To top it off, many are being pushed through at such a rapid rate the true depth of the conflicts between the initiatives may not entirely be resolved before they are even enacted.
A key example of this is the Alternative Investment Fund Management Directive (AIFMD) and the latest EU consultation on venture capital funds. Both give just two months of consultation yet contain numerous complex and technical elements that need digesting.
On the surface the two papers appear to cover similar areas. The original remit of the AIFMD was to cover areas like hedge, private equity or venture capital funds. However, since it was originally mooted it has broadened out so it now catches UK products such as Nurs, charity funds, hedge funds, investment trusts and traditional pension fund pooling vehicles like unauthorised unit trusts.
The VC consultation was released just a month before as the new European regulator (ESMA) issued its 400+ page AIFMD paper last week. In it the European Commission says as venture capital tends to be aimed at sophisticated investors they see no reason for it to be caught under the AIFMD.
So on the one hand we have an alternatives directive that catches plain vanilla funds that it was never originally supposed to cover. Meanwhile the EU is saying venture capital, an area the AIFMD was originally intended to involve, can now be excluded.
It’s not the only example of conflicting policy. Look at the UK’s implementation of RDR just as Mifid is being reviewed and which will also cover product inducements. Conceivably, EU rules could mitigate or supersede UK ones that are still being finalised.
Mifid II is purported to now be looking at the use of derivatives in portfolios, something that actually falls under Ucits rules. If Mifid decides that any fund using derivatives is banned from unadvised sale, then the execution-only arms of many IFAs would suddenly dry up in terms of the products they could offer. Or providers would be forced to change the very nature of how they construct many of their funds.
While obviously many absolute return products make great use of derivatives, so too do other less sophisticated products. Take any fund with FX exposure like US or Asian equities; the currency hedges mean they could no longer be sold direct. Neither could any fund that currently uses derivatives for efficient portfolio management – something virtually all do.
Julie Patterson, director of authorised funds at the IMA says: “The policy framework is fragmenting, with many proposals undermining each other. Fragmentation at this level increases the risk to the public, the opposite of what they are actually trying to achieve. Businesses find it difficult to know what to do or even when and that has knock-on effects into other areas.”
Among those consequences is greater uncertainty for advisers as to what products can and cannot do, consist of, provides protection for or who they can even sell each to and how.
Considering projects like Ucits and Mifid were supposed to create a level of unified protection, it seems the industry is now working backwards. In addition, exactly what all these initiatives are supposed to be protecting clients from, remains to be seen.
