RETHINKING DISTRIBUTION

Increased regulatory costs and burden

greater ownership of asset growth. In Asia for instance, support is eroding for UCITS funds with the recent regulatory changes in Hong Kong, such as the requirement of investor characterisation before the sale of any product containing derivatives.

As an example of regulatory burden and costs, the European Commission estimated the implementation cost of UCITS IV at around EUR 1bn [2] . Regarding the impact of the AIFM Directive across Europe, Charles River Associates prepared a report for the FSA in which a one-off compliance cost of up to EUR 3.2bn with ongoing compliance costs of around EUR 311m were expected [3] . Since the introduction of MiFID in 2007, regulation has put more emphasis on distribution and on conflicts of interest. In the UK, the RDR (Retail Distribution Review) will fundamentally change the way the market for retail investments is structured and operates. One of the key objectives of RDR is to address the potential for adviser remuneration to distort customer outcomes. Other regulations like Basel III and Solvency II may also indirectly impact the distribution of investment products. Due to capital and liquidity requirements, large investors and distributors like banks and insurance companies could potentially reduce their exposure to certain higher-risk asset classes. Instead, they may favour the offering of “on-balance sheet” savings products to their clients. Increased focus at the point of sale Emerging markets may offer significant opportunities for European funds if they decide to adopt the UCITS brand to channel their savings into well-regulated vehicles. As UCITS funds have already been enjoying a growing success in Asia, Latin America and in the Middle-East for the last five to ten years, local and/or regional initiatives may emerge to take [2] Commission Staff Working Document, Impact Assessment related to implementation measures of UCITS IV, April 2010 [3] Charles River Associates, Impact of the proposed AIFM Directive across Europe, October 2009 Increased protectionism

Looking forward: can regulation disrupt the existing distribution model?

Increased regulation will have implications for both the asset managers and distributors. Indeed, it may further strengthen the power of the distributor, but it may also level the playing field among the investment products sold via the same distribution channels. Outside the EU, there are risks that higher barriers to entering emerging markets may prevent European players from tapping into this new source of growth. The question should be how the AM industry will be able to mitigate those risks.

Figure 3

Times are changing

Banking

Bank capital rules

Depositaries

Liquidity requirements

MiFID II

Consumer protection

AIFMD

PRIPs

IMD II

UCITSV

Corporate governance& executive remuneration

UCITS IV

Insurance

Solvency II

Asset Management

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