The AWM Monthly Briefing - 28 February 2019 - Highlights of the Day

10 minutes

Hot topic of the month: The end of the LIBOR for 2021, why should we already work on it?

In his address to Bloomberg, London 27 July 2017, about the future of LIBOR, Andrew Bailey, CEO of the British Financial Conduct Authority (FCA), sealed its extinction. “At the end of [2021], it would no longer be necessary for the FCA to persuade, or compel, banks to submit to LIBOR.”

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As of 1 January 2020, only EU BMR compliant benchmarks may be used in new contracts.

Performance fees: Best practices and the way forward

Frédéric Botteman, PwC Luxembourg

Investment managers trigger performance fees on exceeding targets or outperforming benchmarks. The accepted wisdom is that they align the interests of investors and managers alike. However, fee practices have drawn criticism of regulators and investors for being confusing, poorly described, lacking transparency and inconsistently applied.

The International Organization of Securities Commission (IOSCO) on 25 August 2016, building on its 2004 report calling on high standards of conduct, published 23 examples on how to promote fair and transparent (good) practices for fees and expenses. Topics included permitted, prohibited and performance fees, disclosures on remuneration, transaction costs, commissions, costs of investing in other funds and other changes. This document remains a reference for the industry as well as a reference for supervisory authorities.

Supervisory authorities in Ireland and Germany have formally adopted IOSCO 2016 principles. In addition to that, the German Federal Financial Supervisory Authority (BaFin) has informed the industry about the need for adding a cap of performance fees. Meanwhile, ESMA will publish its guidance on performance fees by Q3/Q4 2019. In Luxembourg, the CSSF has not taken any formal position even if they challenge regularly performance fees scheme described in prospectus.

Meanwhile, management fees are still under huge pressure, for global mutual funds and ETFs, have been declining since 2012, and are expected to fall further by 2025 (Active Equities 0.78 to 0.55, Active Bonds 0.52 to 0.41, Passive Equities 0.21 to 0.12 and Passive Bonds 0.17 to 0.11). Moving, perhaps, to a situation of zero management fees. One could consider the Fulcrum Fee Model, as an innovative approach to fees, that symmetrically rewards and penalises over and under performance or simply reinforces the use of performance fees scheme in their range of products. In any case, performance fees will remain a hot topic for the coming months.

Focus on Regulatory topics

EU Securitisation Regulation

The purpose of securitisation is to convert receivables and other financial assets into tradeable securities using special purpose vehicles (SPVs). It is geared to ensuring economic expansion by increasing the flow of financing and loan supply.

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Beneficial Owner (BO) Register

The EU’s Directive 2015/849 set out a comprehensive legal framework for Member States to detect and prevent money laundering and terrorist financing. It also introduced the requirement for Registers of Beneficial Ownership (BO).

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Business Impacts of CSSF Circular 18/697

The CSSF Circular 18/697, regarding the organisational arrangements applicable to fund depositaries, entered into application on 1 January 2019. It works hand in hand with the provisions applicable to credit institutions acting as UCITS depositary (as per the CSSF Circular 16/644).

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Spotlight on a PwC Solution – Investment Compliance Solution

Stéphanie Jean, PwC Luxembourg

Asset managers and service providers work in a complex and evolving regulatory framework. As good practice, they have to keep with the latest of best practices and regulator interpretations, and minimise potential financial impacts due to non-compliance.

PwC’s Investment Compliance Solution is a web-based repository for AWM professionals. It aggregates essential information and guidance on Financial Indices, Exchanges, Products and Regulations. In addition to the latest and historic information, it includes Technical Notes from PwC experts.

The Investment Compliance Solution is a useful aid to decision making. It is up-to-date, informative and available “on the go”.

Contact us

Michael Delano

Asset & Wealth Management Leader, Audit Partner, PwC Luxembourg

Tel: +352 49 48 48 2109

Thomas Druant

Partner, PwC Luxembourg

Tel: +352 49 48 48 2334

Aurélie Mertes

Marketing Manager, PwC Luxembourg

Tel: +352 62133 57 21

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