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2013 Dechert LLP Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds Michelle Moran April 18, 2013

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 Contents What does the fund industry look like in Europe today? What is wrong? The main offences Punishment and rehabilitation? 2

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 What does the fund industry look like in Europe today? 3

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 What does the fund industry look like in Europe today ? UCITS continued to attract strong net inflows in February of EUR 44 billion, marking a slight reduction from the EUR 49 billion recorded in January. All fund categories registered net inflows in February. Long-term UCITS (UCITS excluding money market funds) registered large net inflows amounting to EUR 41 billion, a modest decrease from Januarys record net inflows of EUR 53 billion. Net sales of equity funds registered EUR 14 billion, compared to EUR 21 billion in January. Bond funds also recorded reduced net sales of EUR 13 billion, down from EUR 20 billion in January. Balanced fund net sales remained flat in February at EUR 11 billion. Money market funds experienced a turnaround in net sales in February to register net inflows of EUR 4 billion, compared to net outflows of EUR 5 billion recorded in January. 4

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 What does the fund industry look like in Europe today Total non-UCITS recorded net sales of EUR 12 billion, down from EUR 17 billion in January. Special funds (funds reserved to institutional investors) recorded reduced net inflows amounting to EUR 9 billion, compared to EUR 15 billion in the previous month. Total assets of UCITS stood at EUR 6,547 billion at end February 2013, representing a 2.4% increase since end January 2013. Total assets of non-UCITS enjoyed an increase of 1.5 percent in January to stand at EUR 2,595 billion at month end. Overall, total net assets of the European investment fund industry stood at EUR 9,142 billion at end February 2013. This has pushed net assets of European investment funds above EUR 9 trillion mark for the first time. 5

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 What is wrong? Investors around the world lost a lot of money which might have been understandable if this was due only to markets. But controls had been found wanting. When examined, products were being run in ways contrary to investor expectations. When the bonnet of the car was lifted to determine cause so much was wrong that the car itself needed to be taken apart. Governments around the world have been mandated to do just that by investors. Investor confidence needed to be restored and fast given the deficit in long term savings and pension provisions. 6

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 The main offences Lack of protection of client assets - Madoff/Lehman. Lack of transparency in investor materials - investors do not understand what they are buying. Excessive costs - funds cost too much. Lack of adequate supervision of funds, managers, depositaries and other service providers. Current remuneration structures encouraged too much short term risk taking when long term return was the predominant aim. Too much uncertainty on the application of rules and regulations to fund products due to divergent approaches by member states. Funds and related service providers grow internationally but die nationally. 7

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 Punishment and rehabilitation? Lack of client asset protection Depositary liability AIFMD and UCITS V Client Asset Protection Rules Lack of transparency Key Investor Information Document Quiet revolution Spread to non-UCITS products (e.g. The Netherlands) Model for PRIPs Excessive costs Management company passport - push to minimise duplication of management companies across Europe Cross border merger under UCITS IV and Master Feeder structures encourage reduction in number of small funds with higher TER 8

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 Punishment and rehabilitation? Lack of adequate supervision Additional management supervisory requirements introduced under AIFMD and UCITS IV and V for managers and depositaries Detailed rules on delegation in AIFMD and UCITS V Aligning remuneration with long term returns Remuneration guidelines in AIFMD and now current UCITS V proposals Bonus caps under AIFMD and UCITS V? Uncertainty on rule application Increased ESMA powers of enforcement under UCITS V International growth, national death Greater uniformity on rules relating to marketing across Europe and relationships with supervision of management e.g. AIFMD Restrictions on private placement 9

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 Attorney Profile Dublin 10 Dublin Michelle Moran Partner Financial Services Dublin +353 1 436 8511 +44 20 7184 7453 michelle.moran@dechert.com

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Government, Political and Regulatory Drivers and Challenges affecting the Asset Management Industry and their Funds April 18, 2013 Definitive advice Practical guidance Powerful advocacy Dechert LLP dechert.com Almaty Austin Beijing Boston Brussels Charlotte Chicago Dubai Dublin Frankfurt Hartford Hong Kong London Los Angeles Luxembourg Moscow Munich New York Orange County Paris Philadelphia Princeton San Francisco Silicon Valley Tbilisi Washington, D.C. Dechert practices as a limited liability partnership or limited liability company other than in Almaty, Dublin, Hong Kong and Luxembourg.

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Product Drivers Changes in the environment and product design Jeremy Soutter April 2013

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14 Changes in client Demands & needs The economic background within which we operate has changed significantly and Volatility will persist due to continuing turbulence in the global economy Investors can no longer rely on long term equity growth to meet their needs (do they know that?) Beta is becoming a commodity, investors will pay only for sustainable alpha The value chain will fit into three categories: End investor selecting own products whether through platform or FA (probably only 15% of market) Financial Planning and total solutions from intermediaries for end investor Manufactured products - European small cap as component part - GARS as total solution - Institutional propositions

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15 Getting Product right The first rule of investment is dont lose. And the second rule of investment is dont forget the first rule. And thats all the rules there are. Warren Buffet

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16 Building Products to meet demand New Product Themes Absolute Return The opportunity for liquid alternative funds is huge and is perhaps now becoming the most popular asset class Most of these will be in the fixed income space as the tool box is bigger, bets are often Macro and not at company level Diversified Strategy/Multi Asset Funds Fund of Funds are changing Ranging from the transition of the Traditional Balanced Fund to hedge fund of funds

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17 Building Products to meet demand New Product Themes Top managers from the big brand houses Still strong demand particularly in equity income, globally and EM Aberdeen GEMs Axa Fram - George Luckcraft Richard Buxton Alternative asset classes Real Estate still a diversifier particularly with institutions Private Equity and infrastructure may become available to retail investors through new regulation of long term investment funds being discussed by the Commission We may see a resurgence of hedge funds as UCITS restrictions are tightened further and AIFMpassport kicks in

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In addition to the long list of acronyms: ESMA Squeezing of investment restrictions further may take best opportunities away from retail investors RDR New share classes for UK, additional possible demand from taxation of rebates UK Product Intervention Naming convention Asset class risk AIFM v UCITS Particular issue for Fund of Fund managers where NURS offers greater flexibility 18 Demands on Managers

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19 Barriers to Offshore Distribution Changes in PP regime Navigating the Transition from PP to AIFM passport MIFID changes in Europe New classes for European Distribution - Ban or disclosure Does this kill open architecture and move us to bancassurance? Substance requirements and demands from Switzerland and Asia Passport of Manco may no longer be most viable position to take One domicile cannot meet all distribution demands Position has been deteriorating for years Regulatory arbitrage still exists In Europe we need this to be sorted out once and for all

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20 Panel Discussion

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PwC Pat Wall International Tax Update Post Crisis Tax Reform Anti Evasion Anti Avoidance US, EU and OECD Slide 22

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PwC Portfolio Investing The Tax Minefield 23 Fund Investments

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PwC US FATCA Ireland Update Ireland - Model I Intergovernmental Agreement with the US. Irish laws & regulations will govern FATCA: 1.Annual reporting to Irish Revenue; 2.No 30% FATCA withholding tax on US income/gross proceeds; 4.No withholding 30% FATCA withholding recalcitrant accounts; 5.New account opening procedures required from 1 January 2014. Deemed Compliant Status for Irish Funds Slide 24

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PwC EU - Financial Transaction Tax (FTT) New draft proposal by 11 Countries Original proposal released in September 2011; already rejected! Would impact both EU ( all 27!) and non-EU financial institutions. 11 countries who have formally joined the Enhanced Cooperation on FTT 7 other countries already operate some form of FTT = Stamp Duty Financial institutions need to be lobbying! Multi layered nature of tax discriminates against investment via Funds! Slide 25

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PwC EU - Alternative Investment Fund Managers Directive (AIFMD) Tax related Aspects Operating conditions (conflicts of interest, treatment of inducements and fair treatment of investors) The role of the risk management function Delegation Reporting requirements and frequency PE Risk Transfer Pricing VAT February 2013

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PwC Cannes, 11 & 12 October 2012 27 OECD Trace Project What on Portfolio Investors Existing Systems - Traditional Residence country: -investor reporting implicit in requirement to obtain cert (tax treaty) - exchange on request Source Country: local paying agent can apply TRS Weakness: layers of intermediation, paying agent may not have sufficient information to apply TRS (TRS = tax relief at source)

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PwC Cannes, 11 & 12 October 2012 28 Proposed New System - OECD TRACE TRACE = Treaty Relief and Compliance Enhancement QI system plus Investor Reporting Investor reporting to Source/Residence Country Contractual arrangements & procedures drafted To be finalised later this year Similar to EU Commission recommendation (Simplified withholding tax relief procedures)

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PwC OECD - Report on Base Erosion and Profit Shifting Key pressure areas -hybrid mismatch arrangements -the tax treatment of related party debt-financing, captive insurance and other intra-group financial transactions; -transfer pricing -effectiveness of anti avoidance measures (GAAR, CFC rules, thin cap) -availability of harmful preferential regimes Slide 29

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PwC Post Crisis Tax Reform Investors to pay a price......... Impact on after tax profits..BEPS Transactions taxes....FTT Withholding Taxes...Dividends & Gains Reporting....FATCA and cousins Increased Cost and Risk Slide 30

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February 2012 Emerging Trends in Real Estate Europe 2012 Slide 31

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A Quiet Revolution- Distribution of mutual funds in 2013 Simon Ellis, Principal- Strategies in Asset Management Carne Fund Congress April 2013

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The World as we knew it Providers, as factors, control the value chain Distribution highly fractured, except integrated banks Ltd professional buyers- ignorance is bliss, for some Push factors dominate sales and marketing Fund management companies as the good guys AND THEN Credit Crunch Extended poor returns Regulatory scrutiny RDR

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The World as we are coming to know it Industrialisation of advice Dominance of platforms Transparency and fees Digital & Direct Whatever next? ?

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35 The Industrialisation of advice Fees remove the role of fund manager as factor The Distribution Firm determines the proposition Use of platforms, portfolio planning tools and professional research Advisers becoming CRMs- not allowed to go off piste Development of adviser brands Use of DFMs Concentration of asset flows to the biggest and/or the best

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Rise of platforms

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Transparency and fees The most immediate focus of attention Expect more demand-side pressure AND regulatory attention Are there any practices that could be considered unfair, unreasonable or unclear? Whos winning the debate over costs vs. value?

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Digital and Direct Who do customers trust? Im onlineare you? Technology is the disrupting force Transparency, are you worth it? Its not the future, its the here and now!

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A Quiet Revolutionbut its making a Big Bang!