Regulatory reports are afflicted by arbitrage and differences in methodologies and data requirements globally. The challenge is particularly pertinent for fund managers, many of which will have operations transcending multiple jurisdictions, each with their own unique regulatory reporting process. The issue is notable in the EU where managers subject to the Alternative Investment Fund Managers Directive (AIFMD) must supply an Annex IV report to the relevant regulatory authorities. EU managers of EU funds have to simply supply an Annex IV to their member state of reference or their home regulator. For firms taking advantage of National Private Placement Regimes (NPPR) and selling their products into a select number of EU member states, the situation is a bit more complex.
Take a UK AIFM with an offshore fund, for example. If that manager is selling into four key EU markets, it will have to supply Annex IVs to the regulators in those jurisdictions. In theory, this should be straightforward. Surely, a manager can simply supply the same Annex IV to each regulator accordingly. The reality is not so succinct. Individual member states have a degree of flexibility in demanding how this information be reported, and can make changes as they see fit.
“Different EU jurisdictions have a diverse array of requirements in regards to Annex IV. Not only can the Annex IV’s content in individual countries be different, but so can the format and the way it is supplied. Some countries allow third party service providers such as ourselves or managers to connect to a portal and upload the report. Other jurisdictions require the Annex IV to be submitted via email. Particular jurisdictions allow Annex IV submissions to be delegated to third parties such as fund administrators whereas others do not. This lack of uniformity can make it problematic for managers during the Annex IV submission process,” said Stephan Bartholme of BNP Paribas Securities Services.
Regulators in the UK, Belgium, Ireland and Luxembourg are obliging non-EU AIFMs distributing non-EU feeder funds into their respective jurisdictions to include information on the master fund in the Annex IV. This approach dramatically increases the volume of data managers must submit to those regulators. Having a multitude of regulatory regimes imposing different reporting templates and content requirements is problematic. It also requires managers to regularly review the requirements in individual member states to ensure they are up to speed with any changes. This can be onerous and discourages AIFMs from marketing across the EU, which in turn deprives investors of choice.
Similar challenges have been faced by UCITS. UCITS IV was welcomed in 2011 by managers as it sought to streamline the cross-border distribution rules across the EU. Improvements were certainly made but distribution is far from straightforward with different countries having varying interpretations of the requirements. Some of these divergences are mundane and manageable, such as documentation translation requirements or the appointment of a local agent. Others are less so, and include more thorough tax transparency obligations as is the case in Germany and Austria. As such, there is a degree of scepticism by managers that even if they stop using NPPR and take advantage of the AIFMD passport, regulatory arbitrage across the EU will still be an issue just as it is UCITS.
An EC consultation has just concluded, which asked industry participants for feedback about how regulations could be improved in regards to marketing and distributing AIFMs and UCITS throughout the EU as part of the Capital Markets Union (CMU). The CMU is exploring numerous facets of financial services as the European Commission seeks to open up more non-bank sources of financing and boost the real economy. Proposals being reviewed as part of CMU include streamlined rules around prospectuses, provisions for the simplified issuance of securitisations, and whether or not existing regulations need to be readjusted. Whether the challenges around Annex IV and its divergences across EU member states are noted by the proponents of CMU is yet to be seen.
Technology is being increasingly used to simplify regulatory reporting requirements such as Annex IV and this too is welcome. “Disruptive technology will have a role to play in simplifying regulatory reporting, particularly big data,” said Bartholme. Other innovations may include Blockchain or distributed ledger technology. DLT being trialled at innovation labs at banks globally although some existential issues need to be confronted before it can be rolled out to the mass market. Blockchain is devoid of standards and there is concern – certainly among members of the asset management community – that its protections against cyber-criminals is not entirely robust although this is disputed by Blockchain advocates.
DLT could enable organisations to report all of the relevant data – applicable to any global regulatory report – onto a ledger. Regulators in turn would be able to access the ledger and identify any inconsistencies. This could mean regulators all over the world would have access to the reports, and be able to share spurious or suspicious data with their counterparts in near real-time. This would be beneficial for detecting fraud and minimising systemic risks. Other technological solutions for regulatory reporting include machine learning or Artifical Intelligence (AI. AI could also assist regulators as advanced robotics could be deployed to spot or highlight errors or spurious data, eliminating what is often a highly manual process.
As advances in technology continue, coupled with regulatory initiatives such as CMU, filing reports such as Annex IV could become much easier for the funds industry.