Scanning the EU Regulatory Horizon
The EU is on course to enter a new phase of regulatory change
This year will be a game of two halves for European policymakers. In the first half of the year, their focus will be on finalizing a number of open proposals. While in the second half of the year, the focus will change to considering new regulatory proposals. In both cases, any changes will become challenges for the industry in the future and it is important that asset managers understand what issues are on the horizon.
The Race to the Finish Line
European policymakers face a tight deadline to get all open legislative proposals approved ahead of the European Parliamentary elections in May. Any proposals that are not approved in time will have to go back to square one after the new Parliament is formed. A similar situation occurred in 2014 and led to the so-called Super Tuesday where a slew of financial regulations were approved all at once. These regulations had wide-ranging implications for the asset management industry that are still being felt today.
Asset managers are not facing nearly the same scale of new regulations this time around but there are some key issues they should be tracking. These include updates to the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) and Alternative Investment Fund Managers Directive (AIFMD) frameworks, a proposed Environmental, Social, and Governance (ESG) framework, the creation of a Pan-European Personal Pension Product, and changes to the European Market Infrastructure Regulation.
In the push to finalize the proposals ahead of the deadline, there will be a number of parallel conversations happening among the European Commission, Parliament, and Council. The drive to the deadline could also lead to hasty compromises, which usually manifest as implementation challenges down the line. Arguably, the issues with the Packaged Retail Investment and Insurance-based Products (PRIIPs) and Markets in Financial Instruments Directive (MiFID) 2 transaction cost calculations are a result of imperfect decisions made in the run up to Super Tuesday. The industry should pay close attention to the developments because decisions made today will become implementation challenges tomorrow.
Here We Go Again
Once the new Parliament is formed this summer, European policymakers will shift gears from finalizing rules to considering new regulatory changes. It is likely that we will see the revival of UCITS 6, which was originally proposed in 2012. While a number of the elements from the original proposal, such as the money market fund rules, have been handled in separate regulations, asset managers should expect UCITS 6 to be quite broad. Possible elements include enhanced liquidity management rules, the creation of specific third-country delegation provisions, and restrictions on performance fees. It is also possible that some policymakers will try to revive the bonus cap for asset managers, which was abandoned with UCITS 5.
UCITS 6 is not the only potential regulatory sequel in the pipeline. There could also be consultations on AIFMD 2, PRIIPs 2, and even MiFID 3. These regulations are at the core of the asset management industry and, depending on their scope, could have substantial long-term global implications.
This will be the first major wave of EU regulation of the post-Brexit era, where the UK may no longer have direct say in EU policymaking. The UK has historically been a major contributor to EU policy and its absence should noticeably change the dynamic. For example, the UK was instrumental in shutting down the UCITS 5 bonus cap. With the UK no longer at the table, the industry is losing what has often been an important ally. The industry should be more vigilant in the consultation process and will need to recalibrate their lobbying efforts to focus on winning new allies in Brussels. The sooner asset management adjusts to the new reality of the post-Brexit era, the better positioned it will be.
Preparing for the Next Phase
Despite being a relatively calm period for regulatory changes, there are signs that activity will pick up in the near future. Asset managers should keep their focus on tracking evolving debates and continue to engage with policymakers during the consultation periods. Firms should also ensure their operations are ready for the next round of regulatory change to take advantage of potential opportunities for new products and solutions.
Read Citi’s 2019 FinReg Outlook: The Calm Before the Storm, for more detail on the key developments, regulations, and trends that asset managers should be tracking for the year ahead.
Sean Tuffy, Head of Market and Regulatory Intelligence, Custody and Fund Services, Citi
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