The Ceaseless Flood Of Regulation - Update On Global Developments, Laws

Tom Burroughes

20 June 2011

Editor’s note: The sheer weight of regulatory activity continues to be a major headache – and possible opportunity – for the wealth management business at all levels. No parts of the world are unaffected. A veritable alphabet’s soup of acronyms has built up: FATCA, RDR, UCITS and AIFM, to name a few. Keeping on top of this bewildering array of rules and policymaker initiatives is a daunting task for compliance managers. To make this task perhaps a bit easier, this publication summarises some of the key developments. As ever, if readers feel the list is incomplete or have comments, we greatly welcome any feedback.

Asia

The Monetary Authority Of Singapore

The MAS has unveiled measures to regulate investments such as hedge funds. At the heart of its concept is the idea of a creating three categories of fund management firms: a “notified” one for smaller funds; and two “licensed” forms which deal with assets above a watermark of S$250 million. One category is for institutional investors, and the other for managers who deal with private individual clients.

Hong Kong

The Hong Kong Securities Institute has introduced a new initiative that includes a competency guidelines programme and certification for market practitioners to address the increasing demand for professionals in the private wealth management industry. An ad-hoc committee has been formed for the competency guidelines, which includes senior representatives from global, regional, and local PWM firms, with the goal of developing a set of rules for market practitioners. These guidelines will be based on global best practices and local requirements relevant to the Greater China market. It is set to be launched by the end of 2011.

International

G20 countries and the OECD

Major industrialised nations have agreed to crack down on so-called tax havens and push for greater openness and transparency by offshore financial jurisdictions. A number of nations – such as Germany, the US, France, Italy and the US – have created tax amnesties and disclosure programmes with jurisdictions such as Liechtenstein to encourage holders of offshore accounts to disclose their assets. These amnesties vary in their perceived success in getting people to own up.

Basel III

Under the international bank capital rules, which update the second iteration of Basel bank standards, they require firms deemed to be significant banking institutions to hold 10.5 per cent in total capital and 7 per cent in common equity.

Bank taxes

There are a number of proposals on the table, from the likes of the International Monetary Fund and the European Union, to levy taxes no banks as a way of paying for future bailouts and to curb, if possible, some of the riskier forms of bank activity. The UK has introduced a bank tax.

European Union

In September 2010, the European Union agreed to create new pan-European regulatory agencies to oversee financial services. It was approved by EU national governments last year. The agencies will supervise banks, insurance companies, securities firms and markets. A new European Systemic Risk Board will look out for threats to the region’s economy. It is feared that these agencies will supplant local regulators such as the UK’s Financial Services Authority, which is already losing many of its bank regulatory powers to the Bank of England.

Alternative Investment Fund Managers Directive

Now approved by EU members, there remain some fine details to be ironed out. The measures initially threatened to create, critics said, strong protectionist controls on the sale of non-EU domiciled hedge funds and private equity funds to EU investors. However, the “passporting” provision, requiring that funds can be sold throughout the EU, coupled with other measures, has allayed some concerns about how protectionist these rules will be. It is also unclear that non-EU domiciles such as the Channel Islands and Caymans will be frozen out if they able to acquire approved “third-country” status by meeting certain tests (such as having adequate custodial and depository banking systems, etc).

Key provisions: new rules for funds located outside the EU; requirements for greater transparency and greater information to investors about leverage. Alternative investment funds are, under the Directive, defined as “all funds that are at present not harmonised under the UCITS Directive”. The European Union’s alternative investment fund sector held around €2 trillion in assets at the end of 2008.

A key concern is that because about 80 per cent of AIFs are based in London, the restrictions on the ability of EU-based investors to put money in non-EU domiciled funds will drive business out of London. It is also feared the rules will reduce potential returns and choice of fund, and also provoke retaliatory action from the US and Asia. The rules are due to take full effect by 2018.

Switzerland

Switzerland’s policymakers are proposing bank rules, for example, that govern the amount of capital banks need to hold against possible future losses are far more severe than new international regulations under Basel III. The reason is that Switzerland’s top-tier banks play a relatively big role in the Alpine state’s economy and that banking accounts for about 12 per cent of Swiss GDP, so that there is more at stake if a bank hits trouble. Under the proposed Swiss rules, UBS and Credit Suisse Group will need to hold at least 19 per cent in total capital, of which 10 per cent would be common equity, compared with just 10.5 per cent in total capital and 7 per cent in common equity under Basel III.

Retail Distribution Review

The RDR, due to be enacted by 2012, is a programme of UK reforms designed to raise the professionalism of independent financial advice and make it more impartial through the removal of commission payments. The RDR is aimed at IFAs. Industry figures have said it will drive up to 15 per cent of IFAs out of the business. The RDR is already prompting a busy level of merger and acquisition activity in the sector as well as a number of initiatives to raise IFA qualifications.

UK bank regulation reforms.

The Financial Services Authority, the UK regulator established a decade ago by the-then Labour-led administration, is being stripped of its major bank regulatory powers, with these transferred to the Bank of England. The FSA will retain oversight of certain financial service activities, including areas such as investment management. The FSA also rules on issues such as whether financial organisations take adequate steps to know their customers’ requirements and recently warned wealth managers to ensure client portfolios are suitable to the needs of clients.

The current Conservative/Liberal Democrat-led government has set up an Independent Commission on Banking to come up with reform proposals, due in September. Among its ideas is that banks should have a Tier 1 capital ratio of 10 per cent, potentially leading to banks charging clients more for using basic accounts. Finance minister George Osborne last week endorsed the commission’s idea that retail banking should be “ring-fenced” from investment banking in the event a bank gets into trouble. The government is also pushing for tougher capital provisions by banks.

Remuneration

The FSA has a remuneration code designed to encourage banks and other financial institutions to defer all or part of manager’s bonuses. The measures, which apply to four different categories of firm ranging from big banks to boutique wealth managers, began to take effect from the start of this year and must be fully implemented by July.

North America

FATCA (Foreign Account Tax Compliance Act). The law was enacted in March last year to root out tax evasion by US citizens and Green Card holders living around the world. The law takes full effect in 2013. Already, a number of banks and other institutions such as Société Générale, Withers and RBC Wealth Management have pointed out that the legislation will add heavily to financial compliance costs.

The law affects funds invested in the US market including, but not limited to, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools, and other investment vehicles. It means that foreign financial institutions must report investors who are taxable in the US to the US tax authorities. If they fail to do so, they pay a 30 per cent withholding tax.

Fiduciary standards – there is currently debate in the US financial services sector about the need for introducing a new fiduciary standard in the country to update legislation passed more than 60 years ago. The Securities and Exchange Commission earlier this year recommended a uniform fiduciary standard for broker-dealers and investment advisors in a study it submitted to Congress. The recommendation raises standards for broker-dealers. Brokers are currently required to meet a suitability standard, a requirement that is less stringent than the mandate for registered investment advisors, who must place clients’ financial interests before their own.

Dodd-Frank Act

One of the most important features of the law is that advisors with assets under management of $150 million or more must register with the Securities and Exchange Commission, the US regulator.

The deadline for advisors to comply with new rules is July 2011. The new law, will be particularly sensitive for family offices. Until now, almost every family office that has not registered with the SEC as an investment advisor or formed a private trust company has been excused from registering by the “fewer than 15 clients” exemption from the definition of an investment advisor of the Investment Advisors Act of 1940.