Dan Hedley, Director of Public Policy at Fidelity International, highlights the key issues and trends shaping the global regulatory landscape.
As we enter 2017, what is the biggest regulatory challenge European asset managers will face?
I think the biggest challenge will be to comply with multiple disclosure requirements for multiple audiences that are designed to deliver different policy objectives. It will be challenging for managers to do so in a unified manner that is operationally efficient and useful to our clients and investors.
This year managers will need to finalize standards for communicating fund data to PRIIPs (Packaged Retail and Insurance-based Investment Products) manufacturers invested in underlying UCITS and Alternative Investment Funds, while developing standards for communicating target market data to distributors under the MiFID 2 (Markets in Financial Instruments Directive 2). Luckily, the asset management industry is quite advanced in solving for both directives, although I think we need to pick up the pace under MiFID 2.
MiFID 2 comes into force in Europe on 3 January 2018. What are the areas firms should be most focused on preparing for within 2017?
It seems to me that most asset managers are already in a positive position to solve for the transaction reporting and fee unbundling requirements of MiFID 2. Product governance requirements and target market assessments, however, will be more challenging to implement. These policies remain subjective and there is not yet industry-wide consensus on how to comply. Fidelity has contributed to a combined industry standard that we hope will be adopted by managers, distributors, and platforms alike. Initial feedback from distributors has been very positive and we are now looking for a place to launch and host our so-called ‘Target Market Matrix.’
PRIIPs has drawn a lot of criticism. What are your key concerns?
PRIIPs policy started out well intentioned, seeking to apply the UCITS Key Investor Information Document disclosure standards to a wider array of investment products. However, it quickly deteriorated as policymakers lowered the standards of UCITS to fit the different characteristics of PRIIPs (most notably insurance-based PRIIPs) rather than seeking to raise PRIIPs to the standards of the UCITS disclosure.
PRIIPs policy does not allow the use of past performance data – despite consumer demand. On the other hand, it removes UCITS year-by-year cost disclosure and replaces it with a reduction-in-yield figure that averages costs across the product’s holding period. This not only hides true costs of ownership beneath an average, but denies investors’ visibility into the cost of their holding at any time other than the end of a recommended holding-period set by the PRIIPs manufacturer. PRIIPs transaction costs are also not transaction costs but rather slippage costs between two points in time. Our preliminary analysis shows that these slippage costs can be negative as well as positive (suggesting managers get paid to transact with brokers, which we can assure you is not the case!).
Looking ahead, what do you think of the CMU (Capital Markets Union) project?
To be honest, we share some of the industry’s skepticism with regard to the tactical need for the CMU. For example, John Kay suggests the CMU is a solution in search of a problem and that the backbone of the EU real economy – the Mitelstand of family-owned German manufactories – has more than adequate access to funding from local cooperative and savings banks.¹
Like John Kay, we welcome the strategic shift away from the deposit channel and towards the investment channel as policymakers’ preferred source of funding. We welcome the new form of regulatory dialogue that CMU ushers in, particularly the fact that policymakers have begun to look at financial services in terms of a trade-off between the social utility market participants can deliver and the risk they represent. The asset management industry is beginning to be recognized as a source of funding equivalent to banks without the systemic riskiness.
One of the proposals included in the CMU is the PEPP (Pan-European Pension Product), what are your thoughts on this initiative?
We are equally excited about the PEPP for similar reasons. It is widely acknowledged that a third-pillar pension provision is needed. We were pleased to see that the recent public hearing on PEPP was well-attended by constituents beyond financiers and regulators. Their attendance acknowledges PEPP’s position within a wider social reform agenda. Clearly, in order for PEPP to be successful, pan-EU tax reform will be required (no small feat), as well as collaboration between asset managers, insurance, and pension providers. Investors’ retirement needs have evolved in a way that demands creative and collaborative thinking from the whole industry, and we look forward to engaging with this dossier throughout 2017 and beyond.
Note: This is an excerpt of an interview with Dan Hedley from the 2017 Regulatory Field Guide. For the full interview please go to bbh.com/regulatoryfieldguide.
About Dan Hedley
Dan Hedley is Director of Public Policy at Fidelity International. He joined Fidelity in September 2010. Previously, Dan spent three years at BlackRock where he was responsible for Regulatory/Government Affairs as well as heading up the iShares Compliance Team.
Dan joined the Financial Services Authority in 2004, working in the Financial Promotions Department, prior to taking a number of roles in conduct policy, retail themes, and Treating Customers Fairly.
The views expressed in this material are those of the author as of January 19, 2017 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only.
Neither, Brown Brothers Harriman, its affiliates, nor its financial professionals, render tax or legal advice. Please consult with attorney, accountant, and/or tax advisor for advice concerning you particular circumstances.
BBH is not affiliated with Mr. Hedley or Fidelity International.
¹John Kay, Other People’s Money: masters of the universe or servants of the people (London, 2015), p.170