Regulation focus: 5 key areas for asset managers

By Flora Glaister

Updated on Thursday, 17 November, 2016

We bring you up to date with some of the most pressing regulatory issues facing asset managers right now.

Key Information Documents

Despite the widely-publicised delay to the implementation date, asset managers would do well not to relax their focus on Key Information Documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) as there is much to do while the revised rules become clear and we progress towards the expected go-live date at the end of 2017.

The PRIIPs regulation falls into three levels:

  • Level 1 is the primary regulation Members of the European Parliament (MEPs) voted on in 2014, with an original start date of this December, which listed the necessity and sections of a KID
  • Level 2 Regulatory Technical Standards (or RTS) provide the details of what exactly goes into each section
  • We also expect Level 3 guidance, possibly as Q&As, once the Level 2 is all agreed.

With the rejection of the Level 2 RTS by MEPs on the 14th September, the likely start date of PRIIPs KIDs was thrown into disarray, with the Commission originally refusing to consider a delay to Level 1, but later recommending exactly that.  We are, at the time of writing, waiting for MEPs to confirm formally that they will now go live on 31 December 2017.

The Commission has asked the European Supervisory Authorities (ESAs) to deliver a revised set of RTS before the end of this year, with suggested changes having been leaked even before the recommended delay was announced.

We know that the Commission has asked the ESAs to consider the following changes to the RTS:

  • Amending the calculation of the performance scenarios to make them less “overly optimistic”, including the addition of a “stress” scenario for all funds;
  • Allowing UCITS KIIDs (and NURS KIIs) to be used when the funds are included in an open architecture PRIIP until the end of 2019;
  • Introducing greater clarity around when a Comprehension Alert is needed; and
  • Including information on the features of an insurance contract for which a biometric risk premium is charged.

Other changes to the RTS have been sought by various parties, including the European Council, but we believe that the ones listed here will be enough to persuade MEPs to adopt the RTS.

At FE we understand the uncertainties faced by asset managers, but we are closely monitoring the situation. To help you prepare, we now offer a European PRIIPs template service. Find out more here.

The Financial Conduct Authority - Asset Management Market Study

Those working in the sector will be looking to next year for the results of the FCA’s market study. The aim of which is to understand whether competition is working effectively to allow investors to get value for money. The Financial Conduct Authority (FCA) warn that if the report finds failings, the regulator may intervene with firm-specific guidelines or enforcement action.

The market study will seek to understand:

  • How asset managers compete to deliver value
  • Whether asset managers are willing and able to control costs and quality along the value chain
  • How investment consultants affect competition for institutional asset management

From an initial start date of summer 2016, the FCA announced a delay following the Brexit vote until early 2017 – with an interim report to the published Q4 of this year.

The interim report will detail areas considered to have raised concerns as well as those where few or no problems have been found. Find out more about our solutions for asset managers wanting to add value to professional and retail investors, such as Precision+ Digital.

Unbundling costs under MiFID II

The European Commission’s (EC) approach to unbundling fees under MiFID II will be on many asset managers’ radar. In April the EC published the long awaited draft rules for research and trading fees, backing the bloc’s initiative to provide more transparency to investors.  Where traditionally managers would bundle research charges with trading fees and pass them onto the customer, under the new rules asset managers must either pay for research themselves or fully separate them from trading fees in a separate account.

Although the implementation of MiFID II has been delayed until January 2018, the EC’s approach to the unbundling of fees is worth following - particularly if they continue in the vein of April’s approach.

The Investment Association (IA) review of the UK Equity Income Sector

April was a busy month for regulation, and those with an interest will have noted the launch of the IA’s review into the UK Equity Income sector.

This came after a number of funds were removed from the sector after they were found to fall short of its requirements – particularly the need for funds to produce a minimum of 10% more than the FTSE All Share’s yield over a rolling three-year period.

The review has split the industry down the middle with regards to those that believe change is necessary, and those who wish to leave the sector as it is.

Most recently, the IA have proposed the creation of two UK Equity Income sectors – a ‘UK Higher Income sector to reflect the existing group and a new sector for those that do not meet the existing requirements.

 The IA have said a final definition of the sector will be made by the end of 2016.

European Securities and Markets Authority (ESMA) investigation into closet trackers 

After finding that up to 15 percent of UCITS equity funds could be considered 'closet trackers', the ESMA said in February that it may consider developing new definitions of active and passive management to make the distinction between the two clearer.

There seems to be a lot of regulation out there for the coming months but we are closely monitoring developments and thinking about more ways we can help your business.

Contact us for more information on how we can help you meet your regulatory needs.