Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CHALLENGES & OPPORTUNITIES

3.5

Distribution networks & agreements and trailer fee management

In the context of cross-border distribution, trailer fee management is an inescapable aspect. As a reminder, distribution agreements are established between a management company and its partners in the field of distribution, the distributors, who will then have the objective to sell the management company products. Then, the greater the distributors’ activity is, the greater their incomes or trailer fees are. This type of commission is generally paidmonthly or quarterly by the management company to the distributors. In these aspects, regulatory changes should be carefully monitored. The Markets in Financial Instruments Directive (MiFID) implemented on 1st November 2007 affected fund distribution by introducing new transparency requirements on trailer fees in order to regulate conflicts of in- terest and inducements and enhance final investors’ protection; If trailer fees are planned, this must be disclosed to final investors. The ongoing review of MiFID might further impact rebates in Europe. Moreover, in the UK, the FSA’s new Retail Distribution Review (RDR) regime, which aims to improve the quality of advice given to retail investors by removing all commissions, is expected to profoundly change the way fund providers work with intermediaries when intro- duced in 2012. New fee disclosure rules are also emerging in Asia. Thus, the Taiwan’s Financial Supervisory Commission (FSC) requires fromMarch 2011 onwards existing funds to disclose all commission fees they award to bank distributors. That move aims to improve the transparency of distribution because offshore fund managers have been providing higher commission fees for banks compared with onshore fund managers 55 . Mutual fund sales agreements and the associated commission processing activities are some of the less efficient aspects of the mutual fund industry. The difficulty of this process originates from two sources: The increasing complexity of distribution networks and the lack of stand- ardisation of the related distribution agreements (and consequently the possible absence of mandatory information to identify distributors or calculate fees). Agreements are very often customised legal documents, which take time to prepare and are expensive. Standardisation is uncommon except insofar as large financial groups insist that agreements must be on their own terms. The transposition of agreements into the back office and the commission calcu- lation and payment process is inefficient and a source of operational and financial risk. It is a commonly-held view that industry practice is so fragmented that there is little prospect of improvement. The multiplication of distribution channels means that management companies have to deal with ever more complex distribution networks, which makes the distributors’ identification, the monitoring of their activity by country and trailer fee management much more difficult than before. In practice, the distribution network definition and set-up can take a considerable amount of time. Moreover, we should keep in mind that a distribution network is constantly changing (e.g. new distributors, modification relating to existing distributors, removal of a node/branch). Open architecture has resulted in ever more complex distribution networks

Notice

CACEIS can help you manage complex distribution networks efficiently, to get a consolidated view of holdings and to handle global trailer fee calculation & payment when distributing internationally.

3.5.1

3.5

Graph 25 illustrates a distribution network with four levels.

55 Source : Ignites Asia, “Taiwan fee disclosure rule to hurt offshore funds”, 31 March 2011

Cross-border distribution of UCITS | page 65