Regulatory update
This regulatory update covers major new regulatory requirements and substantial developments that affect the investment management industry.
§ UCITS IV ENTERS INTO FORCE IN THE EU – AT LEAST ON PAPER
On 1 July 2011, UCITS IV came into force in the EU. However, detailed implementation rules which are necessary to bring into effect the new aspects of UCITS IV are still missing in many jurisdictions. Of the 27 EU member states, Luxembourg, Germany, Ireland, Malta, Denmark and the UK have transposed the directive into national law and were ready for the 1 July deadline. France, Austria, the Netherlands, Romania, Cyprus, Italy, Spain, Sweden and Finland are still at the draft legislative stage. Norway, Belgium and Portugal are still waiting on their respective administrations to issue a draft of the law. The longer the disjointed implementation process continues, the greater the possibility of regulatory arbitrage. It also places investment management firms operating in jurisdictions that have not transposed the directive at a competitive disadvantage with their more compliant counterparts. The problems associated with implementing directives like UCITS IV uniformly across 27 member states have influenced the European Commission’s decision to use mainly so-called ‘Regulations’ in the future, which are automatically binding on member states.
http://www.pwc.com/gx/en/financial-services/issues/regulation/european-fs-regulation-update/updates/july-11-2011.jhtml#1
§ SEC ADOPTS NEW RULES IN CONNECTION WITH DODD-FRANK ACT
On 23 June 2011, the USA’s Securities and Exchange Commission (SEC) voted in favour of adopting several new rules and amendments in order to effect certain provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Dodd-Frank Act. Most of the changes involve the amount of assets under management (AUM) a US-registered investment adviser (RIA) must have under its auspices. But there’s another important change: For the purposes of determining whether a firm needs to register at the SEC or state level, the term ‘assets under management’ is being replaced with the term ‘regulatory assets under management.’ Under the new rules, advisers currently registered with the SEC will have until 30 March 2012 to certify that they are qualified for SEC registration – e.g., that they have registered AUM of at least US$100 million. Advisers that fall short of the new threshold (the old threshold was US$25 million) are required to register with the appropriate state authorities and withdraw from SEC registration by 28 June 2012.
http://www.riabiz.com/a/7152478
§ BROAD AGREEMENT ON OVERALL DESIGN OF BASEL III REFORM
On 26 June 2011, the Group of Governors and Heads of Supervision (‘the Committee’), the oversight body of the Basel Committee on Banking Supervision (BCBS), reached broad agreement on the overall design of the Basel III capital and liquidity reform measures. In terms of defining capital, the Committee recognises that certain deductions in previous proposals could have resulted in adverse consequences on some business models and processes. Therefore, it has capped recognition of the following items at 10% of the bank’s common equity component (the aggregate of the three items are capped at 15%): investments of more than 10% of issued share capital in unconsolidated financial institutions; mortgage servicing rights; and deferred tax assets that arise from timing differences. It has also agreed to recognise minority interest supporting ‘the risks of a subsidiary that is a bank’ and removing the counterparty credit restriction on hedging of investments in other financial institutions.
http://www.pwc.com/gx/en/financial-services/issues/regulation/european-fs-regulation-update/updates/july-11-2011.jhtml#1
§ NEW EU PROPOSAL ON BANK CAPITAL REQUIREMENTS
On 20 July 2011, the European Commission adopted a legislative package to strengthen the regulation of the banking sector. The proposal replaces the current Capital Requirements Directives (2006/48 and 2006/49) with a Directive and a Regulation and constitutes another major step towards creating a sounder and safer financial system. The directive governs the access to deposit-taking activities while the regulation establishes the prudential requirements institutions need to respect.
http://ec.europa.eu/internal_market/bank/docs/regcapital/CRD4_reform/IA_directive_en.pdf
§ EIOPA PUBLISHES RESULTS OF FIFTH QUANTITATIVE IMPACT STUDY (QIS5)
The European Insurance and Occupational Pensions Authority (EIOPA) published the QIS5 report on 14 March 2011. QIS5 is the fifth and last full quantitative impact study before the Solvency II regime is implemented and the publication of the QIS5 report represents a key milestone in finalisation of the Solvency II project.
https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/QIS5_Report_Final.pdf
§ DERIVATIVES, CENTRAL COUNTERPARTIES AND TRADE REPOSITORIES
This compilation of briefing papers deals with two crucial questions related to the European Commission’s Proposal for a Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories (also known as the European Market Infrastructure Regulation (EMIR). QIS exercises are crucial to the development of EU regulation. QIS5 is the fifth in the sequence and probably the last fully comprehensive exercise. The QIS exercises are essential to strive to ensure that Solvency II is designed in the most appropriate manner, with sufficient evidence of the impact of the regime proposed.
http://www.europarl.europa.eu/document/activities/cont/201103/20110324ATT16422/20110324ATT16422EN.pdf
§ SUMMARY OF KEY FATCA PROVISIONS
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in US efforts to combat tax evasion by US persons holding investments in offshore accounts. Under FATCA, certain US taxpayers holding financial assets outside the USA must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. IRS here provides a summary of the key FATCA provisions.
http://www.irs.gov/businesses/corporations/article/0,,id=236664,00.html
§ IASB PROPOSES ADJUSTMENT TO EFFECTIVE DATE OF IFRS 9
The International Accounting Standards Board has published this exposure draft of proposed amendments to IFRS 9 Financial Instruments to propose changing the mandatory effective date of IFRS 9 so that entities would be required to apply them for annual periods beginning on or after 1 January 2015 rather than being required to apply them for annual periods beginning on or after 1 January 2013. Early application of both would continue to be permitted.
http://www.ifrs.org/NR/rdonlyres/8C0E16FF-1512-4D87-9413F4FEDA24EE34/0/EDAmendmentstoIFRS9_August2011.pdf
§ ESMA’S CONSULTATION PAPER (DRAFT) ON POSSIBLE IMPLEMENTING MEASURES OF AIFMD
On 13 July 2011, The European Securities and Markets Authority (ESMA) sent a consultation paper to the European Commission on possible measures for implementation of the Alternative Investment Fund Managers Directive (AIFMD). This paper will be of interest to managers, depositaries and prime brokers of alternative investment funds, investors in those funds, as well as associations or other bodies representing such entities.
http://www.esma.europa.eu/popup2.php?id=7625
§ CUSTODIANS REPORTED BURDENED BY REGULATORY CHANGES IN GERMANY
New domestic and Europe-wide regulations for the financial sector are putting pressure on custodians operating in Germany, consultancy kommalpha has found. In its annual survey – conducted on behalf of the Financial Times’ German pension magazine dpn among custodians and custodian banks operating in Germany – kommalpha said the so-called ‘Depotbankrundschreiben‘ by German supervisor Bafin had caused the most strain. This circular on custodians and custodian banks has sharpened some regulations regarding reporting and verification. Clemens Schürhoff, board member at kommalpha, said the obligation to verify legal and bespoke exposure caps for various asset classes in investment managers’ portfolios, based on independent data warehousing, would lead to an increase in demand for IT solutions among custodians.
http://www.ipe.com/news/custodians-burdened-by-regulatory-changes-in-germany-says-kommalpha_41292.php?s=regulatory%20changes
§ BASEL III AND ITS CONSEQUENCES: CONFRONTING A NEW REGULATORY ENVINRONMENT
Recent fiscal crises demonstrated numerous weaknesses in the global regulatory framework and in banks’ risk management practices. As a result, regulatory authorities have discussed several new measures to increase the stability of the financial markets. One central focus is strengthening global capital and liquidity rules (Basel III) with the goal of improving the banking sector’s ability to absorb shocks arising from financial and economic stress [Source: Basel Committee on Banking Supervision (Dec. 2010) - Basel III: A global regulatory framework for more resilient banks and banking systems].
http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Basel_III_and_its_Consequences.pdf
§ GULATION MAY ‘DESTROY’ GLOBAL SAVINGS CULTURE
There is a danger over-regulation could ‘destroy’ the savings, protection and investment culture, according to a new report published by software consultancy company Focus Solutions. The report, authored by Focus Solutions’ Martin McKenna, said in pre-1988 UK, when the regulatory environment was much more relaxed, the savings and investments culture was healthy, with past generations often pressuring the younger generations to save. It also said that, in the majority, customers understood the products they were buying and the sales process, which was often done face to face as profit margins were sufficient for companies to sustain a larger sales force. He added that, while the profitability was much larger for these companies, this in turn often benefited the customers who would periodically receive bonuses.
http://www.international-adviser.com/article/report-overregulation-may-destroy-global-savings-culture
