Shake-up of rules governing the sector look set to continue as Securities and Commodities Authority steps up oversight
Asset managers are gearing up for growth ahead of new rules from the Emirates Securities and Commodities Authority (SCA) and the Insurance Authority (IA) that could change the investment landscape in the UAE.
The IA has signalled it will launch new rules impacting the sale of life insurance investment products, such as commission caps, cooling off periods, and transparency around fees. A third draft of the new rules was released on January 31. It comes following numerous complaints from investors about issues including onerous fees, inflexible contracts with high redemption penalties, fund churn to generate additional commission fees for advisors, and investors buying products they don’t properly understand from advisors who don’t have their best interests at heart.
But there’s expectation that the SCA will also announce that independent financial advisors (IFAs) will have to be licensed by the security authority and be compliant with SCA rules, and will only be able to wrap SCA-registered funds into life insurance products sold, Patrick Oerer, the chief executive officer of Emirates Wealth, a mutual funds distribution platform, said in a phone interview last week. A statement on the regulator’s website earlier this month said it was “studying regulating the transfer of jurisdiction over financial and monetary intermediaries”. The study is being undertaken alongside the UAE Central Bank, it added.
Currently, insurance investment products can contain funds not registered in the UAE. The move to require registration for funds would align the UAE with international best practice, Oerer said. As yet, no official announcement has been made, however, and the SCA did not respond to an emailed request from Zawya for comment.
Such a move would address what Oerer describes as a current “imbalance” in the industry in favour of companies selling investment products not registered with the SCA, he said in an interview in April.
Gordon Robertson, an industry veteran, says that among IA-registered companies selling life insurance there is now a “mad rush to get their company regulated” and for staff to gain the required industry qualifications. The process for a company to be registered with the SCA can take around a year, he said. He expects that an official announcement will provide a timeline for the new rules, to give sufficient time for companies to register.
With companies also likely to have to comply with the new IA rules, changing commission structures, and declining fees could lead to some companies dropping out of the industry altogether rather than comply, Robertson believes.
“There will be a cleaning up [of the industry], lower fees for clients – so the direction is very positive.”
Local funds industry could benefit
Moves to tighten rules should increase the overall quality of investment products available to UAE investors. Craig Roberts, MENA regional managing director at Apex Fund Services, notes while the SCA has made sure that products being sold to retail investors through promoters such as banks are of a sufficient standard, quality, and are supported, “most people access the market through the IFA network or through insurance wrappers”.
“That has been left pretty much alone and unregulated,” he said.
Roberts believes tighter regulation will help the funds industry grow, and says that a number of fund managers are now gearing up to compete in this space, by pushing towards weekly or daily liquidity for their funds, something that is preferred by retail investors.
“Any development that starts to regulate that market, and ensure then that the funds that have been offered, and the advice given from the IFAs is more credible, should improve the ability of fund managers to tap into the retail space,” he said in phone interview last week.
Lack of SCA regulation for IFAs has probably hindered the growth of local fund offerings, believes Roberts. Despite the size of the UAE retail market, it is not well covered “because fund managers either don’t trust the access routes to it, or because it’s unregulated there has been a lot of concern on the products and how they’ve been offered,” he said.
The potential move to bring insurance investment products under the purview of the SCA has been on the on the cards for some time. Peter Hodgins, a lawyer specialising in insurance with Clyde & Co, said via email earlier this month that a 2016 SCA directive stated that “insurance contracts which are used to collect money for investment into funds will be considered within the ambit of [SCA’s] Fund regulations”.
However, the authority has also indicated that it would not seek to apply its regulations to insurance sector entities “pending the issuance of guidance as to their application which was to be agreed with the IA,” leaving the issue unresolved.
In 2018, the SCA and IA signed a memorandum of understanding, agreeing to cooperate in matters related to licensing and supervising insurance companies, exchange regulatory and supervisory information, and to provide information concerning the insurance companies' governance and financial reports.
Asset managers expand offerings
Meanwhile, maturation of investment fund sales strategies by UAE banks and other onshore promoters is set to increase market penetration of the underdeveloped mutual funds sector, with a number of international asset managers registering new funds for promotion in the UAE.
Azimut DIFC – the local office for the Italian fund manager with total assets of $61.4 billion at the end of April – is launching two new public funds. One will invest in Pakistani equities and the other is a target maturity Sukuk fund, which was launched in April but has already achieved $140 million of assets under management.
While the mutual funds industry in the UAE is widely seen as small and underdeveloped, Giorgio Medda, co-CEO of Azimut Group, describes the industry as “potentially very big”. And he says that international fund houses such as Azimut are seeing increased interest from UAE banks for new products in a bid to be able to offer greater differentiation in the market.
That follows a realisation among many UAE banks “around three years ago” that they were all offering a similar set of funds, mainly from large fund houses, as their competitors, said Medda in an interview in April. Medda has been based in Dubai since 2012 as regional head and was promoted to co-CEO of Milan-based Azimut in April, responsible for asset management.
“There has been this growing need for banks to build strong relationships with selected fund houses so that they can have a specific customised product,” Medda said in an interview last month.
“Expertise is being formed at the bank level in order to create the selection of funds and relationships have now deepened. [Banks] have now realised they don’t really need to have 100 funds when they can focus on 20 that they know very well,” he says.
Deeper relationships with asset managers can allow a bank to offer an exclusive fund or exclusive unit classes for a strategy, as well as provide enhanced investor education and resources for investor training, said Medda.
With most banks offering clients wealth management products rather than selling individual funds, the hope for fund houses is that banks will bundle in mutual funds rather than single securities, says Medda. The advantage for banks is that a fund is a scalable solution, and it means they can choose and select the best managers for each asset class, he said in a telephone interview last week.
Tapping family offices
Family offices in the region should soon have a chance to tap new funds, with the announcement that State Street Global Advisors (SSGA) is seeking approval for five new funds targeting qualified investors, covering investment themes such as emerging markets, low volatility equities, value investing and asset allocation.
SSGA is the world’s third largest asset manager with nearly $2.8bn in assets under management. While it has been in the region since 1992, its GCC client base is predominantly composed of sovereign institutions, ranging from central banks, sovereign wealth funds, and more recently pension funds, all of which tend to invest in discretionary mandates rather than mutual funds, said Emmanuel Laurina, head of Middle East and Africa for SSGA.
“We’re embarking on the next chapter of our growth initiative in the region, which includes a more dedicated focus on the financial intermediary sector. So this is really a way for us to access the wholesale and wealth markets in the region by partnering with financial institutions that want to distribute our products or even partner with us on sub-advisory solutions,” Laurina said in a telephone interview earlier this month.
The intended market includes family offices, and SSGA is currently in discussion with several potential partners for promotion and distribution into the onshore wealth market, including some local banks, said Laurina. He declined to identify these.
“We haven't really targeted family offices actively in the past. That is going to change. The move is designed to make sure that that our coverage is as wide and deep as possible,” said Laurina. The company plans to gain SCA approval for the five funds later this year, he added
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