A European Union directive that aims to regulate the region’s alternative investment fund managers (AIFMs) enters into effect today, but a survey reveals that many managers are still uncertain about its requirements and afraid that it would have a negative impact.
BNY Mellon polled 70 respondents in Europe, Asia, the United States and Latin America from companies whose combined assets under management amount to more than US$5 trillion (C$5.17 trillion).
Half of the participants believe that uncertainty persists in their firms about the requirements of the EU’s Alternative Investment Fund Managers Directive (AIFMD). One-third are afraid of not complying on time and of experiencing adverse financial effects.
Fifty percent of respondents believe that, over the medium term, their organization will be disadvantaged in some way by the new regulation. Only 18% see it as beneficial.
Specifically, money managers see higher costs on the horizon. They believe that initial project or one-off expenses will range from $300,000 to more than $1 million per institution, according to the survey.
In fact, money managers see regulatory reporting as the biggest thief of cost and time, followed by risk and compliance reporting. Respondents are uncertain about the cost of depository services, which are not included in the estimates above. Eighty-eight percent expect that the cost of funds will increase as a result of the new directive.
Two-thirds of participants believe the cost and complexity of compliance will mean fewer opportunities for investors. At the same time, respondents believe that it will be investors who will experience whatever benefits the regulation may bring. More than half of respondents also anticipate an increase in the amount of capital invested in alternative funds.
Additionally, the majority (67%) of participants believe that the new regulation will cause the absolute number of alternative funds to decrease. Thirty-nine percent believe that their company will close some funds, move funds outside the EU or merge funds.
While 58% of respondents already have a project team to deal with the new directive, 73% do not expect to apply for authorization before 2014.
“Despite attempts to improve investor access and information, the industry is challenged by the complexity of implementing AIFMD and the need to comply with it in the future,” says Hani Kablawi, Europe, Middle East and Africa head of asset servicing at BNY Mellon. “This is a demanding time for the industry as it grapples with the slew of further regulation under implementation or discussion across Europe.”
AIFMs make up a big chunk of trading activities in the European financial system, managing lots of assets on behalf of pension funds and other investors. As a result of this great leverage, AIFMs pose a risk to other market participants, and this risk has to be controlled, the EU institutions argue.
“The [financial] crisis exposed a number of deficiencies in this regard, notably a lack of transparency, deficiencies in risk management and asset-safekeeping arrangements, and weaknesses in due diligence,” according to a European Commission press release.
The new regulation aims to create an EU-wide surveillance mechanism for the first time. This would allow asset managers to passport their services throughout the bloc, making wider distribution easier.
In order to secure the passport, managers and funds have to comply with new regulations in the areas of depositories, operations and transparency, and governance.
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