By: Wout Kalis
A growing number of APAC managers want to diversify their investor base beyond regional Asian markets, looking at Europe and the United States as potential targets. Entering new global markets can be challenging though, especially adapting to different regulatory requirements. It’s important to understand what’s needed for entering these markets.
Some APAC managers are exploring whether to become compliant with UCITS or the Alternative Investment Fund Managers Directive (AIFMD) so they can raise capital in the European Union (EU). However, many underestimate the lack of harmonisation within the EU and how much flexibility national regulators have when implementing the rules. UCITS IV theoretically prohibits member states from creating impediments to distribution. However, many hindrances exist across member states that make UCITS distribution difficult and complicated. Disparities in regulatory reporting requirements and taxation transparency exacerbate distribution challenges. Non-EU fund managers and their administrator must constantly be alert to these regulatory nuances.
The recently released delegated acts under the EU’s Markets in Financial Instruments Directive II (MIFID II) are also up for interpretation by national regulators, so the rules are unlikely to be harmonised. Some countries will take a stringent line on inducement bans while others may be more flexible. With implementation scheduled for January, 2018, the uncertainty is particularly worrisome for fund managers. Originally scheduled to be implemented in 2017, European regulators delayed its implementation when they determined that financial institutions would struggle with the technological updates and planning needed to comply within the original timeframe. This also impacts fund administrators who need to be agile and adapt technology platforms quickly to ensure funds are ready to comply.
United States Diversification
US regulations are rife with extraterritoriality. APAC managers should know that the Foreign Account Tax Compliance Act (FATCA), legislation designed to clamp down on US citizens not paying their income tax, has enormous reach. The definitions of US person and US indicia are broad, so managers must conduct thorough due diligence on underlying clients to verify they are not US citizens. If they are, the manager must ensure that person is not recalcitrant. It appears that many APAC managers are just now beginning to understand FATCA’s significance; a straw poll of delegates at Fund Forum Asia in Hong Kong identified know-your-client (KYC) as one of the industry’s most pressing issues.
Regulation impacts every facet of the fund management industry, especially fund administrators who are constantly challenged to stay ahead of the regulation curve. Firms must continually ensure that they adhere to all the rules. Building the systems and framework for compliance can be costly and administratively time-consuming, as can the required staff training. However, the consequences of failing to adhere to the rules can be devastating and may even facilitate capital flight. SS&C is seeing a growing demand for regulatory services, either bundled with or independent from fund administration services, to help managers comply with the slew of new regulatory mandates.
APAC managers are not immune to global regulation. It is crucial that they and their administrators keep on top of the rules, or risk serious problems.