Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
4. Digital..................................................................................................................... 24
K ey global wealth and asset management trends in digital
Digital technologies transforming asset management space
6. Regulations............................................................................................................. 36
Global best practices
K ey regulations affecting mutual fund industry across the globe
Key rules in global regulations that may impact the Indian mutual fund regulatory regime
7. Goods and Services Taxs (GST) impact on the mutual fund sector.............................. 46
According to EYs 2015 India Attractiveness Survey, 32% of the respondents ranked India as the most attractive investment
destination globally, while 60% placed the country among the top three investment destinations. The countrys vast domestic
market and low-cost, skilled labor market continue to be its most attractive features.
Today Tomorrow
GDP growth: 2.5 times Youngest 29
in the past 15 years country in the 100 million new
world by 2020, manufacturing jobs
GDP per head growth: 3.3 times with median through the Make in India
in the past 15 years age of 29 program by 2022
Sources: Oxford Economics Database; United Nations Conference on Trade and Development;
World Bank; IMF; EY Rapid Growth Markets Forecast, EY, July 2014; Nomuras India Internet Report.
1 5
Growth star India overtakes China as worlds fastest growing major AMFI; EY Analysis; Mutual fund assets: Smaller cities share on rise,
economy, The Telegraph, 8 February 2016; GDP: At 7.6%, Indias growth Business Standard, 27 April 2015; MFs asset base from B15 cities jumps
points to fastest growing large economy, The Indian Express, 1 June 2016 19% to Rs. 2 lakh cr, Business Line, 25 August 2016
2 6
India is now a $2-trillion economy, The Hindu, 3 July 2015 India: can the fastest-growing large economy sustain its pace?, BNP
3
The rise of the millennials, Livemint, 1 Dec 2015 Paribas, 14 June 2016
7
4
EFMA, Oxford Economics, EY Analysis ; Karvy: India Wealth Report, India replaces China as top FDI destination in 2015: Report, The Economic
2015; Factors that impacted the fund industry in 2015, Morning Star, 29 Times, 21 April 2016
December 2015
FY65 FY87 FY93 FY03 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Source: AMFI
8
Mutual fund industrys asset base surges 21% to Rs 13.4 lakh cr in 2015, The Financial Express, 3 January 2016
9
AMFI
10
Wall Street gives up on India mutual funds as JPMorgan joins exodus, Mint, 13 April 2016
Lack of widespread financial literacy among investors has been one of the key impediments to further penetration of mutual
fund products. SEBI has been at the forefront of taking initiatives to increase awareness. The relentless effort and significant
time invested by SEBI and AMCs in spreading awareness have increased the familiarity of retail investors with investment
jargons. Increased financial awareness will, in turn, be instrumental in driving higher retail demand for mutual fund products.
The robust AUM growth of the past decade is expected to continue going forward, driven by developments
across the following areas:
11
AMFI data; Despite volatility, retail investors continue to take Mutual Fund route, The Financial Express, 27 April 2016
Global AUM (US$ trillion) across traditional mutual fund asset classes
24.3 23.6 27.0 30.3 32.0 32.2
7.1% 7.3% 6.9% 6.2% 6.0% 6.0%
12.4% 12.6% 12.7% 13.0% 13.2% 13.7%
In 2015, equity funds continued to dominate, with a 43% Notably, in 2015, money market management funds
share in global AUM. However, in recent years, the share witnessed the highest inflows among all asset classes mainly
of balanced/mixed funds, which invest in both equities and due to changes in the US market. Investors have shifted
fixed-income instruments, has increased slightly because their assets toward safe-haven funds, especially government
of the slowdown in net flows into equity funds after 2013 funds, in anticipation of the SECs new money market fund
caused by increased capital market volatility worldwide. regulations.
12
Strategic Insight/Simfund Global Dash Database
AUM distribution by region Allocation of AUM across regions by class (as of March 2016)
(as of March 2016) 0.8%
Africa 9.4%
14.7% 17.6% 21.1%
Asia and 0.3% 22.6%
Pacic 13.1%
10.2% 9.5%
12.4%
13.6% 17.0% 11.8%
23.0% 20.2%
Americas 7.5%
Europe
51.4% 22.0%
35.8% 10.5%
42.9%
24.8%
51.3% 2.3%
41.9% 43.9%
27.8%
20.4%
Product preferences also vary significantly across regions share in the Asia-Pacific region. Strong fund flows in money-
and countries within a region. For instance, bond and mixed- market funds in Asia are driven mainly by Chinas on account
funds are more popular in European markets as sluggish of the high retail demand for online funds managed by large
growth, deflationary trends and geopolitical risks have led to domestic technology companies.
risk aversion. Equity and money-market funds hold a higher
The US Canada Brazil Mexico France The UK Switzerland Germany Australia Japan China Korea India Taiwan
The mutual fund industry in emerging economies in Asia is characterized by low financial literacy levels, high churning of
funds and inconsistent advisory levels, leading to low product adoption. In western countries, such as the US, mutual funds
are seen as long-term savings tools and are also found in retirement options, while in Asia, investors view mutual funds
mainly as trading tools.
13
Cerulli: Ignorance about mutual funds widespread in Asia, LifeHealthPro, 14 October 2014
14
Specialty Funds vs. General Mutual Funds and Socially Responsible
Investment (SRI) Funds: An Intriguing Risk/Return Paradigm, Brian D.
Fitzpatrick, Joshua Church and Christopher H. Hasse, Rockhurst University,
Journal of Applied Business and Economics vol. 13(2) 2012
15
Beginners Guide to International Mutual Funds, 6 October 2014, http://
mutualfunds.com/international-and-global-stock-funds/beginners-guide-
to-international-mutual-funds/; Record number of China-focused mutual
funds launched, Financial Times, 10 January 2016; Mutual fund investors
burnt by energy in 2015, Financial Times, 27 December 2015
Most actively managed funds underperform benchmarks post fees and trading costs, which has resulted in investors
looking at low-cost passive products as an alternative. According to S&P Dow Jones, 10 out of the 11 regions covered (for
both equities and bonds) failed to beat their benchmark over the past 10 years.
Share of global asset management market Dissatisfied with underperforming active funds, which are
also perceived as overpriced, investors are increasingly
switching to passive investment funds, which track the
2009 11% 89% market and charge lower fees. As of December 2015,
~US$747 billion were moved into passively managed funds
and US$312 billion of actively managed funds were pulled
out by investors.
2015 19% 81%
Passive Active
Source: EY Analysis
16
Active asset managers knocked by shift to passive strategies, Financial Times, 11 April 2016; Hello passive, goodbye active: fund investors make the switch,
Financial Times, 23 June 2013; Casey Quirk: Global AUM slumps in 2015; passive, ETFs take majority of flows, Pensions & Investments, 20 January 2016.
Global ETF AUM and their percentage to mutual funds AUM 9.8%
9.0%
8.1%
7.4%
6.5%
6.1%
5.2%
4.2%
3.5% 2.7 2.9
3.0%
2.3
1.9
1.4 1.5
1.1
0.6 0.8 0.7
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ETF AUM (US$ trillion) ETF AUM as a percentage of mutual fund AUM
ETFs have been gradually gaining popularity over actively managed mutual funds. Their widespread acceptance by the crucial
Gen X and Gen Y market segment has emerged as a considerable threat to active asset managers in western economies.
Smart beta ETF strategies are one of the fastest growing The US is the worlds most successful ETF market,
trends in the ETF industry and have become increasingly distinguished by its size as well as liquidity and retail investor
popular for investors seeking to manage risk and factor base. ETFs have also become extremely popular in Europe,
diversification (i.e., low volatility, momentum, quality, value where the average annual growth rate of ETFs exceeded 40%
20
and size). According to BlackRock, smart beta ETF assets during the last decade. ETFs benefiting from low costs,
are expected to reach US$1 trillion globally by 2020 and high liquidity and transparent pricing became popular in
19
US$2.4 trillion by 2025. At the end of December 2015, the western economies against a backdrop of quantitative
smart beta ETFs assets totaled US$260 billion, representing easing by leading central banks. However, the penetration
10.1% of total ETF assets. of ETFs remains low in Asian markets vis--vis the US and
Europe. The advisory business in Asia is still commission-
based (as opposed to fee-based) and, therefore, advisors
21
have less incentive to recommend ETFs.
17
Alternative or Hedged Mutual Funds: What Are They, How Do They Work, and Should You Invest?, Forbes, 28 February 2014; Liquid alternative mutual
funds leave investors disappointed, Financial Times, 23 May 2016
18
Professionally managed Investment Solutions through Exchange Traded Funds, TOPS, 2013; Exchange traded funds grow bigger than hedge funds,
Financial Times, 21 July 2015
19
BlackRock Projects Smart Beta ETF Assets Will Reach $1 Trillion Globally by 2020, and $2.4 Trillion by 2025, BusinessWire, 12 May 2016
20
European ETF Outlook, Lyxor ETF Research, February 2016
21
Could ETF takeup surge in Asia?, Fund Selector Asia, 31 August 2015
According to a study by Tower Watson, pension assets in the 19 major markets increased at a CAGR of 5.3% over the last
decade to US$35.3 trillion in 2015. The US, the UK and Japan account for ~78% of total pension assets, with the US being
the largest market in terms of pension assets.
AUM* (in US$ trillion) Pension assets (US$ billion) in 2015 top 5 markets and India
%
: 5.3
15)
0520 35
R (20 21,779
CAG
21 3,204
2,746
1,523 1,484
94
2005 2015 The US The UK Japan Canada Australia India
Note: *Based on AUM of 19 major pension markets Source: Global Pension Assets Study 2016, Towers & Watson, February 2016
Shift in the retirement market from DB to DC plans Pension fund assets by scheme type
During the past decade, defined contribution (DC) assets
have grown at a CAGR of 7.1% while defined benefits
40% 42%
(DB) assets have grown at a CAGR of 3.4% in the top 48%
seven pension markets: Australia, Canada, Japan, the
Netherlands, Switzerland, the UK and the US. As a result,
DC assets share in total pension assets increased from
38% in 2003 to ~48% in 2015. DC plans dominated the 60% 58% 52%
22
pension markets in US and Australia.
22
Global Pension Assets Study 2016, Towers & Watson, February 2016; Global pension fund assets hit record high in 2013, TowerWatson, 5 February 2014
23
What are proposed collective pension plans?, Financial Times, 4 June 2014
24
What are proposed collective pension plans?, Financial Times, 4 June 2014; UK government criticized for shelving group DC pensions, The Actuary, 16
October 2015; Retreat from CDC strategic, tactical, says UKs Altmann, Investment & Pensions Europe, 16 October 2015
25
Pension survey shows fierce competition for assets, Financial Times, 22 November 2015; Cerulli: Target-date funds snagging larger share of 401(k)
assets, Pensions & Investments, 24 November 2014
56.5% 55.9%
51.1% 49.3% 49.5% 47.7% 46.0%
Equity funds have witnessed significant inflows in recent years: In FY15 and FY16, equity funds witnessed a surge in
AUM in line with the revival in Indian capital markets. In 2015, equity mutual fund assets crossed the INR4 trillion landmark
for the first time in mutual fund history mainly driven by increased demand by retail investors, especially investors from small
towns, as they took to investing in the mutual fund market with sluggish growth in the real estate space and decline in gold
26
prices. During FY16, MFs reported net inflows of more than INR750b in equity and equity-linked savings schemes with
27
investors from smaller towns contributing for 44% of these flows.
26
Mutual fund industrys asset base surges 21% to Rs 13.4 lakh cr in 2015, The Financial Express 3 January 2016
27
Assets under management of mutual funds grow 14% in FY16, International Business Times, 4 April 2016
327.0 260.0
48.5 206.7
38.2
Category I
167.3
137.8 Category II
115.0 Category III
44.1 30.7
Commitments raised Funds raised Investments made
Source: SEBI (Cumulative net gures as of 30 June 2016)
Funds collected for AIFs from HNIs are primarily invested in unlisted securities and start-ups to promote entrepreneurship.
SEBI is also planning to create a new category of AIFs to encourage long-term funds to flow the AIF route. SEBI may reclassify
Category III AIFs into one group of long-term funds such as pensions and another group of short-term arbitrage funds such as
33
hedge funds.
M
uted investor response to popular global products, such as ETFs
34
Contribution of ETFs picking-up but still minimal
33
Sebi registers over 200 Alternative Investment Funds, DNA, 20 April 2016; Foreign inflow boost for alternative investment funds, Business Standard, 22
November 2015; De-jargoned: Alternative investment funds, Mint, 4 March 2015; Alternative Investment Funds coming to India? Heres what you need to
know, The Financial Express, 13 July 2016; Sebi panel suggests reforms to grow alternative funds industry, Mint, 21 January 2016
34
Gold ETFs Lose Shine for Indian Investors, The Wall Street Journal, 20 January 2014
According to EY estimates, the estimated size of the retirement fund corpus in 2025
across different market segments is estimated to be as follows:
39
Govt. working towards bringing informal sector under pension scheme, says Chairman, PFRDA, FICCI, 9 December 2015
40
Need for deeper pension coverage, Mint, 2 January 2016
41
Increase coverage under Atal pension scheme: Govt tells public sector banks, DNA, 12 June 2016
42
Dedicated FDI policy to chart new course for pension sector, Business Line, 12 April 2016
Digital:
Key global WAM
trends in digital
24 Mutual Funds: Ready for the next leap
Successful digital transformation requires asset managers to transform all aspects of their
business
ive
collaboration platforms collaboration operations
Dig
and BPM
rs
Improve customer
Increase sales through Scope of experience through
mobility tools, e.g.,
reduced lead times
sales apps on tablet
transformation and errors
Source: It got so late so soon; Wealth and asset managers awake to new digital age, EY, 2015
Rise of direct to consumer (D2C) Digital is empowering customers as well as changing the
rules of engagement for asset managers
distribution
Technology is enabling platform convergence and creating
The use of digital touch points by financial services
opportunities for new client engagement.There is an
customers has greatly increased in the last few years,
increasing number of online trading, brokerage, investment,
especially in evaluation and purchase. Investor expectations
direct-to-consumer (D2C) and robo-advisors offering user
are shifting customers now demand personalized services,
friendly, low-cost, automated solutions for core functions
and expect them through their channel of preference and at
such as investing, asset allocation, portfolio management
their choice of time and location. New digital access points
and reporting. Technological developments are creating new
are allowing customers to research and purchase across
playing fields throughout the fund-distribution value chain.
multiple channels, including online and mobile. The typical
purchase cycle now involves touch points across many
channels both digital and analog. The emergence of digital
is forcing asset managers to invest in front-office digital
capabilities.
Historical distributor
Customer
Financial services producer experience provider Clients
New models of (disintermediation)
distributionNet
work mediation
Future: Roles are converging and interconnecting, creating new client engagement opportunities
Historical distributor
Customer
Financial Data provider, experience
services customer New models of provider Clients
producer knowledge D2C distribution/network (disintermediation)
mediation
Source: Digital disruption and the game-changing role of technology in global wealth management IT in wealth management 2015 ,
February 2015; EY: The changing face of advice, July 2015; EY Analysis
A direct distribution strategy helps asset managers create closer relationships with and get a better understanding of the end
consumer, which in turn helps in the product-development process. Asset managers can build an effective D2C distribution
strategy by:
Creating a consistent omni-channel client experience: Regardless of the number of products, services, touch points,
customers need to feel like they are dealing with one firm across multiple channels that they now use to interact with firms.
Leveraging the power of social media: Information shared through social media often has an exceptionally quick impact on
brand perceptions and purchasing decisions. Fund firms need to use social media to engage and interact with clients rather
than simply disseminating content.
Reducing product proliferation which will not only remove some costs from the systems but also help to simplify the choice
for the consumer and to reduce the noise created by underperforming products.
Establishing robust controls and processes to deliver on the requirements of regulations such as KYC and AML, which they
have previously been shielded from by the intermediaries. These requirements pose significant challenge to distribution given
the jurisdictional variations in their application and often fragmented and inadequate sources of data for due diligence.
55%
45% 42%
30%
Fund houses need to effectively standardize and centralize operations and also outsource in order to improve consistency,
reduce costs and enhance control. Digital technology is a key driver of standardization, centralization and effective
43
outsourcing:
Standardization Centralization
A common technology platform and data architecture Asset managers can centralize core business functions,
helps in standardizing the investment manufacturing not only in the middle- and back-office (e.g., trade
and administration processes. Fund houses are processing, corporate actions and reconciliations), but
rationalizing the number of applications and replacing also further up the value chain in investment research
legacy patchwork of applications with the best breeds and portfolio management, by creating centers
of PM/OMS/EMS* platforms for each major asset of excellence in near-shore or off-shore locations.
class. They are shifting away from custom developed Notably, larger asset management firms are more likely
or customized third-party solutions to out-of-the-box to maximize near-shoring and off-shoring strategies.
vendor capabilities that offer integrated PM, OMS and
EMS solutions. In the front-office, for instance, where Asset managers' target location strategy for
large firms have historically supported two, three in-house operations activities
or more platforms based on asset type, the drive is
to consolidate to a single core application for order
8%
management, execution, processing and investment
record keeping (IBOR). According to Ovum forecasts,
17%
technology spend in asset management is expected to
grow at a CAGR of 5.1% between 2014 and 2018.
55%
20%
Outsourcing
Increased focus on core strengths will further drive
outsourcing of all non-core activities to third-party
service organizations. Firms will look to consolidate Maximize use of nearshore locations
their outsourcing arrangements with one or two Maximize use of offshore locations
strategic partners, and as these strategic partnerships Limited or no nearshoring or offshoring
Dont know /uncertain
mature, asset managers will use them to provide
more support in client-facing processes, including Source: Managing complexity and change in a new landscape,
EY Survey, 2014
distribution and client reporting.
While many asset managers currently prefer the
proximity and time zone characteristics of near-shore
43
locations, ultimately they may move to an off-shore
Ovum says increase in financial markets IT spending points to end of credit model, leveraging lower cost centers and maximizing
crunch, Ovum, 19 March 2014, http://www.ovum.com/press_releases/
ovum-says-increase-in-financial-markets-it-spending-points-to-end-of-credit- the use of the 24-hour clock (e.g., India and Malaysia).
crunch/*PM/OMS/EMS Project Management, Operations Management,
Enterprise Management
Quality/Timeliness/Reliability
of data across enterprise 45%
Reducing cost/Increasing
28%
efciency of service
Source: Managing complexity and change in a new landscape Global survey on asset management investment operations, EY, 2014
44
It got so late so soon; Wealth and asset managers awake to new digital age, EY, 2015
45
Blockchain could be totally transformative for fund industry, Financial Times, 22 May 2016
46
Fund managers to increase spend on data analytics, Bloomberg, 27 April 2016
Robo-advisors
Robo-advisors, an automated low cost alternative to traditional financial advice providers, have gained popularity
recently.
Sectors most affected by automated According to a survey by the CFA Institute, 54% of the
nancial advice tools respondents around the world viewed asset management
2% as the financial services sector most at risk from
disruption by automated financial advice tools.
7%
Robo-advisors offer user-friendly digital platforms and
8%
conduct individualized risk profiling via algorithms to
determine an optimal asset allocation for an investors
12%
portfolio. They use a combination of simplified client
54%
experience, lower fees and increased transparency
16% to offer automated advice directly to consumers. The
mass-affluent segment is expected to benefit the most
from lower costs and increased access to investing
guidance. According to a CFA Institute survey, 34% of
Asset Management Banking Securities the respondents believed that automated advice could
Insurance Others None of the above entirely replace human advisors in the mass-affluent
49
Source: Robots Will Strike Asset Management Firms First, segment. Notably, in the US, the D2C robo-advisor
Bloomberg, 3 May 2016 market is increasingly becoming a fixture in the asset
management space. According to research by Cerulli
According to a survey by the CFA Institute, 54% of the
Associates, robo-advisors in the US will manage US$489
respondents around the world viewed asset management
billion by 2020, fueled by a shift of assets from traditional
as the financial services sector most at risk from 50
advisors to automated investment. Further evolution of
disruption by automated financial advice tools.
robo-advisors would require incorporating a broader set
of investment options and products.
47
The Cloud makes some changes in the asset management industry, //www.bisam.com/our-
48
insights/cloud-makes-some-changes-asset-management-industry, 23 March 2014
Fintech Will Change the Way You Invest, US News, 25 April 2016
49
Robots Will Strike Asset Management Firms First, Bloomberg, 3 May 2016
50
The rise and rise of robo-advisers, Financial News, 30 March 2016
52
Case study: the UKs largest fund houses are testing block chain to save trading costs
Five of the UKs largest mutual fund companies have teamed up to work on a project to test whether block chain
technology can be used to rationalize trading costs. This is the first instance of asset managers testing block chain.
These UK fund houses collectively manage more than 1 trillion in assets and are investigating several uses of
block chain, such as trading illiquid securities directly and facilitating quick movement from one asset manager to
another a process that currently takes several days. If these uses are successfully implemented, asset managers
can substantially rationalize costs by cutting out the need for intermediaries such as banks. Fund houses have lagged
behind in exploring potential uses of block chain, mainly because any system failure could lead to huge reputational
risks.
51
Blockchain could be totally transformative for fund industry, Financial Times, 22 May 2016.
52
Five UK fund houses explore blockchain technology, Financial Times, 6 February 2016; Five UK Mutual Fund Companies Consider Using Blockchain for
Trading Assets, Coinspeaker.com, 10 February 2016
Fund houses are moving toward a paperless experience, and an efficient and easy
transaction process
Effect of digital technologies on the mutual fund investment transaction process:
53
How Technology Is Shaping The Indian Mutual Fund Industry, BusinessWorld, 3 May 2016; Indian mutual fund industry: The road ahead, ICRA-Assocham
Report, November 2015; Ease of doing business, The Economic Times, 22 March 2015
54
Aadhaar enabled e-KYC can save Rs 10,000 cr over next 5 yrs : Survey, Business Standard, 18 March 2016
55
How to do E-KYC for mutual fund investments, The Economic Times, 29 February 2016
56
The best ways to buy mutual funds online, The Economic Times, 20 June 2011; Investing in mutual funds? Heres the cheapest, easiest way, NDTVProfit, 7
October 2013
68
Case study: robo-advisor interfaces in India
Goal-oriented investments: FundsIndia.com is an online health and life insurance, and also gives tax planning
platform that offers mutual funds. It has four portfolios guidance. The algorithm also analyses expenses and gives
(known as smart solutions) targeted toward four goals: expense rationalization tips. Portfolios are reviewed and
childs education, childs marriage, retirement and rebalanced half-yearly. Investors are charged an annual
first-time investment. Schemes are suggested based fee of INR1,000.
on the number of years till the goal and the monthly A
utomated: Scripbox offers a ready basket of funds on
investment amount. The portfolio is reviewed regularly the basis of an investors investment horizon. It offers
and rebalanced accordingly. three portfolios of mutual fund schemes equity, debt
F
ull-service advisors: ArthaYantra offers online end-to- and tax savings which are curated using an in-house
end financial planning, from evaluation to management. research process. An investor with a longer time frame is
Risk profiling is done online with the help of behavioral typically directed to a basket of four pre-selected equity
finance. Investors inputs are acquired on 60 model funds, while an investor with a shorter time frame is
portfolios and an optimum one is designed. Once the directed to a portfolio of debt schemes. These baskets
report is generated, a financial planner explains it to the of funds are selected based on proprietary algorithms.
investor. The company provides mutual fundrelated Portfolios are reviewed annually. This platforms main
investment advice, as well as recommendations on objective is to reach youngsters and first-time investors.
Going forward, a number of robo-advisors are expected to enter the Indian fund management sector. While some will connect
directly with investors (B2C model), others will provide algorithmic platforms to distributors (B2B model) to enable them to provide
portfolio solutions to their clients. As the sector evolves, more innovation is expected in terms of lower costs, more complex
financial planning etc. Online mutual fund distributors and robo-advisors are also witnessing interest from private equity players,
69
which have already invested INR1.5 billion into such platforms. While robo-advisors may not pose a threat to value-based
financial advisory services, they may pose challenges to pure transactionbased distributors who are mainly focused on offering
convenience. Some industry experts also believe that going forward, all types of distributors robots, fee-based advisors and
transaction-only distributors will co-exist as there is low penetration of distributors in the country, with only a small number of
70
distributors catering to the large population base.
62 68
Sebi set to allow e-commerce firms to sell mutual funds, Mint, 27 June 2016 Robo advisory could change distribution, Mint, 22 September 2015; Robo-
63
Indian mutual fund industry: The road ahead, ICRA-Assocham Report, advisory: which one is for you?, Mint, 20 June 2016; Robo advisors best for
November 2015; SEBI using technology to push for growth of Mutual Fund small investors, Business Standard, 18 October 2015; The advent of robo-
industry, IndiaInfoline website, 28 October 2015 advisors, ValueResearch, 1 September 2016
64 69
Online MF distributors, robo advisors catch fancy of private equity players, Online MF distributors, robo advisors catch fancy of private equity players, The
The Economic Times, 1 April 2016 Economic Times, 1 April 2016
65 70
Robo advisory could change distribution, Mint, 22 September 2015 Robo advisory could change distribution, Mint, 22 September 2015; Robo-
66
Robo advisory could change distribution, Mint, 22 September 2015 advisory: which one is for you?, Mint, 20 June 2016; The nuts and bolts of
67
Robo-advisory: which one is for you?, Mint, 20 June 2016 Robo Advisory, Business Line, 29 May 2016
Mutual Funds: Ready for the next leap 35
6.
Regulations:
Global best practices
North America
Europe (and Eastern Europe
Dodd-Frank Act, Basel III, AIFMD,
emerging markets) UCITS,
FTT and IFRS Convergence are
AIFMD, EMIR, extraterritorial
likely to dominate the regulatory
Dodd-Frank, FATCA, Basel III, plus
agenda.
MiFID II, PRIPs, MAD II, AMLD
and especially FTT all contribute
to a complex and concentrated
period of regulatory reform in the
region over the next 3-5 years
and beyond.
Latin America
Improved regulatory regimes with
the intention to come into line Asia-Pacic
with the G20 recommendations. A number of initiatives are being undertaken
For example, a higher percentage by regulators to reduce bureaucracy, speed
of adherence to Basel core Rest of the world up the process of bringing new products to
principles than the developing Many of the emerging markets such market and stimulate market activity within
markets of Asia (Source: IMF). as Africa and the Middle East their jurisdiction by attracting more participants.
currently under extreme civil unrest, Investor protection, through stricter codes of
making the application of national conduct for intermediaries, is also a high priority.
and regional regulation extremely The rst steps toward an integrated marketplace
challenging. will be implementation of the proposed Asia
passporting scheme.
Global regulators have imposed a multitude of regulations of redemption to instantly give investors their money back,
on the asset management sector. While banks have focused even in stressed markets under tight liquidity conditions.
72
on shrinking their balance sheets after the financial crisis, Hence, the FSB has proposed certain measures.
the asset management sector has rapidly expanded, from
National regulators to impose stricter reporting norms
US$50 trillion in 2004 to US$76 trillion in 2014, accounting
and gather more data, monitor leverage and ensure fund
for 40% of assets in the global financial system. Asset
houses effectively utilize tools such as fees and gates to
managers have also moved into the shadow banking space
71 discourage redemptions in stressed markets
for instance, lending of securities.
Stress testing, which has become common in the banking
As a result, the Financial Stability Board (FSB) raised
sector, to be applied to funds as well
concerns regarding the ability of open-ended funds in case
71
G20 regulators aim to rein in asset managers with new rules, Business Insider, 22 June 2016.
72
G20 regulators aim to rein in asset managers with new rules, Business Insider, 22 June 2016.
The US
Mutual fund houses are categorized as regulated Data reporting requirements: In June 2015, the
investment companies (RICs) and subject to regulations SEC announced the Form ADV Proposal and the
of RICs. Registered funds and investment advisors in the Fund Reporting Proposal. It requested for additional
US are regulated under the Investment Company Act inputs to Form ADV (an annual form with details
(1940) and the Investment Advisers Act (1940) by the regarding business, AUM etc.), namely aggregated
Securities and Exchange Commission (SEC). ETFs, REITs statistics about separate accounts, such as AUM,
and unit investment trusts also classified as RICs. Foreign holdings breakdown by asset type, information about
firms can enter the US market by establishing an RIC. derivatives use, breakdown of AUM by client type
US RICs managed US$18.1 trillion in assets at year-end and custodian information. The regulator introduced
2015, with the mutual fund and ETF markets managing two new forms N-PORT and N-CEN for enhanced
US$17.8 trillion in AUM the largest market in the fund reporting and also included a provision for
73
world. US mutual funds are subject to a comprehensive electronically providing reports to shareholders.
regulatory regime and need to abide by certain
Comprehensive ETF rule: The SEC is considering a
provisions, such as ensuring liquidity (invest at least 85%
separate framework of rules to govern the burgeoning
of the portfolio in liquid securities, which can be disposed
exchange traded products (ETP) market covering
of within seven days), leverage (maintain a maximum
trading, listing, product structure and focusing on
ratio of debt-to-assets of 1:3) and transparency (provide
risks specific to ETFs.
information about their operations, financial conditions,
contractual relationships to regulators, investors etc.). Liquidity risk management: In October 2015, the
Mutual funds also have to designate a chief compliance US capital market regulator proposed that funds
officer (fund CCO), who is responsible for administering be required to predict the number of days taken to
74
the funds compliance policies and procedures. liquidate each position in the fund at a price close to
the current value (days to liquidate bucketing of fund
In July 2014, the SEC adopted amendments to money
holdings) and determine a minimum percentage of
market mutual fund (MMF) rules. The new rules require
the portfolio that must be held in assets that can be
a floating net asset value (NAV) for institutional prime
sold and settled in three days (three-day liquid asset
MMFs based on the market value of fund assets and
minimum). It also prohibited funds from holding more
provide non-government MMF new tools, such as liquidity
than 15% of assets in securities that are deemed
fees and redemption gates, to address runs. The new
illiquid (15% illiquid asset limit).
rules, which are to be fully implemented by October
2016, are impacting the US$2.7 trillion of assets in Derivatives risk management: In December 2015,
MMFs with more than US$200 billion shifted from prime the derivatives proposal was issued, which would
funds (those that can invest in a wider variety of assets) to introduce leverage limits based on gross notional
75
government funds (limited to government securities). exposure, and the only assets that would be permitted
for asset segregation purposes would be cash and
In December 2014, the SEC laid out a program for
cash equivalents. Asset segregation is a requirement
modernizing the regulation of US-registered mutual funds
that funds hold liquid assets against derivatives
and investment advisers. The SEC is looking into the
exposure.
following areas of the US open-ended fund industry to
76
modify regulations: Transition of client assets: The SEC also plans to put
in place a rule to ensure that asset managers have a
plan for transitioning the management of client assets
if there is a material disruption to an asset managers
business.
73
Global Management of Regulated Funds A Comparison of UCITS and U.S. Mutual Funds, K&L Gates, 2014; 2016 Investment Factbook, ICI, http://www.
icifactbook.org/ch1/16_fb_ch1
74
Comprehensive Regulatory Regime for U.S. Mutual Funds, //www.ici.org/pdf/14_ici_usfunds_regulation.pdf
75
US money market fund reform: an explainer, Financial Times, 29 April 2016; SEC Adopts Money Market Fund Reform Rules, SEC website, 23 July 2014
76
Modernization of US Asset Management Regulation, BlackRock, March 2016
Undertakings for Collective Investment in Transferable Securities (UCITS): With the implementation of the UCITS
legislation, the entire European continent has moved toward a single market in terms of the manufacturing and distribution
of asset management products. This regime provides a single European regulatory framework for an investment vehicle,
allowing a manager to market the vehicle across the EU irrespective of the country it is domiciled in. UCITS can also be
sold to non-EU countries such as Switzerland, Hong Kong and Singapore. The original UCITS directive was published in
1985 and UCITS regulations are continuously evolving: UCITS IV was published in 2010 and UCITS V guidelines will be fully
77
applicable from January 2017.
UCITS II Abandoned: UCITS II was abandoned in 1998 after EU Member States failed to reach an agreement on its scope and
purpose. Key provisions included much of the framework of UCITS III.
UCITS III 2001: Firms were given until February 2007 to ensure their funds were UCITS III compliant. UCITS III was divided into
two distintive directives:
Management directive: Creation of the European Passport whereby a UCITS fund authorized in its home state could be s
old anywhere within the EU. Also required the use of a simplied prospectus detailing the key features of a fund. Product
directive: Allowed for investments in a wider range of asset classes with a corresponding distinction between
non-sophisticated and sophisticated funds.
UCITS IV 2009: UCITS IV was effective 1 July 2011. Key provisions included the following:
Streamlined regulator to-regulator notication procedures
Management company passport created
Key Investor Information (KII) document replaced the simplied prospectus
Master-feeder fund structures are introduced
Framework for domestic and cross-border fund mergers is created
UCITS V Spring 2016 (estimated): UCITS V amendments were proposed by the EU Commission in July 2012 and approved by
European Parliament in April 2014. Will align UCITS Directive with the AIFM Directive. Key provisions include the following:
Depositary regime updates, including their appointment and eligible entities, oversight duties, cash-monitoring duties,
safe-keeping duties, delegation and overall liability
Establishment of remuneration policies and practices that promote sound and effective risk management and do
not encourage risk-taking. Remuneration structures will need to include rules on variable and xed compensation,
including a requirement that at least 50% of variable remuneration be in the form of units
Creation of a sanctions regime and whistle-blowing procedures for reporting incidents to authorities
79
Alternative Investment Fund Managers Directive (AIFMD): Markets in Financial Instruments Directive (MIFID):
This EU legislation aims at increasing investor protection MiFID has been the cornerstone of capital market regulation
and reducing systematic risk by creating a harmonized EU in Europe since its implementation in November 2007. MiFID
framework for managers of alternative investment funds II, the EUs response to the financial crisis, is a top compliance
(AIFs) i.e., non-UCITS. An AIF covers a wide range of funds priority for asset managers, global giants and niche
and structures and includes hedge funds, real estate funds, specialists. The directives main objectives are to increase
private equity funds and US 40 Act funds. AIFMD came competition and consumer protection in investment services.
78
into effect in July 2013. It not only impacted the way
77
funds are marketed and distributed in EU, but also put forth
European mutual funds: An introduction to UCITS for US asset managers, EY Report,
2015; Six Months and Counting Key Dates Before UCITS V Goes Live, Matheson,
provisions on increasing transparency on key issues such as September 2015; UCITS V: Remuneration, Matheson, May 2016
78
remuneration for instance, linking compensation with fund 79
AIFMD, http://www.investeurope.eu/policy/key-topics/manager-fund-regulation/aifmd/
The world of financial instruments is more complex. Time to implement change.
performance and payment in units of own funds. Capital markets reform: MiFID II, EY Report, 2015
Insufficient levels
of investor protection Investor
MiFI
due to the rapid protection
innovation and
growing complexity in
financial instruments
resulting in mis-selling Ma
transp
Source: The world of financial instruments is more complex. Time to implement change. Capital markets reform: MiFID II, EY Report, 2015
Internal
controls/
governance
Creation of a level playing Equity trading obligation on RM, MTF and SI only
ID II Market
field between market (no off-market trading)
participants since the
structure Mandatory trading obligation for OTC derivatives
envisioned benefits of
increased competition Introduction of organized trading facility (OTF) for
have not always been non-equity instruments
arket passed on to end
parency Limitation on trading on dark pools for equities
investors, retail or
and equity-like products
wholesale clients
Open access to trading venues, CCPs and
benchmarks
et transparency
rticipants since
mentation has
ng environment
x and opaque
Asia-Pacific
Asia is the third-largest mutual funds market
worldwide, after the US and Europe. The Asia fund
passport initiatives could be seen as the first attempt
toward the unification of the Asian funds markets.
The objective of the passport is to provide collective
investment scheme operators with a common
framework that offers them regulatory consistency
across multiple jurisdictions.
ASEAN Collective Investment Scheme (CIS): ASEAN
CIS was launched in August 2014 to provide a fund
passport across Singapore, Malaysia and Thailand.
In September 2015, regulators from the three
jurisdictions jointly issued a handbook to implement
the Streamlined Review Framework to facilitate
operational guidance for industry practitioners and
to ensure faster access to capital and shorter time
to market.
Asia Region Funds Passport (ARFP): In April 2016,
Australia, Japan, Korea and New Zealand entered
into a Memorandum of Cooperation. ARFP aims
to facilitate cross-border distribution of managed
fund products across the Asia region. The eligibility
requirements to be a passport fund include US$500
million in AUM, at least US$1 million additional
capital, minimum qualification requirements and
years of experience for officers (for instance,
the CEO must have at least 10 years of relevant
experience), and compliance with investment
81
diversification.
80
Post-implementation review of the Retail Distribution Review Phase 1, FCA, December 2014
81
Asia Region Funds Passport: Fact sheet, April 2016, //fma.govt.nz/assets/Fact-sheets/160428-ARFP-Fact-sheet.pdf ; Asian rivals for Ucits funds look a bit
limp, Financial Times, 11 October 2015; Asia Region Funds Passport update, McMahon Clarke, May 2015
Regulatory changes are expected to reshape not only internal policies and procedures, but also the fund houses business
models. Regulations need to be aligned both at a domestic as well as a global level. Asset managers are considering multiple
related regulations for instance, in Europe aligning Dodd Frank, Basel III/Capital Requirements Directive (CRD) IV, European
Market Infrastructure Regulation (EMIR), Market Abuse Directive (MAD) II and MiFID II under one regulatory change program
to provide a much more controlled, consistent and efficient implementation, avoiding duplication of work in overlapping
82
areas.
Organizations are having to deal with Illustrative approach, will vary from organization to organization
and may be subject to change as regulatory requirements evolve Coordination of new
the challenge of multiple regulations
regulatory implementation
with overlapping themes. Critical is a
holistic approach covering all relevant
regulations and building out projects
MiFID II UCITS AIFMD EMIR CRD IV AML PRIPs/ FTT FATCA
on a topical basis.
IMD II
Business conduct/compliance
Distribution
Risk management
Capital
Tax
0
Source: MiFID II: Time to take action Wealth & Asset Management, EY Report, 2014
82
Capital markets reform: MiFID II, EY Report, 2015
M
IFID II requires certain minimum knowledge and T
he UCITS V remuneration guidelines require UCITS
competency standards for staff providing relevant managers to balance fixed and variable pay and
services by January 2018. Professional and pay a substantial portion (at least 50%) of variable
examination bodies have recommended specific remuneration in non-cash components such as units
qualifications, such as CFA charter and Investment of UCITS. Significant UCITS managers should also
85
Advice Diploma for Investment Advisors. establish a remuneration committee.
I n the UK, after the RDR, financial advisers need to A
IFMD has put forth provisions such as linking
achieve a higher minimum standard of qualification compensation with fund performance and paying in
before they are allowed to provide advice: from a units of own funds.
benchmark of Financial Planning Certificate (level
I n the Netherlands, there is a cap of 20% of gross
3 qualification) to a Level 4 Diploma qualification,
salary on the bonuses paid to finance professionals,
which is an FCA-approved program that meets
including asset management staff.
the FCAs RDR qualification requirement for
84
independent retail financial services advice. I n Singapore, the Monetary Authority of Singapore
Moreover, every individual financial advisor needs (MAS) recommended that financial advisors adopt
to complete at least 35 hours of professional a balanced scorecard framework for remunerating
training each year to stay up to date with industry representatives, using non-sales key performance
and regulations. indicators, such as the quality of advice and the
suitability of recommendations. The MAS has
C
ountries participating in the ASEAN Fund Passport
banned product-specific incentives and sales
System require fund managers to have certain
bonuses.
years of experience to advise investors.
Transparency/reporting
M
IFID II requires portfolio managers to record telephone conversations that lead to or are likely to lead to portfolio
88
transactions.
M
iFID II requires firms to disclose all costs and charges associated with a clients investment. For example, costs that
may not typically be disclosed to consumers, such as transaction costs, will need to be disclosed in the future.
I n UK, the Financial Services User Group (advisor to the EC) has proposed that financial advisors disclose the reason
behind recommending an active fund in order to support retail uptake of passive products.
T
he Netherlands has implemented a new voluntary code, which facilitates transparency on fund costs. Firms that
adhere to the code provide investors with consolidated figures showing the firms own costs and charges related to
investment products and transaction costs of their investments.
M
IFID II requires firms to keep a record of actual and potential conflicts of interests for the firm (including its
managers, employees and tied agents).
M
iFID II imposed new requirements on firms and trading venues to produce public data about executed transactions.
Firms must annually summarize and publish their top five execution venues by trading volume for each class of
financial instrument, as well as information on the quality of execution obtained.
I n Singapore, a customer knowledge assessment is required by the Monetary Authority of Singapore to assess a
retail clients investment knowledge and experience before they can be sold select investment products.
83
https://www.fitchlearning.com/sites/default/files/MiFID%20II%20summary%20sheet_final.pdf
84
http://institute.ifslearning.ac.uk/Qualifications/QualificationsinFinancialAdvice/DipFA.aspx; http://www.professionaladviser.com/professional-adviser/
feature/2104173/rdr-qualifications-definitive
85
UCITS V: Remuneration, Matheson, //www.matheson.com/images/uploads/publications/UCITS_V_Factsheet_on_Remuneration.pdf
86
The receipt of monetary and non-monetary benefits under Mifid ii, CharlesRusselSpeechlys, 9 February 2016
87
FOFA - ASIC guidance and FOFA - Background and implementation, ASIC website; Trailer fees are first to go, Financial Post, 5 July 2010; FoFA,
Financial Planning Association of Australia, /fpa.com.au/policy/policy-issues/fofa/
88
MiFID II Expected to Have Significant Impact on Investment Managers, Skadden, January 2016
Although GST is expected to make it easier to do business Furthermore, AMCs/mutual funds may have a presence
in India, the draft law has raked up some questions and also across India or they could operate through a marketing/sales
some uncertainty on various vital aspects of taxation, such partner model. Under the present service tax legislation,
as: where AMCs have presence across India, they obtain
centralized registration, and the centralized location is
Place-of-supply rules for non-account linked services to
where they pay tax on revenue and avail input credits. Under
hinder certain services that are currently zero-rated,
the Model GST Law, AMCs will need to obtain registrations
e.g., export
in every state and comply with the tax payment, input
Applicability of tax on distribution costs credit and tax filing obligations. This will mean a significant
change in the manner in which revenue and expenses are
Marketing and activation spends across India
captured and reported. Also, the input credits of the GST
Inter-branch transactions liable to tax paid for supplies made at the branch level would have to be
Valuation of services, including domestic inter-branch captured and reported separately.
transactions This may result in accumulation of input credit at the branch
Multiple state-wise registrations level. This will also mean that transactions between two
different registrations will be treated as taxable supplies
From a taxability point of view, there may not be any and, therefore, need to be mapped, measured, offered for
significant changes i.e., fee-based incomes will continue to tax and reported.
be liable to tax or GST. There are mutual funds that export
advisory services to funds located outside India. Under the A possible resolution to this issue could be granting a central
current service tax legislation, these services are treated as tax registration to AMCs, with the ability to avail credits
zero-rated and not liable to tax. It is important to note that and pay taxes only in one of the States. This will involve
the place of supply of banking and other financial services extensive advocacy efforts by the industry to convince both
has been prescribed as the location of the recipient of such Central Government and State Governments regarding the
services. However, in cases where the service is not linked need and the workability of this proposal.
to the account of the recipient of services, the place of Organizations will have to work on assessing the impact of
provision of service would be the location of the supplier these changes on their business with regard to the following
of service. The term account has also not been defined aspects: cash flow, profit and loss account, business process
under the draft law. However, the definition of account and technology. A work plan should be put in place. Given
as contained in the present Place of Provision of Service that the implementation timeline that the Government has
Rule, 2012 is fairly narrow and covers only interest-bearing proposed is 1 April 2017, the period available for businesses
accounts. This implies that services in relation to qualifying to get ready is limited, and immediate action may be
accounts would be linked to where the service recipient is required for larger setups to be ready in time.
based; however, in all other cases, the location of the service
provider would be considered.
Kirti Shenoi
Sameer Gupta Manager - Brand, Marketing and
Partner & National Tax Leader Financial Communication, EY
Services, EY Kirti.shenoi@in.ey.com
Sameer.gupta@in.ey.com
Jaspal Singh
Divyesh Lapsiwala Manager - Brand, Marketing and
Partner Indirect Tax Services, EY Communication, EY
Divyesh.lapsiwala@in.ey.com Jaspal.singh@in.ey.com
Tanmay Mathur
Writing & Editorial, EY Knowledge
Tanmay.mathur@in.ey.com
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