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Looking to the future

Eight current and emerging trends to look out for within the funds industry, according to industry experts

Sarah Maguire: “The fintech movement will no doubt have a huge impact on the asset management industry and the way funds are administered and sold.”
Sarah Maguire: “The fintech movement will no doubt have a huge impact on the asset management industry and the way funds are administered and sold.”

Brexit

"London is a major centre for European fund managers. The Irish funds industry has long benefitted from strong ties with those managers. As such, it is in Ireland's interest for the UK to get an EU trade deal which allows those relationships to continue. However, if such a deal is not reached and, as a result, UK fund managers need to establish operations elsewhere in the EU in order to access the EU market, Ireland could benefit by attracting those managers. Conversely, if UK managers were to select another EU country, Ireland runs the risk of losing its existing relationships with them. Consequently, Ireland will need to work hard to attract these managers in order to maintain its current position and create new opportunities." (Gareth Bryan, partner, KPMG Ireland)

Regulatory change

"The funds industry is subject to common EU regulation but supervision is largely done by local regulators. However, proposals are currently being debated which would see the European Securities and Markets Authority (ESMA) having a much greater regulatory role (with some powers stripped away from local regulators). This could be disadvantageous to Ireland as it erodes our autonomy and makes communication of local issues and interests more difficult. Historically, Ireland has often had similar perspectives on such issues as the UK; the absence of the UK's voice in the future means that Ireland needs to strengthen its alliances with other EU member states as these new regulatory reforms are debated." (Gareth Bryan, partner, KPMG Ireland)

International tax reform

"Ireland has proactively engaged in the debate about tax reform and is participating in many international tax reforms including those at an EU level. Where issues have been identified, the Irish Government has moved to address them. While Ireland's tax system should continue to evolve in line with changing international norms, it is important that Ireland is not subjected to a "land grab" by other countries in the process. For example, we should be sceptical about recent EU proposals to create new EU taxes on the digital economy. These proposals risk undermining the sovereignty of individual EU member states and, no doubt, the extra cost will ultimately be borne by consumers." (Gareth Bryan, partner, KPMG Ireland)

Fines

“Banks manage lots of funds. Fraud-related fines weren’t there a decade ago, prior to 2008, but now they are a very material part of the reduction in earnings of the financial institutions. This has an impact on funds as well. We have an operational loss data set that has been developed around the world, and the total losses for the international institutions that are covered, since 2008, come to well in excess of $300 billion. A third of that is related to fraud. A duty of care to stakeholders was a far less pressing issue prior to the global financial crisis, as exemplified by the vast number of fines that have arisen since that crisis.” (Cal Muckley, professor of Operational Risk in Banking and Finance, UCD)

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Change in nature of fund management businesses establishing in Ireland

“We have seen a significant increase in managers and distributors looking to locate operations in Ireland. This development is likely influenced by Brexit and the need for UK firms to look to establish substance within an EU27 jurisdiction, so as to continue to be able to benefit from EU marketing and management passports. International tax initiatives such as BEPs are also encouraging firms to look to move vehicles away from “offshore” jurisdictions to EU jurisdictions such as Ireland, closer to their main operations.

This is a welcome movement up the value chain in terms of the type of jobs and functions performed in Ireland, particularly in the areas of portfolio and risk management. There has been a focus at EU level on ensuring that any outsourcing arrangements from EU jurisdictions such as Ireland to non-EU jurisdictions, including the UK post-Brexit, do not result in “letter box” operations in any EU jurisdiction.

“The Central Bank of Ireland has been a thought leader in this area, particularly through its CP86 consultation process and resulting Fund Management Company Guidance – this includes a considered and comprehensive framework aimed at ensuring that the governance around and oversight of delegation arrangements are sufficiently robust.” (Dara Harrington of Arthur Cox’s Asset Management and Investment Funds Group)

Shift from “active” to “passive” management

“A consistent trend in recent years is the move from active to passive management of investment funds. We have witnessed an explosion in the scale of assets under management within index tracking exchange-traded funds which seek to offer a low-cost way of obtaining exposure to the performance of the wider market. Critics of active management have pointed towards the higher costs charged by active managers for often sub-par performance. It is likely that many traditional active managers will look to add passive investment products to their stable of products, whether that be straightforward index trackers or more complex “smart beta” products. Regulators are likely to increasingly focus on systemic risk posed by the size and nature of the passive management sector.” (Dara Harrington of Arthur Cox’s Asset Management and Investment Funds Group)

Loan-origination funds

“In 2014, Ireland was the first European jurisdiction to offer a regulated loan-origination fund product. After a period of relatively slow growth and some technical refinements to the product, we are now seeing growing market acceptance and there has been a steady trend in credit managers using this product. When one considers that in the United States, roughly 80 per cent of credit comes from non-bank sources, whereas it is the reverse in Europe, the potential for growth in this area as the European market matures is significant.” (Dara Harrington of Arthur Cox’s Asset Management and Investment Funds Group)

Fintech

“The fintech movement will no doubt have a huge impact on the asset management industry and the way funds are administered and sold. Blockchain applications, artificial intelligence and digital investment platforms could streamline a number of outdated processes, creating efficiencies and opportunities for the funds industry. The use of artificial intelligence, which allows for efficient processing, recording and reporting of data, is likely to continue to grow. A new generation of millennial investors are emerging, who expect user-friendly and engaging ways to compare investment products and invest via online platforms. Embracing these innovations will likely take time and will require collaboration from industry, regulators and fintech firms. Given Ireland’s success as a domicile for funds, fund-service providers and technology firms, there is a huge opportunity for Ireland to excel in the fintech movement.” (Sarah Maguire, partner, Walkers)