The case of the Asset Management Industry

1
The case of the Asset Management Industry
Peter De Proft, Director General, EFAMA
2
Agenda

• Characteristics of Asset Management
• The regulatory framework UCITS and MiFID
• Prominent conflicts of interest
• Inducements
• Softing and bundling
• Churning
• Conclusion

3
Characteristics of Asset Management (I)

• Conflicts of interest are inherent, but less
• concentrated because
• Alignment of interests
• Fees and reputation are performance-based
• Certain activities are not undertaken
• Proprietary trading
• Research (sell-side)
• Reputation at risk

4
Characteristics of Asset Management (II)

• 3 classic conflicts of interest
• Investment risk not fully assumed by manager
• Compliance with investment policy to be ensured
  (depositary) risk management in place
• Allocation of orders to various investors
• Objective policies and procedures to be defined
• Selection of brokers
• ? Conflicts of interest are manageable

5
The Current Regulatory Framework (I)

• UCITS mainly production, partly
  distribution-side
• MIFID distribution-side
• ? Overlaps
• Common approach fiduciary standard Asset
  managers have to act in the best interest of
  their clients

6
The Current Regulatory Framework (II)

• UCITS
• Act honestly and fairly
• With due skill, care and diligence
• Try to avoid conflict of interests
• Act in the best interest of the investors, the
  UCITS and the integrity of the market (Article 5
  h)
• Management company to be structured and organized
  in such a way as to minimize the risk of
  conflicts of interest (Article 5 f (1) (b))

7
The Current Regulatory Framework (III)

• Level 1 MiFID
• Act honestly, fairly and professionally in
  accordance with the best interests of its clients
  (Article 19 (1))
• Identify conflicts of interest (Article 18 (1))
• Prevent through organizational and administrative
  arrangements (Article 13 (3))
• Disclose if not appropriately managed (Article 18
  (2))
• Level 2 MiFID Implementing Directive
• Article 22 administrative requirements around
  the management of conflicts of interest

8
Prominent Conflicts Inducements

• MiFID objective remove biases in investment
  advice that arise from distribution commissions
• EFAMA supports transparency to investors and
  suitability tests
• Concern uneven level playing field with regard
  to substitute products

9
Prominent Conflicts Softing Bundling

• High performance to be achieved through
• Low costs for transactions
• High quality research
• ? Softing bundling should not be forbidden per
  se
• MiFID inducements allowed if
• Clearly disclosed and
• Designed to enhance the quality of the relevant
  service (Art. 26 (b) Implementing Directive)
• ? Reasonable approach

10
Prominent Conflicts Churning

• Activity primarily undertaken by brokers
• Excessive buying and selling may reduce
  performance
• ? Asset manager normally not at the source of
  churning

11
Conclusion

• Fiduciary duty imposed by UCITS and MiFID
• MiFID successfully addresses the area in which
  most conflicts of interest arise distribution
• Importance of creating a level playing field
• Consistent MiFID implementation throughout Europe
• Substitute products

12
Contact

• Peter De Proft
• peter.deproft_at_efama.org
• EFAMA secretariat
• Square de Meeûs, 18/2
• B-1050 Brussels
• Tel. [phone]
• Fax [phone]
• E-mail info_at_efama.org
• www.efama.org