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It is likely we will see significant regulatory changes, however this does not mean that the future is set in stone

will see that our approach in the US maintains full access for EU fund managers and custodians in our market.” It seems that this is a point on which the US is not willing to compromise. Indeed, on this matter, US concerns are shared by a number of third-country offshore financial centres that provide a critical role in the industry, providing regulated fund structures, functionaries and professional expertise in tax-neutral centres.

Regulatory changes The European Union, however, is not the only body looking to impose additional supervision of the funds industry. The International Organisation of Securities Commissions (IOSCO) recently recommended six high-level principles on the regulation of hedge funds, which aim, similarly to the AIFM Directive, to protect investors by introducing mandatory registration of funds, managers and advisors, and increased disclosure and supervision requirements. It also published a template listing 11 types of data that hedge funds will be required to provide from September. Kathleen Casey of IOSCO explained that collection of consistent, comparable data would allow the monitoring of systemic risks and prevent gaps in regulator reporting requirements. Sources from the industry, talking to the Daily Telegraph in February, spoke of how meeting IOSCO’s rules would be much preferred to the EU Directive, with one saying: “Hedge funds have always agreed with the G20’s view that more information about markets is needed to ensure financial stability.” In a move aimed at improving efficiency and effectiveness, the US

Securities and Exchange Commission (SEC) this year set up a new asset management unit as part of a more generalised reorganisation, and has focused its recruitment efforts on staff from the funds industry. The strategy of this new unit has yet to be seen – some fund managers hope that a deeper understanding of the industry could result in greater cooperation and a lower risk of enforcement action, whereas others are worried that, as a result of the increased oversight, the SEC could deal out harsher penalties to make up for violations it may have missed in the past. Both sides agree, however, that the new unit should result in faster investigations, and therefore less time-cost for both the regulator and the industry when investigations are necessary. Ultimately, it is likely we will see significant regulatory changes,

which may in some cases be viewed as onerous – however, this does not mean that the future is set in stone. Lord Myners, Financial Services Secretary to HM Treasury, suggested that: “Those who lobby constructively, offering solutions as well as pointing out problems, will

42 June/July 2010

get a fair hearing anywhere in the EU.” It is important that offshore third countries, along with key influencers from other third-country jurisdictions, continue their negotiating efforts to achieve a result that is acceptable to all.

Funds need to be flexible Regulatory changes are not the only challenges the industry is facing. Real-estate funds have been suffering in these difficult economic times, with property values falling dramatically and loan-to-value ratios suffering. Despite recent signs of a reverse in decline, this fall in values has had a knock-on effect, resulting in default or breach of terms. Covenants relating to interest cover remain threatened by reduced occupancy levels and subsequent rental declines, generating a lower return than expected at the time of financing. When this continued threat is combined with the generally illiquid

nature of these investments, cash-flow problems may in some cases be inevitable. A tension is created between waiting for the depressed market to recover, to maximise realisations on disposal, or selling off the properties at a loss simply because the cash is needed. This quandary is even further borne out by the financing institutions that are caught between becoming property managers and potentially depressing the price further as they attempt to liquidate assets, or holding unoccupied properties for long periods. It is clear that to achieve the best refinancing outcome or renegotiation of terms, preparation and early and continual assessment of cashflow and valuation is key. A review of debt positions and shrewd realisation of opportunities may help to provide future certainty. In addition, for those property funds with capital to deploy, opportunities for investment seem to be growing. It is clear that the catalyst for increased reporting and transparency

has been the downturn in the financial markets. Investors have become increasingly risk-averse, and regulators and politicians have seized the opportunity to push through changes that aim to protect both the retail and professional investor. It remains to be seen whether these new rules do more harm than

good to global stability, and whether investors – and confidence – will return to the market. However, talented and forward-looking fund businesses will take these challenges and convert them to opportunities to rise above the competition. n

HEATHER MACCALLUM is Executive Director, KPMG, in the Channel Islands

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