France’s top financial regulator has called for a shake-up of how Europe’s €17.6tn asset management sector is supervised, a move that could have big implications for fund groups with EU entities after Brexit.
Robert Ophèle, chairman of Autorité des Marchés Financiers, said the expansion of the fund industry in recent years had created challenges for regulators that required a new approach.
Asset management in Europe is an increasingly cross-border business. Groups frequently set up funds in back-office hubs such as Luxembourg, manage them from financial centres such as London or Paris, and sell them to investors elsewhere in the EU.
But they are supervised by the authority in their home country, creating a fragmented regulatory environment.
“We want to have an appropriate supervision framework for the asset management industry,” Mr Ophèle told the Financial Times. “The cross-border nature of asset management is increasing, and it’s clear that we will probably see further concentration and cross-border marketing of funds in future.”
Brexit has added further complexity because of the widespread practice of delegation — where an EU fund outsources portfolio management to an entity outside the bloc — involving the UK.
UK groups including M&G and Columbia Threadneedle have shifted billions of euros to Luxembourg or Irish fund ranges because of Brexit. But more than £2tn of EU fund assets are still managed from the UK on a delegated basis, according to trade body the Investment Association.
Mr Ophèle’s comments underscore the profound challenges awaiting the UK finance industry. Britain has lost its ability to influence development of European financial regulations at a time when France is pressing for a tightening of the supervisory framework for asset managers across the bloc.
While a French-led EU push three years ago to limit delegation was unsuccessful, the European Commission recently floated the idea of tougher rules on delegation rules as part of a review of EU asset management regulations.
Mr Ophèle said the AMF was not against delegation, adding that concerns about the framework were “only a small part of the story”. He called for the EU to clarify the remits of financial regulators across the region to minimise loopholes and overlapping responsibilities.
“The robustness of asset management could be challenged in difficult times,” he warned. “We have to be able to know what is in our remit as a supervisor, especially in times of crisis.”
Mr Ophèle suggested giving “lead supervisor” status to the regulator in the EU country where a fund management company is based, mirroring the model that exists in banking and insurance.
“It would be useful for the supervisor of the management company, which has a full understanding of the activities and the risks of the asset management group, to be lead supervisor and be in close co-operation with all of the other supervisors,” he said.
Julie Patterson, asset management regulatory change leader at KPMG, said that if the AMF’s proposal was adopted it could lead to greater scrutiny of fund groups’ outposts in Luxembourg and Ireland. “It reinforces the emphasis on management companies needing to have a minimum amount of substance,” she said.
The Irish regulator recently upbraided asset managers for “significant shortcomings” in the governance of their local entities, pointing to insufficient staffing levels and poor due diligence of delegates.