally critically important to the existence and to the further development of the Luxembourg funds centre as the leading funds distribution hub. The CSSF’s role in this respect is often ignored and deserves to be better known. For every actor in the financial sector, meeting the regulators is a must. Meet the regulators is a privilege. Speaking to the regulators is, at times, an art. Speaking to the CSSF is in this respect no exception. As to the question whether or not we are fortunate to be able to meet and to discuss with the CSSF, to be able to rely on the CSSF in international fora, and to rely on the CSSF to have the MOUs in place that are necessary to an internationally oriented business, my answer is yes. Definitely, yes. SEPTEMBER-OCTOBER 2013 —
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
AIFMD
Getting organised “Grandfathered” or not, alternative investment fund managers in Luxembourg face several governance challenges. Text Thibaut Partsch Illustration Jocelyn Gravot
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he 22nd of July 2013 was an important day for the alternative investment fund community. As a result of the law of 12 July 2013 relating to alternative investment fund managers, all new AIFMs which had not been performing activities before 22 July 2013 are now obliged to comply immediately with the new law. Those Luxembourg AIFMs which were already performing activities before that date – and which enjoy a grandfathering period of one year – are now obliged to take all necessary measures to comply with the new requirements and to submit an application for authorisation before 22 July 2014. Luxembourg’s financial regulator – the Commission de Surveillance du Secteur Financier – has, in the meantime, requested that all potential Luxembourg AIFMs carry out a self-assessment as to whether or not they qualify as an AIFM under the new law and had to inform the CSSF by 16 August 2013 of the conclusion of their analysis. In addition, AIFMs which, by that time, have concluded that they do qualify as AIFMs under the new law, and accordingly will have to request an authorisation, must submit to the CSSF by 1 April 2014 a file containing information as regards its compliance with AIFMD product rules by 22 July 2014. AIFMs will therefore have to address some questions in respect of their governance, and the governance of the funds they manage. While it is already clear that many funds will delegate their management to newly established AIFMs, the exact allocation of tasks between the governing body of the funds and the future AIFMs remains unclear. Directors are obliged to discharge their duties diligently, and as a result, may need to monitor the AIFMs; directors may also insist on retaining their ability to revoke the powers given to the AIFMs. In addition, Luxembourg vehicles managed by AIFMs located outside of Luxembourg may have to ensure that they otherwise retain sufficient “substance” in Luxembourg for corporate and tax reasons. Ultimate responsibility
The governance of the AIFMs themselves will also have to be organised. Senior management will have ultimate responsibility for portfolio management, risk management, valuation and compliance. It may discharge these functions — SEPTEMBER-OCTOBER 2013
“The exact allocation of tasks… remains unclear” Thibaut Partsch
Partner, Loyens & Loeff
with the help of the AIFM’s local employees, advisors, investment managers or employees located in branches that the AIFM may have established in other countries. Organising this process in sizeable organisations, whose decision-making centres are not necessarily in Luxembourg or
even in the European Union, may require some time. Beyond the pure regulatory questions raised, these processes also frequently entail tax law or labour law challenges. Decision processes for alternative investment funds and AIFMs will have to be discussed by AIFs and their future AIFMs as soon as possible. In the context of appointing an AIFM, it is important to note that Luxembourg offers the possibility to engage professional management companies which can provide AIFMD compliant services. However, whatever the final choice will be, potential governance questions (such as the way advisory services would be structured) will have to be solved. The beginning of the grandfathering period should therefore be the occasion for all grandfathered AIFs to start thinking quickly about their next steps and Luxembourg professionals will surely be happy to help identify the best solutions.
FILING TO ALL
AIFMD TRANSPARENCY REPORTING
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Under the AIFMD, alternative investment fund managers must produce and file AIF and AIFM reports to Competent Authorities that include 130 new pieces of information. That’s a lot of data and validations to collect and manage--from multiple sources, and at varying times and frequencies.
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View from Brazil
Increasing alternatives Despite the financial crisis, the Brazilian funds sector became the world’s sixth largest. But big shifts are coming. Text José Carlos Doherty Illustration Jocelyn Gravot
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he Brazilian investment funds industry – including not only mutual funds but also hedge funds and other alternative investment funds – has experienced a significant development in recent years, with a 44.9% increase in assets under management: from 784 billion US dollars in 2009 to 1.1 trillion US dollars in the first quarter of 2013. As a matter of comparison, the world industry’s AUM increased 21.4% in the same period. This significant expansion occurred despite the effects derived from the global financial crisis. Indeed, although some impact was felt in 2008 and 2009, net sales and AUM quickly recovered, evidencing the soundness of the Brazilian regulatory framework and the capacity of the industry in adequately managing risks and yielding positive returns. In this context, Brazil consolidated its position as the sixth largest investment funds industry in the world, according to Investment Company Institute data.
Indeed, asset liquidity and return were severely concentrated in the short term until recent years, blurring the usual perception of risk-return relationship by investors. Now the “new” shape of the yield curve facilitates investors the identification of this relationship. They have now the ability to identify the links of both maturity-risk and return with liquidity. These modifications in macroeconomic conditions pose several challenges for the Brazilian investment fund industry. For both investors and funds’ managers, returns are generally lower and the triad maturity-liquidity-return is now more discernible. In general, in order to obtain higher returns, they will have to increase their exposures to longer maturities and less liquid assets. Certainly, the new environment will demand some re-configuration of the industry. Investment funds will need to conciliate the investors’ demand for yield, the introduction of new financial instruments and new distribution channels, and the systemic soundness of the sector.
Environment changes
Challenges ahead for fund managers
Distribution
The main challenge fund managers will face is how to reconcile the regular investors’ demand for liquidity with a good profitability. Currently, funds’ portfolios are mainly composed of highly liquid assets and repurchases operations, with a 140% level of industry turnover (based on a monthly average over 12 months), a level which is only comparable to US money market funds. Inevitably, some re-structuration of portfolios will be needed. It is expected that an increasing participation of private securities, especially corporate bonds and equity, will occur. One can also expect the lengthening of maturities in portfolios and the allocation of resources in alternative assets with lower liquidity.
In Brazil, banks are the major distributors of investment funds and concentrate the majority of participants. The predominance of banking branch distribution certainly will remain in the coming years, but, as the market is becoming more sophisticated, alternative distribution channels are gaining relevance. Funds distribution via the internet is increasing and retail investors are now buying funds through trading platforms. Now the same fund is being offered by different distributors and independent advisors are growing in influence. The introduction of new funds, such as equity and fixed-income ETFs, will reinforce the path of diversification in distribution channels, increas-
In recent years, Brazilian investment funds witnessed some relevant changes in the environment they operate. The most remarkable one is the easing in monetary policy. The Central Bank of Brazil cut the annual nominal interest rate from 12.5% in July 2011 to its historical floor of 7.25% in October 2012 – a level that had remained unchanged until April 2013 – and the annual real interest rate to levels around two percent. This decrease in interest rates was followed by a general decrease in the returns offered by assets, specially fixed income bonds. It also gave room to improvements in the structure of public debt, giving momentum to a process which is occurring since mid-2000s: yield curves have now longer maturities and a “text-book” positive slope. — SEPTEMBER-OCTOBER 2013
In addition, this process of diversification could be followed by the incorporation of new financial products to funds’ portfolios. Financial derivatives instruments, structured products and the like will be more common to managers’ dayto-day operations. These developments may generate higher returns but imply the assumption of higher risks by investment funds, demanding more diligence in risk management, aligning the liquidity profile of funds’ assets with usual (and unusual) redemption flows, and more caution in asset pricing. Moreover, different investment strategies require more management expertise and specialisation in different illiquid assets which should envisage more professional certification. So an increasing qualification of funds managers will be need to deal with these novel challenges. Finally, there is also room for product development especially with regard to the structuring of new types of funds, such as exchange-traded funds that follow fixed-income benchmarks, and to the expansion of private equity and real estate funds.
SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
“Inevitably, some re-structuration of portfolios will be needed” José Carlos Doherty
CEO, ANBIMA (the Brazilian Financial and Capital Markets Association)
Initiatives that promote investor education are a necessary condition to conscious investment decisions and are already in place in Brazil.
Talent and innovation
ing the competition among different channels and within the sector, a process which may benefit both the industry and investors.
Regulation and investor education Although Brazil already presents a solid regulatory framework, this challenging environment brings the need to adapt it to newer demands. The incorporation of new risks in the portfolios should be a major concern and the matching between assets’ liquidity and obligations an imperative issue.
Moreover due to the lower liquidity of new alternative funds, marketing of those products should be prudent, including an appropriate disclosure of information – international standards are being implemented – and suitability process, as already outlined in ANBIMA’s self-regulation codes. Information disclosure is relevant, but not sufficient: investors need to know how to assess the given information. The new environment adds complexity to investors’ decisions and requires understanding of those new risks, instruments and types of funds.
Brazil is currently living a unique period in its economic history. So as the Brazilian investment funds industry, that faces now a quite challenging future. The Brazilian industry is already supported by a sophisticated and robust infrastructure mixed with talent and innovation capacity. This affirmation is supported by the experience acquired during the international crisis, when few resources vanished and investors’ confidence was sustained. Now the industry has to address the challenges associated with longer maturities, portfolio diversification and the assumption that new risks are outweighed by managers and investors. For managers, the ability to manage risks and expand new channels of distribution will be increasingly important. For investors, the cornerstones will be information disclosure and risk perception. SEPTEMBER-OCTOBER 2013—
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Photos Charles Caratini 01. Jean-Philippe Bachelet (Deloitte), Laurent Halbgewachs (F2C) and Vincent Lagrange (Finesti) 02. Antoine Kremer and Aurélie Cassou (ALFI) 03. Marco Hirth and Dietmar Dunkel (DWS Investment) 04. Shirley Collyer and Tony Langham (Lansons Communications) 05.Sandra Cortese (KBL) and Cynthia Kalathas (AMMC Law)
06.Edith Magyarics (VBS) and Jill Griffin (Northern Trust Global Services)
05
07. Jean-Michel Loehr (RBC Investor Services Bank) and Jean-François Marlière (Marlière & Gerstlauer Executive Search) 09
08. Ghassan Hakim and Tony Parker (Riva Financial Systems) 09. Alix van Ormelingen (Aviva Investors Luxembourg)
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10. Luc Frieden (minister of finance)
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15 11. Sally Wong (HKIFA) 12. Alain Picquet (KPMG) and Eric Van de Kerkhove (VDK Consult) 13. Vincent Lagrange (Finesti) and Helga Patin (FactSet)
17. Alan Chalmers (Fund Europe Limited) 18. Rana Hein-Hartmann and Fred Tankpinou (Funds Partnership)
14. Marc Saluzzi (chairman, ALFI)
19. Freda Deed (Interactive Data) and Frédéric Simon (Confluence)
15. Amanda Yeung and Bernd Henninger (Ernst & Young)
20. Allan Stewart (Clearstream) and Patrick Wallerand (ATTF)
16. José-Benjamin Longrée (PwC)
21. Martin Peter (Swiss & Global Asset Management)
SEPTEMBER-OCTOBER 2013 —
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Photos Charles Caratini 22. John Parkhouse (PwC) and Noël Fessey (Schroder Investment Management)
27. Stefano Giovannetti and Saverio Fiorino (HSBC Securities Services)
23. Tom Seale (EFA)
28. Theresa Hamacher (NICSA)
24. Olivier Marcy (Finesti) and Karim Rezki (Dexia Asset Management)
29. Junaed Kabir (IFDS Luxembourg) and Jan Vandendriessche (VP Lux)
25. Holger Hildebrandt (Deka International) and Helmut Hohmann (Alceda Fund Management)
30. Serge D’Orazio (KBL) and Christophe Wintgens (Ernst & Young)
26. Stéphane Ries (KBL), Claude Blocry and Aurélien Baron (Kredietrust Luxembourg)
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31. Michael Ferguson (Ernst & Young) and Joseph Hardiman (US Carne Global)
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SPECIAL ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
ALFI
September-October 2013 Published on September 12, 2013
special supplement SEPTEMBER OCTOBER 2013 SUPPLEMENT
J
A Accenture 43 Alceda Fund Management 46 ALFI 3, 6, 7, 28, 46 AMMC Law 46 ANBIMA 44 Arendt & Medernach 30 Atoz 15 ATTF 46 Aviva Investors Luxembourg 46
B Bachelet Jean-Philippe Bankhead Troy Baron Aurélien BlackRock Blocry Claude Bloomberg BNP Paribas Securities Brausch Freddy Business Initiative
Cover Illustrations Jocelyn Gravot
ALFI GLOBAL DISTRIBUTION CONFERENCE IN ASSOCIATION WITH NICSA & HKIFA
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C
Born in 1980, Jocelyn Gravot grew up and studied in Nantes, France. A graduate in visual communications, he works as an artistic director for several agencies and as an illustrator for publications including Trois Couleurs, Les Inrockuptibles and Monsieur Magazine. Today he lives in both Nantes and Paris.
Caceis Carlos Doherty José Cassou Aurélie Central Bank of Brazil Centre for European Policy Studies Chalmers Alan Citigroup Clearstream Collyer Shirley Cortese Sandra CSSF
39 44 46 44 30 46 38 46 46 46 3, 40
D D’Orazio Serge Debruyne Lieven Deed Freda Deka International Deloitte Dexia Asset Management DO Recruitment Advisors Dobbins Martin Dunkel Dietmar DWS Investment
46 10 46 46 24, 32, 46, 51 46 31 22 46 46
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F F2C FactSet Ferguson Michael Fessey Noël Fidelity Investments Finesti Fink Laurence FINMA Fiorino Saverio Frieden Luc Fund Europe Limited Funds Partnership
46 46 28, 46 46 38 46 28 32 46 3, 6, 46 46 46
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Studio manager Stéphanie Poras Layout Monique Bernard (coordination)
46 46 46 32 52 38 46, 36 46 46 30 17
L Lagrange Vincent Langham Tony Lansons Communications Laures Gérard LinkedIn Linklaters Lipper Loehr Jean-Michel Longrée José-Benjamin Loyens & Loeff
46 46 46 36 38 40 6 46 20, 46 42
M Mackay Williams 28 Magyarics Edith 34, 46 Marcy Olivier 46 Marlière & Gerstlauer Executive Search 46 Marlière Jean-François 46 Morgan Stanley 38
N NICSA Northern Trust Global Services
6, 7, 8, 46 46
P Parker Tony Parkhouse John Partsch Thibaut Patin Helga Peter Martin Picquet Alain PwC
R RBC Investor Services Bank Rezki Karim Ries Stéphane Riva Financial Systems
46 46 46 46
S Saluzzi Marc 6, 7, 46 Schroder Investment Management 46 Seale Tom 6, 46 Securities and Exchange Commission (US) 8 Simon Frédéric 46 State Street 22 Stewart Allan 46 Swiss & Global Asset Management 46
Tankpinou Fred
46
I 20 19 46 46 44 25 36
46
V Van de Kerkhove Eric van Ormelingen Alix Vandendriessche Jan VBS VDK Consult Victor Buck Services VP Lux
46 46 46 46 46 34 46
W Wall Street Journal Wallerand Patrick Wintgens Christophe Wong Sally
38 46 46 46
Y Yeung Amanda
In this Index are all companies, people and advertisers mentioned in this special edition.
— SEPTEMBER-OCTOBER 2013
46 46 42 46 46 46 46
U
Hakim Ghassan 46 Halbgewachs Laurent 46 Hamacher Theresa 8, 46 Hardiman Joseph 46 Hein-Hartmann Rana 46 Henninger Bernd 46 Hildebrandt Holger 46 Hirth Marco 46 HKIFA 7, 46 Hohmann Helmut 46 Hong Kong Investment Funds Association 10 Hong Kong Monetary Authority 10 Hong Kong SFA 10 HSBC Securities Services 46
IESE Business School IFBL IFDS Luxembourg Interactive Data Investment Company Institute IQ Solutions IRS
K Kabir Junaed Kalathas Cynthia KBL Kiesch Lou KMPG Kneip KPMG Kredietrust Luxembourg Kremer Antoine Kremer Claude Kurt Salmon
US Carne Global
Director Guido Kröger Art director Maxime Pintadu
24
T 46 38 46
H
Illustrations Jocelyn Gravot Cynthia Schreiber
G Giovannetti Stefano Google Griffin Jill
Jayawardana Melvin
46
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