Getting ready for a regulatory shakeup

The internationalisation of the finance industry has prompted Bafin, the German financial supervisory authority, to work hard to make the country more attractive to international investors. Asset ­managers are also concerned about both the risks and opportunities arising from the new withholding tax (Abgeltungssteuer), which may arrive earlier than anticipated. “Each week I observe a distortion of competition,” Bafin’s Horst Nottmeier told delegates. “Countries interpret the EU rules for wealth management (the Ucits directive) differently, and investors use this to practise supervisory arbitrage.” The diminishing number of newly issued funds is fuelling fears that Germany could lose out as a financial market location. The proposed amendment to the German investment law still has to pass readings in Parliament and will not come into force before November. Further delays are likely. The amendment aims to deregulate the investment industry. For example, the timeframe for new approvals will have a four-week deadline. “If we don’t get through with the procedure within four weeks, the fund will be automatically approved.” Standard products should pass within one or two weeks. For institutional funds (Spezialfonds), the requirement to allow a maximum number of 30 investors will be diluted, as well as rules for the protection of investors. Fund managers will be allowed to use new products, such as ‘hedge funds lite’, in the special assets category. The amendment also aims to modernise open-ended property funds. To do so, obligations for daily redemptions will deviate from the current legal situation. For example, if a large volume of redemptions looms, they can be suspended for a while. This calls for adequate risk management systems to be set up. These changes are made in the light of the liquidity crisis that open-ended funds suffered in 2006. The amendment also seeks to promote product innovations: “The legislator has to make sure he creates something that makes us competitive in areas such as investment certificates.” One example is the promotion of private-public partnership funds, and new creations in the category “other special property” (Sonstiges Sondervermögen). “You can do a lot in this area. What you can’t do is going short,” said Mr Nottmeier. The possibility of taking up short-term credit will extend to 20 per cent of a fund’s volume (unlike Ucits funds where only 10 per cent is allowed). The rules for investment corporations with changing capital (“Investmentaktiengesellschaft mit veränderlichem Kapital”) have been revised – modelled on Luxemburg’s Sicav, an investment corporation with variable capital. There is now room for self-administered corporations with changing capital as well as for foreign-administered corporations with changing capital. Mr Nottmeier said he was “a little sad” that the existing rules for hedge funds “have not been optimised comprehensively, which is what I have been aiming for”. Instead, they have been adapted to some single practical needs, such as making it possible for fund of funds to borrow short term up to 10 per cent of the fund volume, or clarifying the position of prime brokers. But there are still restrictions on the asset types that can be included in hedge funds. Germany’s fund management industry, which manages roughly E1400bn, will also be affected by the new withholding tax. The tax aims to harmonise taxation of income from investment of capital, including interests and payouts of dividends. “This is a penalty kick without a goalie for us,” said Ulrich Gallus, head of private wealth consulting and fund of funds at DekaBank. The tax will favour investments in funds – but both investors and consultants were still largely unaware of the opportunities, he said. Christoph Hott, head of investment strategy for private clients at Sal Oppenheim, thought it was likely the legislator will bring forward the date of entry into force to January 2008, instead of January 2009. “If that happens, we will have a problem, of course,” Mr Gallus said. Asset managers are planning to use the tax argument for a large-scale fund sale in 2008. For stocks that have been acquired before the date, capital gains will get taxed and the yearly deadline for private sales business (“Spekluationsfrist”) will be dropped. Therefore, many investors will use the time until then to reshuffle their portfolio.

RF