Following the publication of the European Commission’s proposed amendment to the ESA Regulation to give more supervising authority to ESMA, EBA and EIOPA, the Association of the Luxembourg Fund Industry (ALFI) has expressed its surprise and concern about the new role for ESMA in the authorisation procedure of delegation arrangements.
Denise Voss (pictured), Chairman of ALFI, says: “We question this proposed additional layer in the authorisation procedure, required when a fund wants to delegate part of its activities to third countries. This is increased bureaucracy, it lengthens time to market and it increases costs. This will undoubtedly have a negative effect on the competitiveness of EU funds as a whole, and ultimately on the investor. We see no added value in this as the local regulators, being close to the asset managers and the market, remain best placed to authorise and oversee funds and their operations.
“The stipulations in the Commission proposal on the authorisation procedure of delegation arrangements are a new element since the initial consultation, which closed in June and to which ALFI responded. These provisions do not prohibit delegation to third countries and ESMA will not directly supervise UCITS funds and AIFs which delegate, amongst other activities, portfolio management to third countries, but the involvement of ESMA will add an addition layer to fund authorisation process and, as such, time to market will be affected. Costs will increase because the proposal would require additional resources at ESMA. These costs would be borne by the industry, on top of the industry’s current financing of the local financial supervisors. Ultimately these costs are likely to be passed on to the investor.
“Delegation is a tried and tested business model that gives investors in funds – including millions of European investors – access to expert portfolio management from managers based around the globe. This model has worked well over the last 3 decades since the introduction of UCITS, and is applied in financial centres throughout Europe.”
Explaining how the delegation model works, Voss says: “Delegation of certain functions back to a company’s headquarters, to other parts of a group or to specialist third party asset managers, while effective decision making and oversight of risks remains in the country from which delegation takes place, is a time-honoured practice not only in Europe but across the globe. It is part and parcel of the global financial system and it is an inherent feature of the European fund model which, in turn, is recognised as a success story worldwide.
“Similarly, in order to give investors access to expert portfolio management skills and experience delegation enables a fund manager in the EU to outsource some portfolio management to a specialist in, for example, Japan or Hong Kong, who knows the local market. Equally a fund management company can delegate to a portfolio manager in eg London – whether the UK is in or outside the EU makes absolutely no difference in this context.
“This proposal risks initiators from third countries turning their back on using European UCITS or AIFs to raise capital in Europe or offer investment solutions to a European client base. It could have a significant impact on the competitiveness of European financial services and products as a whole. UCITS in particular are a European success story, with UCITS investors resident in over 70 countries – in and outside of Europe.
“The delegation model has been both good for European investors – in terms of investment choice – and for Europe, in terms of jobs created in the financial centres throughout Europe. It is difficult to understand the rationale for the Commission’s proposals, which impact not only asset managers and investment funds, but also banks, investment firms and insurance companies, especially given the goals of the Capital Markets Union – which ALFI strongly supports – that seeks to facilitate additional sources of financing economic growth and jobs in Europe.”
ALFI says it is continuing to examine the nearly 300 page text and has set up a high-level task force to look into the current proposal for a regulation to amend the ESA Regulation and other sector actors and to coordinate ALFI’s response.