A potpourri of challenges

Rising investor caution and the impact of regulatory reform from United States and the European Union should convince French asset managers to re-examine their business models.

A survey published in December 2011 by financial consultant McKinsey found many French investors were disillusioned with mutual funds and migrating to other products. Of the 30,500 polled, 80% said they had withdrawn capital from funds, citing disappointing returns, poor service and the need for cash.

This trend coincides with preparations for two key tranches of regulatory reform which come into force from 2013 and will create significant operational challenges for asset managers in France and beyond.

The Alternative Investment Fund Managers Directive will introduce a Europe-wide framework to regulate alternative funds and will be a hot topic at the GI Forum in Paris on March 13-14.

Then there is the Foreign Account Tax Compliance Act (FATCA), under which asset managers must identify and report accounts for all US clients holding financial assets outside the US of more than USD 50,000 (€36,500).

These combined factors demand that French fund managers remain vigilant about their approach to investors, ensure their investment and distribution strategies are polished, and monitor their compliance with ongoing regulatory changes.

The first task is to maintain capital inflows during ongoing volatility in the market. The McKinsey report said half the investors polled would not put their money into a mutual fund again if they had E10,000 to invest.

To counteract these pressures, French asset managers should ensure consistent service to investors and pay attention to communication channels.

The report said investors felt asset managers had failed at the point of sale and again throughout the investment period. It also said two thirds of clients had not informed their advisers when redeeming their interest in a fund.

Asset managers also need to manage expectations. The survey said that 61% of investors expected a return level of at least 5% above inflation, and more than a third made no connection between return and risk levels.

In the case of UCITS funds, managers may find a solution with Key Investor Information, which from July 1 2012 they have to supply to potential investors under the new UCITS IV regime which came into force last year.

They should ensure their KII clearly explains the fund objectives in plain language and contains all of the relevant information – such as the risk and reward indicator – so potential investors have a clearer picture of expected performance.

FATCA is the second challenge. Asset managers will have to undertake assessments and decide whether to accept the additional burdens and costs associated with FATCA compliance, or adapt their strategies to reduce their exposure to US interests

A snap poll among RBC Dexia clients showed some were grappling with the implications of FATCA and the impact it would have on their operations.

Given the number of FATCA regulations and the grey areas that remain on key concepts, when asked to rate how well they understood FATCA, 38%  of respondents said their knowledge was highly insufficient and 30% said insufficient. More than a third were undecided about whether they complied with FATCA and 23% did not know.

Approaches to the cost and method of compliance varied. More than two thirds of respondents (69%) had made no estimation of costs, 23% believed it would cost less than E150,000 and 7% predicted between E150,000 and E300,000. The majority (61%) intended to manage compliance through an external provider.

In contrast, asset managers had given serious consideration to adapting their distribution and investment strategies. Nearly half (46%) said they would only select distributors that were compliant with FATCA and the rest would either construct their portfolio to exclude US clients (38%) or undertake an investment policy that would exclude US assets (15%).

There has, however, been news that asset managers have welcomed. In a joint statement signed on February 2012, the US, Germany, France, Italy, Spain and United Kingdom agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange based on existing bilateral tax treaties.

Asset managers were quoted in the French press late last year as expecting 2012 to be “tough”. While the challenges are stark, they have the power to take action. Firstly, they can improve their relationships with potential investors and educate them in the benefits of investing in mutual funds, which accounted for 49% of total revenue to European asset managers in 2010. Secondly, they can address the requirements of FATCA and put in place concrete plans to ensure compliance or tailor their strategies to minimize its impact.

Philippe Legrand
Managing Director, France
Sales & Distribution