Custody Risk: How has the Kiid been progressing?
Georg Lasch: From a provider perspective, there are many organisations producing a Kiid and disseminating it, and some securities services providers are offering Kiid services to clients. It is a new service that is well defined by the regulations, including its production, and clients are now asking for it.
We see two issues. One is on the retail side when the funds are directly distributed to retail clients and where the management company has to ensure the person at the end has received the Kiid. The other issue is the cost of producing Kiids once or several times a year for every share class. Larger fundraisers or fund sponsors are thinking about reducing share classes as Kiids need to be produced at share-class level and not just at sub-fund level. While the share class is an easy way to adapt the product to a market, to a distribution currency or to different types of clientele, in terms of management commissions, etc., the introduction of this additional fixed cost for producing the Kiid is creating another small barrier to adapting the product to the end-consumer. That is negative; I favour a Kiid at the sub-fund level rather than at the share-class level, the additional cost will lead to a more general offering to the end-client and may be less adapted than what we have seen in the past.
Daniela Klasén-Martin: This is an additional challenge from a management company perspective. You are right, there are many service providers offering Kiid services, competing on fees. The offer and the range of cost is very valuable but it remains an increased cost. In theory, and in the long run, the Kiid wasn’t to constitute an additional cost as it was set to replace the simplified prospectus. In practice, it constitutes an additional investment as it requires additional, regulatory information, such as the synthetic risk and reward indicator (SRRI) and the ongoing charges figure, which is different from the total expense ratio (TER). The SRRI has to be recalculated and a new Kiid issued if it is higher than the initial risk category for four consecutive months, which I believe may result in additional costs, in particular if the risk profile of the fund is not correctly assessed at inception.
With regard to the ongoing charges figure, there are still matters to clarify concerning its calculation and how it differs from TER. Some service providers will need to calculate both the TER and the ongoing charges figure. For any change in these measures, you will need to produce a new Kiid, so we will see more of a burden on the management company, which may end up in the ongoing charges figure/TER in one way or another.
Custody Risk: What has been the impact of the eurozone crisis on the funds industry in Luxembourg?
Régis Veillet: The whole eurozone is still being negatively impacted by the crisis. It is clear to eurozone clients what is happening and they can make distinctions between countries and financial institutions, but when you start speaking with non-eurozone bodies, then the real difficulties start. Organisations outside of the eurozone tend to confuse what is happening in Europe, and group Greece in with the rest of Europe.
As a service provider, we have changed the way we approach clients. We have had to explain the eurozone crisis. We had to explain about Luxembourg, about our exposure to government bonds, about our capital ratio and about our plans to face the crisis. This has changed the way we are approaching business. Two years ago, no one asked us about the Tier I ratio of the bank. Now, it is impossible to imagine going to a meeting with a prospective client without those figures in mind. There is an opportunity for Luxembourg here because it is seen as a safe haven in Europe by those who understand the differences within Europe.
Georg Lasch: During the crisis, rating agencies were reviewing their rating every second day in terms of downgrading countries and companies, including banks. This became very media-intensive, which helped drive the crisis effect, and it became quite different to the reports from analysts – the analysis of fundamentals of a company were ignored by some media, which created the wrong impression. If you remain calm, you help everyone to remain calm. You make people stress when you accelerate the movement. In the third quarter/fourth quarter last year, there was a crisis acceleration movement, which created a wave of panic across Europe in the investor and client space. The service provider side generated an urgent need for communication and even more transparency for our clients on asset protection, stability and safety of the provider. Very generally, clients were not relying on ratings any more and required more in-depth information on Tier 1 equity ratio, exposure to sovereign debt and its valuation. At the end, they needed to be reassured on the stability of their provider. On our side, we generated more attraction power through the known stability of the BNP Paribas Group. Finally, the global systemically important financial institutions status elaborated by the Group of 20 nations has given a sort of safety label for the systemic banks that is much appreciated by clients and will be a differentiator for the future. One thing that has changed is the safety argument is here to stay.
Custody Risk: Were clients moving money, making redemptions?
Georg Lasch: Not necessarily. The clients that were most aggressive with this were mainly Asian clients that react quite short term and were really panicked by the movement of Europe. Luxembourg has always been part of Europe and has participated in making it very strong and stable, so it has always benefited from being part of Europe. We have never been questioned and never had to explain that Europe was something positive. Last year, with the sovereign debt crisis, we were hit by this adverse effect of being a part of Europe, and it suddenly created a more negative perception of its stability. People suddenly reflected that change into their view of Luxembourg, which is not the right perception because Luxembourg is very stable. Asian investors have really slowed down their move towards creating Ucits. Although I don’t think they will create an Asian passport, it has kept money from flowing into Ucits. Hopefully it is a more delayed time movement than a structural one. The second area that has put pressure on Europe is the US. So it is mainly from the outside world that we get pressure on Europe – people investing less into the European space and, hence, into funds. We have seen net redemptions, but less heavy redemptions than we would have had in 2008.
Régis Veillet: Within a couple of days, everybody rediscovered the whole concept of counterparty risk, and we had to adapt our speech to something that has always been here but that organisations tended to skip. Some countries stood behind their financial institutions much more aggressively, and were communicating far more than others within Europe in the second part of last year. We need to be careful with this political issue around standing behind your financial industry. Europe shouldn’t forget that the financial industry is important for its economy.
Georg Lasch: Before, we never focused on the domicile as being the real added value. We thought having a Luxembourg fund was good because of what we could do and what we could offer a service provider in Luxembourg. But we have seen other markets in Europe – Ireland and others, for example – suffer from the adverse effects of the crisis when the Chilean pension fund regulator said the counterparty risk, or country risk, of Ireland was too great and too important for pension funds to be able to invest in locally domiciled funds. That was not put into force, but we have seen some countries thinking about not allowing investments in certain other countries because of their sovereign risk. And, while funds are a separate entity to sovereign risk, some have incorporated that entity into the view of the country risk, which we would never have imagined.