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Today New City Initiative is comprised of 51 leading independent asset management firms from the UK and the Continent, managing approximately £400 billion and employing several thousand people.

Displaying articles for 3 2018

EU Cross-Border Marketing Proposals Fall Short

EU Cross-Border Marketing Proposals Fall Short

In 2015, New City Initiative (NCI) partnered with Open Europe and produced a paper – Asset Management in Europe: The Case for Reform – which acknowledged that despite the availability of passporting under the UCITS and AIFMD regimes, various impediments levied at a national level stifled the seamless cross-border distribution of EU-regulated fund products across member states.

These restrictions, NCI calculated, created 1.5 million euros of initial costs to a UK-based fund manager distributing across the EU-27 (plus Switzerland), and a further 1.4 million euros in on-going Annual maintenance costs. NCI notified EU and UK regulators about this anomaly and the detrimental impact it was having on boutiques raising EU funds at a time when Growing regulatory and operational requirements were eating into margins.

Shortly thereafter, it was announced the Capital Markets Union (CMU), an initiative welcomed by NCI at the time, contained among some of its policy objectives a commitment to make cross-border distribution of EU fund structures (AIFs, UCITS, ELTIFs, EUVECAs, EUSEFs) more efficient, by removing some of these national barriers and obstacles flagged by NCI among other industry bodies and associations.  

In March 2018, the European Commission (EC) came up with a set of proposals designed to expedite cross-border distribution of EU regulated fund products. To summarise, the proposals do not exactly tally with what NCI or other industry associations had in mind, mainly because they introduce even more obligations and complexities for firms marketing into the EU to deal with. Arguably, this is the exact opposite of what was being called for by the industry.

Nonetheless, there are some small wins for asset managers to take home, primarily around local regulatory costs and charges. A persistent irritation – and one that was outlined in NCI’s paperback in 2015 – was that home and host state regulators levied fees on AIFMs and UCITS during the authorisation and registration process, which were not homogenised, thereby discouraging EU funds from distributing beyond just a handful of markets.

A report on the CMU proposals by law firm William Fry said that while local regulators can still levy charges on AIFMs and UCITS during authorisations and registrations, these must be proportionate to the regulator’s own costs, and they must publish all fees and charges on their websites, and notify ESMA accordingly. The same report said that while this change was modest, it was welcome, a view shared by NCI.

Less welcome, however, is the EC’s stance on pre-marketing, a vaguely defined concept that allows firms to avoid notifying EU regulators and complying with AIFMD and UCITS while they make preliminary contact with investors provided they adhere to some very strict conditions. The lack of EU-wide standardisation has always meant that pre-marketing in one jurisdiction (i.e. the UK) may contradict the marketing rules in another country.

Having not previously demarcated where the boundaries for pre-marketing actually were, the EC has sought to instil some clarity under CMU for the benefit of its member states and fund managers. The EC said that pre-marketing was the “direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union to test their interest in an AIF that is not yet established.”

In addition, pre-marketing does not allow managers to share draft prospectuses or offering documents with investors. This latter proposal is certainly more constraining than the existing approach taken in the UK where it is permissible under pre-marketing rules to share draft documentation with investors – provided prospects are not obliged to enter into a binding agreement afterwards.

In the short-term, the rules are likely to rile the UK, which takes a fairly tolerant attitude towards pre-marketing versus other constituents in the EU27, but its lasting impact may be felt elsewhere, especially among third country managers. Many non-EU firms (including UK managers post-Brexit) have expressed alarm that legitimate practices under reverse solicitation could well be outlawed under the new pre-marketing rules.

This leaves few options for third country managers looking to run EU money after Brexit. Firms can either comply with AIFMD and then build the appropriate infrastructure around it, or just assiduously study the pre-marketing rules being put forward by the EU and ensure they do not break them (i.e. do not market inside the EU period).

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Enabling Technology Change at Boutiques

Enabling Technology Change at Boutiques

Advancements in technology bring benefits, but boutique asset managers need to embrace change in a way that is considered and not impetuous. While fin-tech is an exciting premise, fund managers must ensure they do not get overwhelmed by the hype that some of these innovations have generated. This will require asset managers to be engaged on fin-tech matters, but equally pragmatic so as to reduce the risk of wasting money on products that deliver limited or zero value to their businesses and clients.

Finding the right use cases

Fin-tech innovations like Blockchain and AI offer a number of advantages, but asset managers need to be selective about how and where they integrate this technology into their organisations. Firstly, a lot of fin-techs have been established, some of whom are marketing products which are unsuited to the industry’s needs, or that solve a non-existent problem. Such providers need to be avoided.

Furthermore, not all inefficiencies within a business warrant a fin-tech intervention. Existing software providing automation can solve many of the current operational inefficiencies which are present across the industry. Spending money on fin-tech when it is untested and expensive is not a sound business judgement, so boutiques may want to wait until the technology becomes more commoditised and homogenised before adopting it.

Managing risk

The risks posed by innovative technologies to businesses are only now beginning to be understood. As such, human intervention is still necessitated when managing these new technologies. While a lot has been written about robotics removing jobs in the middle and back office, there will still need to be human oversight to check that the data being inserted into these AI programmes is accurate, alongside the trends that are identified by the software in order to spare fund houses from serious losses.

Ensuring technology is future-proofed against embryonic risks is also key. Take Blockchain, for example. Blockchain theoretically protects the data it holds through encryption and cryptography, but concerns are growing about how effective these defences will be as and when quantum computing enters the mainstream.[1] Highly-powerful quantum computers – if exploited by cyber-criminals – could unlock Blockchain’s encryptions thereby

undermining one of the technology’s chief selling points. 

Service provider risk is a serious issue for managers when working with fin-tech firms. While banks are cushioned by balance sheet capital, many fin-techs are reliant on VC or private investor funding, with a limited runway to achieve success. With fin-techs aggressively burning through these cash reserves, many are anticipating a consolidation of providers. As such, managers need to make sure they work with fin-techs which have a long-term strategy and strong balance sheets.

Not disregarding the rules

Regulators have been highly supportive of disruptive technology and are encouraging financial services to innovate, but abuses will not be tolerated. The big tech industry has been left rattled after data mismanagement was exposed at Facebook, and some financial services firms are understandably nervous about whether some of their own big data strategies could incur scrutiny.

As the General Data Protection Regulation (GDPR) becomes law later this year, innovations in big data need to be counterbalanced carefully with clients’ privacy rights, otherwise firms could be on the receiving end of some severe regulatory reproaches.  Adopting a strategy which puts client data at risk of being misused would be a very dangerous approach for any manager to take in the current political environment.

Don’t be afraid of the new competition

While boutiques should not prematurely implement innovative technology without a clear-cut strategy, they cannot afford to ignore the lurking competition which could potentially challenge the industry. The big tech companies are moving into financial services courtesy of open banking rules. Apple and Amazon already facilitate payments, while Facebook has obtained an electronic money license in Ireland.

Many of these big tech providers will also be monitoring developments at Yu’e Bao in China, a subsidiary of Alibaba which now operates one of the biggest money market funds in the world. These firms are undoubtedly identifying ways to tap into asset management to complement their existing services.

For boutiques to succeed in the future, they must be willing to face this new competition head on, and not bury their heads in the sand.  History has shown in many industries that large incumbents can struggle to deal with disruption if they move too slowly and focus on protecting their existing business.  Boutiques are smaller, nimbler and more innovative, giving them an excellent advantage.

 

[1] Global Custodian – Quantum computing threatens Blockchain security

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Reflections on NCI’s Blockchain Event of 28 March 2018

Reflections on NCI’s Blockchain Event of 28 March 2018

On 28 March 2018, New City Initiative (NCI) held a discussion and panel event on the topic of how Distributed Ledger Technology (DLT) and other technologies would likely affect the boutique asset management industry. In some of NCI’s recent policy papers we have explored the unique culture within small and medium-sized boutique asset managers: that culture promotes innovation and use of DLT is likely a trend that will advance rapidly in the industry.

The evening was structured as follows. Firstly, I gave a brief introductory presentation on DLT, including some usage cases across industries such as banking, insurance, music and public services. The common perception of DLT is its usage in Bitcoin, yet that is merely one usage case and moreover presupposes that public blockchains will dominate. The transformative effect runs more deeply and is likely not yet fully perceived, just as early use-cases of the internet in the late 1990s were not necessarily those that thrived: companies such as Amazon have used the internet as an enabler to drive changes in real-world businesses and, in my opinion, that is how the effect of DLT will ultimately be seen. This was followed by a panel discussion featuring three expert panellists: Liliana Reasor, who is CEO of SupraFin; Richard Maton, Partner at Aperio Strategy and Founder of the Financial Institution Innovation Network, and; Nick Bone, Founder and CEO of EquiChain.

Liliana talked about how the traditional IPO market can be disrupted by the processes used in Initial Coin Offerings (ICOs), transforming the operation of capital markets and empowering individual investors: SupraFin is a leader in this space. Nick commented on how DLT can be used to automate middle and back-office functions, but how there should be an awareness of vested interest in resisting change. Rather, investors may ultimately access securities and the custody chain directly, a usage case that EquiChain is developing. Richard commented on the need for changes in organizational culture and collaboration models to create and develop solutions that incorporate DLT and other technologies such as Artificial Intelligence (AI) and the capacity to be self-critical: by way of example, Kodak, Xerox and the like could not adapt, and perhaps actively avoided change; the result is self-evident.

Another interesting topic discussed was how DLT, and the security it can give, could allow emerging economies to leapfrog legacy economies, a process assisted by demographic change and a modern dependence on the state in Western countries. I walked away feeling excited about the future yet thinking that the asset management space, and financial services generally, will change rapidly in the face of technology: DLT intersects with AI and the increased data processing capabilities often called Big Data.

Panels such as these are a good opportunity to consider major changes in our industry and make us rethink certain assumptions. For instance, it may not be Brexit or regulation that turns out to be the biggest threat and opportunity to asset managers, but instead the adoption of disruptive technologies such as DLT and AI, amongst others.

Furthermore, the insightful questions from the industry audience put paid to the view that asset management is conservative and resistant to change; instead they demonstrated an appetite for innovation.

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Brexit - Still far from settled

Brexit - Still far from settled

To say the timing of AIMA’s (Alternative Investment Management Association) Global and Regulatory Policy Conference in Dublin was fortuitous is an understatement, happening less than one day after the UK and EU announced a conditional agreement for a transition or implementation period, potentially giving businesses an additional 21 months to finalise their Brexit planning. The word conditional here is very important because the transitional arrangement will only be formalised if the withdrawal treaty is fully agreed.

To summarise one AIMA attendee, "it is an agreement conditional on an agreement." Any number of issues could wreck UK-EU negotiations over the next 12 months including the future status of the Northern Ireland border; Spanish disagreement over Gibraltar; or even insistence from nationalistic Greeks that a Brexit transition be somehow linked to the immediate return of the Elgin Marbles (sadly not a joke).

If no withdrawal agreement is ratified, a Hard Brexit in March 2019 beckons. Despite all of the vainglorious media reports over the last 48 hours, it is very difficult to see what has actually changed. EU regulators – conscious of this misplaced optimism - have been at pains to stress that the risk of a no-deal is not a remote possibility, but something which organisations should still be actively provisioning for.

As such, fund managers must not over-analyse this relative thawing of Brexit negotiations, but should continue making preparations to ensure EU access – assuming they still want it – is still available to them following the UK’s departure. With delegation and reverse solicitation’s future both looking increasingly precarious in the AIFMD review, now is the time for firms to consider whether they create subsidiaries in the EU-27.

On the basis that there is unlikely to be any certainty around Brexit until early next year, the decision to relocate will have to be made blindly.  However, regulators at the AIMA event warned UK fund managers and banks that establishing shell companies inside the EU to game market access will not be tolerated post-Brexit. A number of EU regulators have also told managers that authorisations could take time if submissions all occur concurrently, and are recommending that firms send over their applications by mid-2018.

The other big risk for asset managers is fragmentation. Recent statements from EU regulators have been revealing. While fragmentation is not ideal, many EU regulators seem resigned to the fact it will happen, and have urged firms to plan for it.  For boutiques, this risks adding more costs to their operations if they are marketing into the UK and EU. Managers should start factoring these potential costs into their businesses, and build buffers accordingly.

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