Malta's Vision for the Future of Asset Management was outlined by Chairman Prof JV Bannister during the Third Annual Malta Spring Fund Conference, held on 14th and 15th March, with the principle theme being Implications for Funds, Managers, Service Providers. The conference was organised by ESAFON, the European & Swiss Network of Asset and Fund Managers, Family Offices and Strategic Advisers.
The asset management industry plays a distinctive role in capital markets by pooling the savings of investors and investing them strategically in financial instruments and other assets with the aim of generating returns. This industry fulfils an essential economic function by directing savings towards productive activities, facilitating the participation of small investors in financial markets; taking part in both primary and secondary equity markets; providing short and long-term credit to corporations, financial institutions and governments and participating in price discovery.
This is a sector of growing importance for Europe, which now accounts for about 30% of global assets under management making it the second largest player in the world after the United States.
Explaining the Authority's Vision and direction for the further development of the funds sector, Prof Bannister described five key fundamental areas as being at the foundation of stability and growth of this sector:
- Convergence between traditional and alternative strategies;
- Convergence on Transparency
- Convergence on Regulation;
- Convergence on Consumer Protection
- Opportunities
Evidently, a number of desired regulatory changes have been brought about as a consequence of the international financial crisis. However, a number of changes have also been brought about by innovation within the sector. In the wake of these events, investors have demanded higher transparency and better governance from managers, particularly after the crisis, prompting for instance hedge funds to abandon their 'black-box' approach to investing in order to expand or retain their business.
The Chairman explained that in the coming years, additional changes in regulation that were adopted to take stock of the lessons learned notably in the financial crisis (such as the AIFMD) are expected to deepen convergence. The registration requirements, conduct of business rules and transparency obligations that used to operate only for traditional managers have been extended to the alternative space, thereby reducing the gap in terms of administrative burden – which acted as a major disincentive for alternative managers to launch their own mutual and UCITS funds.
Prudential rules, which influence the allocation of institutional investors by establishing capital and solvency charges, have been revisited to give more weight to the ultimate underlying rather than the legal form of the fund. It follows therefore that managers will increasingly offer customised solutions to institutional investors, where they will apply the best tools at their disposal, whether traditional or alternative, and thereby furthering convergence.
Tackling the subject of consumer protection, Prof Bannister noted that while this has traditionally targeted retail investors with regulation providing a framework for asset managers to structure and sell funds in the retail market, the crisis also revealed the importance of affording an adequate level of 'protection' to professional and institutional investors.
The protective role of regulation for professional and institutional investors, is limited chiefly to mandating a level of disclosure from managers that enables their clients to conduct meaningful due diligence processes and making conduct of business principles explicit in regulation so that investors are better equipped to ensure that managers abide by their fiduciary duties. These two elements complement strictly prudential rules in the AIFMD and, by their connection with financial stability, are also integral parts of 'manager regulation'
In his concluding remarks, the MFSA Chairman explained that targeted rule-making to strengthen financial stability will continue as concerns about maturity and liquidity transformation, and imperfect risk transfers, outside the regular banking system (shadow-banking) are likely to result in restrictions to practices such as securities lending or the re-hypothecation of collateral. Some industry sub-sectors, such as money market funds with stable net asset values, are likely to see fundamental changes in the way their business is regulated.
Funds under AIFMD will attract the interest of institutional investors. The challenge will be to implement the AIFMD successfully, achieving its objectives without undermining the competitive position of the EU asset management industry. As the AIFMD comes into force and gains momentum, the allocation of institutional investors to non-harmonised investment funds is set to increase further. Moreover, as prudential rules turn their attention to the ultimate underlying rather than the legal form of investment funds, the access of institutional investors to non-harmonised funds will be eased.
Prof Bannister argued that regulation can help industry development and open opportunities for European asset managers in other areas of the globe. As much as 25% of assets under management in UCITS funds are sourced outside the EU, with the majority of the assets coming from Asia and an increasing share from South America. In a period of slow growth in Europe, emerging economies represent a significant opportunity for European asset managers to market both their funds and their management services. The challenge is to develop the AIFMD into a competitive framework that would see EU managers successfully offering not only their funds but also their management services around the world.
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