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Tighter Euro fund rules will harm investor returns

Tighter regulation within the European fund management industry will drive up the cost of funds and hit investors’ returns, according to the European Fund and Asset Management Association.

The industry has already seen a wave of new regulation following the financial crisis, including the controversial Alternative Investment Fund Managers directive and proposals for Ucits V.

Efama deputy director general Jarkko Syyrilä says that the cost of funds is set to rise and adds that asset managers will have to pass them on to investors. Commenting on the fund management regulation situation, Syyrila says: “It is difficult to say by how much the cost of funds will go up as a result of regulation but the impact will be significant.”

Among the chief cost drivers for the Ucits funds are the Investor Compensation Schemes Directive and the revised requirements on depositary liability.

Non-Ucits funds are regulated under the AIFM directive, which includes more regulation on valuers’ liability, compliance, additional external reporting to regulators and depositary liability.

If the ICSD proposals go through in their current form, then all of the European member states will have to build a compensation fund for their Ucits ranges.

If the depositary of a Ucits fund loses assets or the custodian goes bankrupt, the scheme would have to cover the losses. This means that Ucits funds will have to pay 0.5 per cent of their assets over the course of 10 years into a pre-funded compensation pot. Together, all EU countries need to raise £24bn for their Ucits assets.

Depositary banks will also face a strict liability under the AIFM directive and Ucits V should they lose the assets which a fund has deposited with them. This will drive up the bank capital requirements, which then raises the cost of running funds for the asset managers.

Baillie Gifford head of retail investments Chris Fletcher claims that requirements to disclose remuneration under the AIFM are “silly”. He says they will inc-rease admin and compliance costs and asset managers may become less profitable.

Martin Currie head of product development Toby Hogbin expects that costs will be shared between investors and asset managers. “Regulation always comes with costs,” he says.


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