Ben Lucas on Europe’s AIFMD | EY | Video

World Finance interviews Ben Lucas, Asset Management Director at EY, on how Europe's Alternative Investment Fund Managers Directive has affected the asset management industry

January 13, 2014

Speculation about the Alternative Investment Fund Managers Directive (AIFMD) has dominated the European funds industry over the past couple of years, but the deadline for EU and EEA Member States to transpose its provisions into national law was not until July 2013. Ben Lucas, Asset Management Director at EY, discusses the challenges that asset management firms are facing, and the best practices that have emerged from the directive.

World Finance: Ben, overall how would you say companies are handling the changes resulting from the directive?

Ben Lucas: Overall it’s a fairly mixed reaction, so there’s a pretty clear split between the larger players who are very used to dealing with regulatory change – be it MIFID or UCITS or whatever else it is that they’ve dealt with before – versus the alternative asset classes, who are pure-play. So a private equity house, or a hedge fund, or a real estate fund, for which it’s much more of a fundamental cultural shift, for them. So, they’re coming from, effectively, either a very low level of regulation, or no regulation at all, to actually an incredibly high level of regulation. So for them it’s a real step-change in mentality and cultural shift.

“If you’re a small start-up shop, you’re going to need quite a lot of external advice”

World Finance: And who would you say will benefit most from this directive?

Ben Lucas: In the short term, I think there’s going to be a fairly significant cost impact. So if you look at the firms, no one will benefit directly from it in the short term. But the funds that will handle it best will be the larger firms. So obviously the marginal cost, if you’re already dealing with a significant amount of regulation and regulatory change, you’ve already got the budget set aside for that. And you’ve got the change departments and compliance departments set up ready for that.

The larger firms will handle that slightly better. The other firms that will benefit immediately will be the service providers, because if you’re a small start-up shop, you’re going to need quite a lot of external advice. You’re going to need services such as depository, which are mandated by the directive. And then if you look to things like the reporting requirements of the directive, then, again you can see that there’s a lot of crossover with other regulations, and firms that are already providing services in the reporting space will very easily be able to provide reporting for AIFMD. So you’d expect that the service providers will do very well out of it.

In terms of the benefits to the managers themselves, and then ultimately the investors, they will – if they materialise – will be somewhat further down the line.

World Finance: What are the biggest challenges facing firms at the moment?

Ben Lucas: A lot of firms took advice very early on, when the directive was in its early stages. And I think the result of that is, to minimise cost, they took advice, went away, and started working on whatever that advice had been. And there’s been quite a lot of change since then, numerous iterations, lots of consultation papers, further guidance; and I think some firms have checked back in and taken further advice, had a bit of a health-check around that. Others haven’t, and are now struggling to deal with what is actually quite a changed environment from where they were when they were initially looking at this, perhaps 18 months ago, or something like that. That’s certainly one of the challenges.

The other fundamental one, as the deadline approaches, is around operational readiness. So again, a lot of the advice and a lot of the guidance that firms have had, has been theoretical. And what that means in terms of actually managing your back office or selecting your depository, and working with an outsource provider for the first time, perhaps, is very very different on the shop floor, effectively.

“Things will have settled down beyond 2018: the framework should be starting to bed into place”

World Finance: And what are some of the best practices you’ve seen develop as a result of the directive?

Ben Lucas: So in terms of actual response best practice, there is I think, very little, because it’s so varied in terms of how the market’s responding. I think there are guiding principles around how you react to the directive which are best practice.

So for example, proactivity. Don’t bury your head in the sand. If you think something is potentially – for example, your method for calculating derivative gross commitment or whatever that might be – if you think it\s potentially throwing out massive numbers? Engage, and check. So you can check with your peer group, you can check with the industry bodies at AMA, IMA, you can check with the actual regulator themselves. That early engagement, I think, is taken very well from the regulator.

World Finance: Finally, what do you expect the long-term impacts of the directive to be?

Ben Lucas: Short-term being now, medium-term being perhaps up until 2018, and then 2018 and onwards? If we look at it in terms of those three timeframes, short-term now, I think it’s very difficult for anyone to say anything other than just increased operational cost. So, I think that will hit the managers and eventually hit the investors. So I think that’s pretty widely taken in the market.

Medium-term, I think there is a real question around… it’s very clear that there is a cost, but the main problem in the medium-term is that there’s also uncertainty. So people aren’t just worried about, okay, if we want to do business in Europe there is a regulatory cost associated with that. There’s also a future uncertainty about what that might mean. Will the thresholds come down? Will the valuation methodology change? All of those questions mean that people, by choosing to do business, will then be engaging in a level of uncertainty they might not be happy with.

In the longer term, regardless of whether the net effect is positive or negative, it should at least be clearer. So you will have a framework that… the tools will be there to enable you to make your cost-benefit analysis about whether those euros are worth investment, whether it is worth doing business in Europe. Because hopefully things will have settled down beyond 2018. The framework should be starting to bed into place. And the result of that is you should be able to make a much more informed decision.

World Finance: Ben, thank you.

Ben Lucas: Thank you.