Collaboration between different jurisdictions is key for regulation, said panellists at this year’s Association of the Luxembourg Fund Industry (ALFI) London Conference.
The conclusion was reached in a panel entitled ‘Let’s hear from the regulators’, where current issues around regulation amid geopolitical crisis, the aftermath of a global pandemic, and Brexit were addressed.
Considering the wave of global crises facing the industry, the approach that regulators need to take to address these was considered. Marco Zwick, director of the Commission de Surveillance du Secteur Financier (CSSF), highlighted the importance of having specific guidance for different crises, rather than general waivers. “Special times require special measures,” he said, “but we must be mindful of these special times.” Throughout a crisis, regulators must be prepared to adapt and reassess, he continued.
The importance of cross-country communication was also raised as an essential part of navigating troubled waters, with a harmonised response needed.
The necessity of strong cross-border relations was a key theme of the panel, with Mhairi Jackson, manager of funds and asset management policy at the UK Financial Conduct Authority (FCA), outlining some of the post-Brexit regulatory requirements that are being developed.
Prefacing her response with the comment that “things were much simpler when the UK was in the EU,” Jackson explained that Overseas Fund Regulation will replace the current passporting system, with the latter regime ending in December 2025. The new regulation, currently in its “very early stages,” will see HM Treasury using equivalence assessments to maintain equivalent outcomes between UK and EU regimes.
Jackson stressed the operational burden that this change in regulation will place onto firms, within a relatively short time frame. In addition to equivalence requirements, companies will have to re-register with the FCA and this data will have to be processed and approved.
Zwick added that Luxembourg already considers the UK as equivalent to its market, following MiFIR implementation. He went on to say that the difference initially suggested during the AIFMD review to distinguish portfolio management delegations to EU and non-EU countries was “not really making sense,” and stated that the due diligence and oversight obligations of delegates needed to be the same, with the ultimate goal across all jurisdictions being investor protection.
In light of a recent Broadridge study, which reaffirmed Luxembourg’s reputation as a “gateway for distribution,” moderator Michèle Eisenhuth asked Zwick what the country’s industry must do to maintain this status. He responded that accidents absolutely need to be avoided in order to continue the success of distribution, or existing distribution models may be questioned.
The importance of digitisation was also cited as a “key” priority for the country, including the development of communication interfaces by the CSSF to speed up the request submissions process, increase efficiency and reduce time-to-market.
Looking at the UK’s recent regulatory changes, Jackson discussed long-term asset funds (LTAFs), developed in response to defined contribution (DC) pension schemes’ lack of confidence in aiming for high returns. LTAFs use an open-ended structure, allowing for long-term illiquid assets and the potential for higher returns. As part of the implementation process, the FCA has established a productive finance working group to determine what barriers are being faced around long-term investments.
LTAFs are currently available to DC pension funds, however Jackson said that a recent study is being processed to see how they can be opened up to retail investors. She stressed that these should form a part of a diversified portfolio, and that they will be limited to 10 per cent of retail investors’ assets.
Considering long-term investment funds (LTIFs), Zwick commented that their success may have been mitigated by diversification and investment limits, both of which are currently under consideration and subject to change. He added that investors need to fully understand what they are being offered, and that the regulatory focus will be on investor protection.
Discussing regulatory fees, Zwick assured that the CSSF would question fee structures at a fund’s inception if needed, and that fees are particularly important to consider in relation to smaller investment funds. Johnson added that the FCA considers a series of specific criteria to ensure that funds are providing investor value, including costs, comparative market rates, and economies of scale. She added that the regulator requests an annual review from companies, a requirement which has seen firms changing their fee structures as a result.
The FCA annual review of these disclosures has found that there are still areas to improve, with value assessments often difficult to locate and funds not fully considering fee value, she concluded.
Both Zwick and Johnson advocated for the presence of non-executive and independent directors (NEDs) on funds’ boards as independent assessors. Zwick said that NEDs and independent directors can help boards to take a holistic view of their funds, providing additional expertise in relation to new regulatory areas such as ESG. He stated that the CSSF would support this being made a mandatory requirement in the future, subject to EU-level decisions. However, Johnson warned that not all NEDs fully understand rules, and that this can prove an issue.
Concluding with regulatory priorities for 2023, Johnson named value assessments and greenwashing as major considerations, with Zwick adding crypto assets and anti-money laundering to the list. While there are considerable challenges facing the industry, regulators are working to address these issues and reassess their approaches.
