REGULATION: Striking a balance

balanceRegulation plays a vital role in the development of regional asset management markets. Funds Global talks to different supervisors in the Mena region about their strategy.

The regulatory regime is a crucial ingredient in any financial market, particularly in the Mena region where the asset management industry is still at a nascent stage of its development. Devising a strategy for supervision is therefore becoming an increasing area of focus in many Mena markets as various financial authorities seek to strike the right balance between ensuring stability and encouraging activity.

Regulators will argue that the two, stability and activity, are not mutually exclusive and that confidence breeds growth. However, a light regulatory touch and a streamlined registration process are often the defining characteristics of domiciles looking to attract asset managers to a new fund centre.

The events of the past three years have of course focused investors on the importance of strong oversight and robust regulation, traits which have not always been associated with the supervisory regimes of the more dynamic fund centres, particularly those with dedicated authorities devoted to promoting international activity in the financial services sector.

While such development agencies play an important part in promoting the asset management industry to a worldwide audience, they do also create the potential for friction that arises from a dual regulatory system. Such an issue has arisen from the latest proposals from the Emirates Securities and Commodities Authority (Esca) concerning the regulation of the investment management industry within the United Arab Emirates. The proposals were first issued in January this year and are due to be passed into law in July.  

The main features of the proposals are that the Esca will replace the central bank as the authority for overseeing the registration of any mutual fund distributed within the UAE. Any such fund will be required to establish a joint stock company, have its permanent headquarters in the UAE and have a minimum capital base of 10 million dhirams. In addition 10% of this capital must be invested as capital reserves for any fund that is established.

For funds registered in the financial-free zone the Dubai International Financial Centre (DIFC) are not subject to the new rules and are considered as “foreign funds”. However should any DIFC-registered fund wish to market itself to any UAE-based investors, it will first have to get the approval of the central bank.

The Esca’s overhaul of the rules for asset management is long overdue, particularly when compared to the regulatory framework within the DIFC which is more commensurate to international standards. And the intentions behind the new rules are clear – to create a more regulated market in the UAE with greater transparency and investor protection which will, in turn, increase confidence in the market and lead to a greater investment.

However, the concerns raised by many local asset managers is that the new rules look too favourably on large domestic banks and are too punitive on smaller asset managers. The proposals add another layer of regulatory red tape and an increase in capital requirements that many smaller asset managers will find unwelcome. Meanwhile the larger UAE-based banks such as First Gulf Bank. National Bank of Abu Dhabi and Emirates NBD that are looking to grow their asset management arms within the UAE may well find some benefit from the new rules.

Furthermore, say critics, the proposals are far too rigid and overly focused on the retail investment market. They do not make enough distinction between different investor types (retail and institutional) or different fund types (private and public equity-based) or take into account the different concerns and regulatory needs of each fund or investor type.

The rules have not yet been passed and it remains to be seen how much of the many hundreds of pages of industry responses will be considered in the final draft but the Esca proposals have alerted fund managers looking to market to Mena-based investors to the fact that central banks are liable to make sudden and unpredictable changes to regulations.

A similarly sudden and unpredictable change in regulation was made by the Qatar Central Bank (QCB) in February this year when it announced that only pure-play shariah-compliant banks would be able to practise Islamic banking and the many commercial banks that had opened Islamic banking divisions would have to close them down by the end of 2011.

On the one hand such a move does prevent any potentially damaging distillation of the Islamic banking market and does make it easier for the QCB to regulate, particularly in terms of capital adequacy. Inevitably though, it will raise questions about the creep of protectionism within central bank regulation.

More damaging though is the perception that the QCB’s ruling was made with little consultation with the industry and appeared to contradict the central bank’s existing attitude to Islamic banking operation. Ever since the QCB allowed commercial banks to operate Islamic banking services, they have attracted more than 80,000 retail and corporate customers. And it was only in July 2010 that the QCB governor H.E. Sheikh Abdullah bin Saud Al Thani was on hand to open HSBC’s new Islamic banking branch, which will now have to be shut down before the end of the year.

Fortunately no alarming amendments have been made to the regulation of the asset management industry in Qatar. As with other Mena domiciles Qatar has two regulatory regimes for asset management. The QCB supervises any regulated entity working within the state while the Qatar Financial Centre Regulatory Authority (QFCRA) supervises the regulated activity of any firm registered within the Qatar Financial Services Authority (QFC Authority). 

When the QFC Authority unveiled its plan to develop Qatar as a global hub for asset management, the QFCRA issued a consultation paper on making amendments to its rulebook. The previous rulebook for Collective Investment Funds had not been overly successful and had resulted in few applications, says George Pickering, managing director, Policy, Enforcement and Risk. “There was a need to simplify and strengthen the regulatory process so that current and future participants could have full confidence in the system.”

Following the consultation period, the new rulebooks for Collective Investment Funds (CIF) and the Conduct of Business became effective as of January 2011. The changes focused on four areas within fund management:
• allowing authorised firms within the QFC Authority to operate foreign funds
• establishing a regime for QFC Authority-registered retail funds
• allowing foreign funds to be marketed to retail customers
• allowing the custodian of a QFC Authority collective investment fund to also perform administrative functions for that fund

The last of these areas reflects the increased interest from international custodians and asset servicing firms in establishing a presence in Qatar. State Street is already here and JP Morgan looks set to join them. Pickering believes the arrival of these asset servicing firms will dovetail nicely with the growth of the funds market. “We are looking for firms to provide fund administration. The aim is to safeguard assets but also provide more advanced services like daily Navs. The rules allow for that but it is a question of seeing whether there is a demand for this.”

In addition to these changes, the new rulebooks also covered private placement, allowing for greater involvement of private equity and hedge funds within the QFC Authority, another area of increased interest. “I think the new rules send a clear message that we are open for business and have a clearer and more streamlined process for setting up within the QFC Authority. And we have received a lot of interest,” says Pickering.

The Central Bank of Bahrain (CBB) believes it is a priority to promote stability in the financial sector and that this in turn will generate more activity. “The CBB strongly believes that when a financial system is stable, it will promote continuity of business and activities undertaken within the financial system, which will ultimately lead to attracting more activity,” says Mohammed Ayman Al Tajer, director, financial institutions supervision directorate, CBB.

Stability in an economy is a strong factor in enhancing the confidence of fund operators in the region, thus attracting them to establish and operate mutual funds, and in attracting investors to invest in those funds, says Ayman Al Tajer. “This would all result in more activities in the long run. Stability is also a key factor in sustaining gradual and healthy growth in the sector. This would ultimately translate in a strong confidence sentiment of investors participating in such market.”

The CBB has also invested considerable efforts in upgrading its asset management regulations to become more transparent and to ensure a level playing field for all players, says Ayman Al Tajer. “In doing so, we had to focus and address particular areas such as enhancement of corporate governance, defining the role of each relevant party to a fund, in addition to amplifying the need to prudent risk management practices.”

The CBB believes it is possible to strike a workable balance between ensuring stability and promoting activity, says Ayman Al Tajer, as long as the regulator does not compromise on the quality of its regulatory framework and does not deviate from the objectives for which it has been established.

In terms of the development of the asset management industry in its jurisdiction, Ayman Al Tajer believes that the central bank has a major role to play. “The central bank sets the main parameters within which the industry players operate. In order to carry out the role efficiently, it must partner with industry players in the sense that it must maintain a continuous dialogue on current industry issues facing the players, get to know their needs, share thoughts wit them regarding enhancements to improve the regulatory framework and consult with them whenever new regulatory requirements are proposed, prior to being imposed on them.”

In addition, regulators and central banks are required to regularly familiarise themselves with key areas such as industry development (both regionally and internationally), issues faced by players globally and the impact that such developments and issues might have on their local investment management industries, says Ayman Al Tajer.

©2011 funds global

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