Asset managers and investors are waiting for the new European Union Commission to be assembled because they want to know what they can expect from the new EU government regarding upcoming financial industry regulation.
One thing that is already clear is the EU action plan on financing sustainable growth will be one of the drivers for new regulations. For example, the requirements with regard to reporting duties on sustainable activities will be translated into a formal format. In addition, it is also clear the current action plan was only the first step with regard to fostering sustainability within the financial industry, as this action plan is only focusing on environmental issues—the E in ESG. Therefore, it can be expected that the new EU Commission will extend the action plan to the S (social) and the G (governance), as the EU government strives for the position of global leadership when it comes to sustainability.
It also appears to be clear that the EU Commission, as well as the European Securities and Markets Authority (ESMA), will review the fees and expenses charged by mutual funds. The focus of this review is expected to be on the transparency of internal services fees, as well as on the harmonization of the different fees and expenses charged by mutual funds. Another topic that might come under review is performance fees, as there is no common standard in EU countries for these fees at the moment. This is a hindrance for fund distribution and stands against the goal of a common market within the EU. This means that the EU Commission needs to find a middle ground between the countries with high standards on when and how performance fees can be charged and those who only comply to the minimum standards. Only then can there be further harmonization of the EU markets for mutual funds.
It is also expected that at least ESMA is going to review the use of modern portfolio management techniques, with a focus on securities lending. The current regulation on securities lending is rather generic and may need some more specifications and higher minimum standards to avoid defaults that may damage investor confidence and cause loses. This is because securities lending has become very popular as fund managers can make additional profits from this activity.
Following the liquidity issues at GAM Investments and Woodford Investment Management that led to the closure of multi-billion-euro mutual funds, I would expect that there will be a review of the Ucits regulation with regard to illiquid holdings within mutual funds. These led to market events mentioned above and massively impacted investor confidence in the investment management industry in general.
It would be no surprise if the new EU Commission initiates a general review of the Ucits V regulation, which will lead to a new version (Ucits VI) of the regulation. If this ends up being the case, I would also expect that the new Ucits regulation will contain more standards for fiduciary duties, as well as for mutual fund transparency.
Detlef Glow is head of Lipper EMEA Research