POLITICS MARKETS INTERVIEW Good news, bad news Investors are urged to Christian Dargnat, approaching as Labour eyes up new splash the trillions they what will be his last six months City friends. hold in cash. as President of the European Fund and Asset Management Association, talks to Dan Atkinson about what has been achieved so far in his two-year term and what he still hopes to accomplish. Establishing trust, he says, is the key. THE HUB BY Dan Atkinson November 2014 SHARP FOCUS ON THE WORLD OF FINANCIAL SERVICES

INSIDE:

TOP STORY New Asian hero plans high risk $650m gamble Page Two

BUSINESS CLUB: Foreign banks face Fund industry maps out new rules from UK treasury Dan Atkinson Page Three brighter future London MONEY MATTERS: Europe’s fund-management industry has some way In the medium term, he believes, social and Lord Hill’s new plan to go to restore public confidence after the economic demographic trends are highly favourable, and he crisis, and financial education has a big part to play in predicts that assets under management in Europe will for Europe’s single this, says Christian Dargnat, President of the European reach $100 trillion by 2020, up from $21 trillion in 2013, market Fund and Asset Management Association (EFAMA). Mr Dargnat says he hopes financial supervisors are Page Three aware that the asset-management industry can play a “We are at the beginning of a process of persuading vital role in improving the flow of funds to the small and ABOUT Hume Brophy our citizens that we are to be trusted,” he says, in an medium-sized enterprises that are essential to Europe’s interview ahead of his final six months in office. recovery, provided regulatory barriers are removed. Hume Brophy is a specialist Financial education has been a key theme of his international Financial Services, presidency to date, and he sees it playing a pivotal A major theme of his last months in office will be Public Affairs and Public Relations role in rebuilding public confidence. “In addressing the pressing for a fair deal for European asset managers company with offices in London, question of trust, we have to do it through education. in the United States. “Europe has the most open Brussels, Dublin, Paris and We have to address young people.” asset-management market in the world,” he says. “But Singapore. The views expressed it is not the same in the US market. Trying to sell a in The Hub are not necessarily As the financial-services sector emerges from the European product in the US would be much tougher those of the company. Informed economic crisis and recession, Mr Dargnat sees the than selling an American product in Europe. contributions are welcome. industry “making the bridge” between savers and “We need a level playing field at a world level. That is something to press for in the year to come.” Follow us @Hume_Brophy borrowers, with an increasingly important part to play in www.humebrophy.com raising finance for business. Interview Back Page

David Henry Doyle EU Transaction Tax stalls as deadline looms Brussels

The political deadline set for end-2014 to reach a modest first step with a much reduced scope. weeks to break this impasse. However, a a deal on an EU FTT is rapidly approaching. The second wishes to have the broadest possible legislative agreement on FTT is becoming less However, a breakthrough currently remains out of scope, including derivatives. likely with every day that passes. reach as the 11 participating countries continue to disagree on fundamental aspects of the proposal. The insistence on a broad scope stems from All eyes are now on the December meeting of These include whether to include derivatives in concerns that a tax with a dramatically reduced Finance Ministers. If no last minute breakthrough scope alongside equities and how to redistribute scope could cost more to implement than it will can be found in the coming weeks the fate of the revenues collected from the proposed tax. generate. There is also the hope that additional FTT is deeply uncertain. There remains a real There are currently two camps among EU Member tax revenues would help supplement national danger that some national capitals may no longer States participating in the FTT. government budgets. Several political and wish to take part in a tax that is too watered down The first, dominated by larger countries, wants diplomatic moves have been made in recent and therefore unprofitable. GLOBAL REACH. LOCAL INFLUENCE. THE HUB | NOVEMBER 2014

Good news bad news as Labour eyes City

Caroline Escott London CASUAL attendees at this year’s Labour Party Conference in Manchester could be forgiven for thinking that the Party still does not really ‘like’ financial services. Delegates heard of plans for a tax on bankers’ bonuses to Ed Miliband’s pronouncements on hedge funds and tax loopholes. However, behind the rhetoric, Challenges: Indonesian President Joko Widodo now faces massive macro economic problems there is evidence of a more nuanced Labour policy approach to the sector. Nation Profile Shadow Ministers continue to engage with financial services stakeholders, emphasising that a well-functioning The $650bn Far Eastern City is vital to the economic recovery and policy proposals have focused on restoring trust to the sector, making it SIMREN PRIESTLEY fairer and boosting lending to the real planning gamble Singapore economy. Indonesia is about to begin a major structural There have been, however, significant efforts to With Ed Balls’s neoclassical economics overhaul which will soon see it launch an intensive improve Indonesia as a place to do business. The background and a senior Treasury international campaign for inward investment. country has been actively encouraging foreign direct team with City experience, a Labour investment (FDI) and a number of leading international government will probably avoid In a remarkable display of true democracy in largely groups are moving in. Toyota and Honda already implementing some of the more extreme authoritarian Southeast Asia, Joko Widodo, a once manufacture here; global banks are servicing a growing anti-City rhetoric that it currently uses small-time furniture exporter, has been sworn in as middle class and private equity groups including KKR to appeal to its core vote. However, President. His ascension of the political ladder has and Carlyle are all making investments. one noticeable exception could be the raised hopes both domestically and internationally of proposals to cut tax avoidance by the implementing economic reform in Southeast Asia’s This investment is widely seen as the most promising sector. biggest economy. way to build and sustain momentum and Mr. Widodo Most Labour speeches on financial Given the size and diversity of the country he is has voiced his plans to return growth to 7% by 2019. services mention a shake-up of banking presiding over will certainly have his hands full in This will come from increasing investment, especially partly through proposals which include managing the challenges that lie ahead.Not only must in the country’s infrastructure sector. This means separating retail and investment banks he battle with this divided electorate, but he needs to cutting red tape and stamping out corruption. and favourable comments made on work with 580 local governments to push through his An endemic issue in Indonesia, removing corruption alternative finance sources include peer- plans for development. and increasing State transparency, has been cited as a major priority in an effort to attracting investors. to-peer lending. Banking reform will A drop in growth to 5% in Q3 this year, after five Mr. Widodo is keen to implement consistent regulation, almost certainly make it into Labour’s years of progress due to a fall in commodity prices reduce graft and streamline tender processes to manifesto and could be a key part of any and decreased demand from China is likely to remain improve competitiveness. coalition Programme for Government. so. Monetary policy has been tightened to stem capital outflows, and is preventing the current account deficit Currently ranked by the World Economic Forum as Proposals from Labour’s Business from widening. Depressed commodity prices combined 61st out of 148 economies in terms of infrastructure, and Pensions teams should also be with the looming lifting of US interest rates and the Indonesian is battling to build roads, railways and ports. monitored closely. Under plans to potental outflows that will result, mean that Mr. Widodo However, slow decision-making is seriously hampering boost economic growth from Labour and the Indonesian Central Bank must find other the process. Peer Lord Adonis, BIS would become sources of financing. a more powerful and strategic department. Their headline corporate governance proposals, including those on remuneration and takeovers, will Big plans from a quiet man therefore be key, as will plans to boost small business lending and finance. Indonesia requires $545 billion to deforestation, terrorism and the Far East with a high level of in capital over the next 5 human trafficking.. acceptance. George Osborne’s Budget 2014 aimed to years to improve the country’s However, he has had significant The investment pipeline is reform pensions and Labour’s Pensions infrastructure. But the dynamic success as Governor of Jakarta healthy: Korea’s Samsung team have been correspondingly active new President, Joko Widodo, and has developed a strong Electronics plans to make phones in their response; proposing a review of is confident about his plans to reputation among world leaders locally next year; Philippines’ the reforms within six months and also deliver 2,000 km of new roads, and local farmers alike as a Jollibee said it would attempt promising further action on the legal 10 new seaports and bridges dynamic individual already to re-enter the market after duties of pension and other fiduciaries to linking the many islands of the fighting for major reforms. He is pulling out during the Asia crisis; protect people’s pensions. vast country. a humble individual who still flies Germany’s VW plans to open its The bad news for the City is that change There are, however, a number of around the country in economy first plant by 2017; and, Mitsubishi is probably coming, but some of the serious domestic problems facing and his plans for reform and is planning to invest $600million details remain vague. The good news is him such as climate change due development have been met in in a new factory. that this leaves room to engage with the Party on financial services policy issues. GLOBAL REACH. LOCAL INFLUENCE. THE HUB | NOVEMBER 2014

THE BUSINESS CLUB: MARKETS: Foreign banks to face new Dan Atkinson Splash the regulation by UK treasury London cash, leaders The UK Treasury is consulting on The Treasury said: “The purpose At least once a year, the a major extension of its powers of the regime is to improve branches will have to consider tell savers over foreign banks in the City. standards of conduct and “whether there are any grounds accountability in RAPs,” adding on which a regulator might It wants to be able to regulate that a key feature of the regime is seek to withdraw its approval A drive to apply the trillions the conduct of senior managers a “presumption of responsibility”, of a senior manager or another of dollars held by institutional in the British branches of under which “senior managers person approved by a regulator investors to the needs of the post- foreign banks in the same can be held to account when and, if so, to notify the regulator crisis world economy has been way as regulations apply to an RAP fails to comply with of those grounds”. launched by two major global their counterparts in British regulatory requirements in forums. institutions. their area of responsibility and Stricter still would be the rules they failed to take reasonable that apply whenever an RAP The international effort to turn Under the proposals, foreign steps to prevent or stop the wishes to appoint someone “to long-term savings into finance managers would become subject contravention”. a role in which he or she could for business and for major infrastructure projects is being to a raft of new responsibilities do significant harm to the firm”. led by the Group of 20 leading and requirements, including a In addition, the regime requires In these cases, the branch will economies and the 34-strong rich “presumption of responsibility” “mandatory statements of issue a certificate to that effect to nations’ club, the Organisation when things go wrong. responsibility”, listing the areas of the employee concerned, which the branch’s business for which will need to be renewed every 12 for Economic Co-operation and Development (OECD). Central to the proposal is the each manager is responsible. months. designation of foreign bank Branches will be required “to verify, before making an Branches will also have to “notify A special role is envisaged for branches as “relevant authorised application to a regulator for the appropriate regulator when fund and asset managers in terms persons” (RAPs), which in approval of a candidate for a they take formal disciplinary of financing small and medium- turn, would bring its executives senior management position…that action against senior managers”. sized enterprises (SMEs) and within the scope of the “senior they are satisfied that the person The consultation will run until there is a call for institutional managers and certification is fit and proper to perform that January 30. investors to be encouraged or even regime” (SM&CR). role”. legally required to exercise proper “stewardship” of the companies in which they invest.

In the period following the financial crisis and recession, institutional investors have been put forward as an alternative to the banks as Capital Markets Union set to a source of financing for industry. Banks are now more heavily regulated in terms of the amount free up alternative funding of capital they need to set against the loans they make. The G20 and OECD are keen to support such a development, but in a We stand at the threshold of a “new frontier of Europe’s Gary Titley is a seasoned former European legislator, senior consultant at Hume Brophy and recent paper they warned that any single market”. Thus spoke Lord Hill. well known authority on EU foreign and security jurisdictions hoping to benefit from policy. He was first elected to the European such investment need to ensure With this rousing rhetoric, by Brussels standards, the Parliament in 1989 and went on to serve four they have the right legal and other consecutive terms. new EU Commissioner for financial services heralded the structures in place. conception of an EU “Capital Markets Union” this month. During this time Gary served as the UK Labour The only problem: no one is quite sure what it means. Party’s leader in the EP and was also a member of the party’s National Executive. His committee “Investors are willing to commit assignments included Transport, Industry and their funds to investments only Dismissed as a public relations exercise by some, the Energy, Internal Market, Economic and Monetary, when they have some assurance “CMU” comes in response to the advance of eurosceptic gary titley Legal Affairs and Foreign Affairs, where he was that financial markets and the spokesman for the Socialist Group. parties across Europe driven by low growth and high Senior Consultant institutions are safe and sound unemployment. and operate according to rules What can we expect to happen in the next year? and procedures that are fair, The intention of the project is to open up alternative The solutions proposed at this early stage include a transparent and free from conflicts sources of funding for the economy beyond traditional new European Long Term Investment Fund vehicle, of interest”, they said. bank lending. This is no easy task. Europe’s banks still rehabilitating high quality securitisation, developing SME account for 70 per cent of lending. By contrast, in the growth markets, improving SME credit information and They added: “Long-term United States 80 per cent of financing comes from the treatment of covered bonds. investments can be particularly markets. It is this situation that the CMU seeks to reverse. challenging, given the longer time However, as we enter this new mandate stakeholders horizons over which problems Lord Hill’s first step has been to identify the challenges. would do well to read between the lines. In his first days and related weaknesses can Savings are concentrated in the banking system, markets the new Commissioner has laid down a challenge not just materialise.” But while “some institutional investors have the are fragmented due to different rules, there is a tax to his own staff but also to industry. It is this: financial in-house asset management bias against equity, Member State insolvency law is not institutions should engage with consumers, businesses capability and the wherewithal, to harmonised, and there is a paucity of information on SME and wider society to solve the problems identified above. undertake infrastructure and other credit risk. long-term investments, there has If this is done Hill has promised to “champion the been only limited activity in this Now in listening mode, the Commission will soon launch contribution the industry makes to growth and jobs”. New area, said the G20 and OECD. a Green Paper to gather input from industry on what they frontier or not, this is an opportunity for new dialogue not see as the main obstacles to CMU. to be missed. GLOBAL REACH. LOCAL INFLUENCE. THE HUB | NOVEMBER 2014 Trust is the key for asset managers in a new world

Christian Dargnat was elected President of the European Fund and Asset Management Association in June 2013 for a two-year term, having Christian Dargnat, approaching what will be his last already served two years as Vice-President. He is one of six months as President of the European Fund and the leading figures in European fund management, being Chief Executive Officer of BNP Asset Management Association, talks to Dan Atkinson Paribas Asset Management, the largest investment centre about what has been achieved so far in his two-year of BNP Paribas Investment Partners, of which he is Chief Christian Dargnat Investment Officer. term and what he still hopes to accomplish. President, EFAMA

Q. You have stressed that recovering investor trust A. Yes, this is still the likely outcome. But often it A.In Europe, we are going through a process of after the financial crisis is critical to the industry’s will be the same people going for both low-risk and what is called disintermediation. In the US, two- future, in particular with regard to the returns for high-conviction funds. They will say I want two- thirds of financing comes through the market, investors. Is this recovery of trust now firmly under thirds in a passive fund, one-third in an active fund. while in Europe two-thirds has come through the way and likely to continue into the New Year? As in life, people do not want it tepid. They want banks, the “intermediaries”. We in Europe are hot water or cold water. The traditional diversified converging towards the US model whether we A. Progress remains too slow. Often when the asset-class strategies failed the financial crisis. like it or not. Are regulators aware of it? I hope media cover the industry it is with a negative Pure beta products are by definition outperforming they are, because we [in asset management] are stance, a negative bias. There can be a lack of traditional assets in a market with strong in a position to benefit from this process. We knowledge of what we do and that means the trends. One of the reasons is that correlations collect savings and pass them on to people who positive aspects are rarely covered. We are at the increased with the volatility. Moreover, we have are looking for money. We are making the bridge beginning of a process of persuading our citizens to understand that the increasing complexity and between these two populations. Yesterday the role that we are to be trusted. We spend a lot of time internationalization of financing markets has was performed by the banks, today by the asset saying what we are not. We are not traders. We created new specialized asset classes along with managers. We still need bankers. They will bring are not vultures. But what we are is a group of the need for greater asset-allocation expertise. the clients and their projects to the asset managers. people who collect savings to invest in financial But the banks will need to understand the change markets. To finance the “real economy”. In terms in their business model. of convincing our clients, the road in front of us remains longer than what we have achieved so Q. Following on from this, you have been far. We are on our way to communicate about In addressing the question of especially committed to the creation of a properly- an independent report realised by an academic. functioning bond market for small and medium- The study will enhance the role of the Asset trust, we have to do it through sized enterprises (SMEs) in Europe to finance Management for benefits of the economy and its education. We have to address the continent’s fast-growing younger companies financing. and thus help drive the economic recovery. Are young people. In a more simple legislators and regulators starting to listen to this? Q. Financial literacy and investor education have been key concerns of your presidency to date. How way we have to express what A. We need to finance SMEs in a better way. They does this tie in to the question of trust that you we do, we have to give concrete know how to knock on the door of a bank. They raise? examples. You are a nurse, you do not know how to go to the market. The role of A. In addressing the question of trust, we have to want to buy a house. Why do the banks will be to help them. We asset managers do it through education. We have to address young need expertise to understand the risk of SME people. In a more simple way we have to express you need us? financing. We know the risks with regard to large what we do, we have to give concrete examples. companies. But we are not so sure about investing You are a nurse, you want to buy a house. Why in SMEs. We need also a regulatory framework do you need us? Too often the media try to sell that will help us to finance SMEs, to give us a level their products through creating an impression of Q. On the same theme, you have described the playing field. We need an eco-system that supports scandals in financial services. On the question of financial crisis as a temporary setback for Europe’s SME lending. bonuses, no-one says the manager in question has asset-management industry and suggested it is on increased the value of people’s savings by X per course to have about $100 trillion in assets under cent. That does not necessarily mean he is worth management by 2020. Is this prognosis still on the bonus money but it does mean that he has track? Could this figure be achieved earlier? People are becoming richer and created something and we should make that clear. richer. They are more able to A.The key is the trend, in terms of demographics and global growth. People are becoming richer and make savings. richer. They are more able to make savings. That We are a group of people who means more resources for asset managers. Will Q. Are there any issues relating to the wider collect savings to invest in we reach this figure earlier than 2020? Given no world in your in-tray? growth in the eurozone, it could be difficult. But financial markets. whether earlier or later, we know what the trend is. A. Along with the need for a level playing field That is what is important. among banks, insurers and asset managers, we Q. You have said that the asset-management need a level playing field geographically. Europe industry that emerges from this period will be very Q. You have been prominent in presenting the case has the most open asset-management market in different from that of ten years ago, with traditional that the fund-management industry has a key role the world. But it is not the same in the US market. funds taking just 30 per cent of the market in to play in stepping into the breach left by bank Trying to sell a European product in the US would future, low-cost, low-risk funds taking 40 per lending to industry and - furthermore - in doing so be much tougher than selling an American product cent and high-conviction funds promising “alpha” safely, in contrast to banks. Is it your impression in Europe. We need a level playing field at a world returns accounting for the balance. Is this still your that regulators and others are becoming more level. That is something to press for in the year forecast? receptive to this message? to come.