Ireland’s funds industry – with its more than 20,000 employees – provides services to around 13,000 funds. The breadth of funds ranges from tightly regulated products for retail investors – which are regulated by the EU’s ‘Ucits’ regulations – to more sophisticated offerings for large institutions and wealthy individuals.
A recent Irish success story has been the resurgence of sub-advised funds – where a fund provider outsources the investment management to a third-party, typically for a strategy that the provider cannot cover internally. The fund provider needs to know its elected investment manager is subject to strong oversight and governance. Ireland’s regime has been set up for precisely this type of thing.
Ireland’s success in supporting sub-advisory firms is down to it becoming a major centre for other investment-related outsourcing. The country looks after around €6.7 trillion of assets for its clients who are located all over the EU and even further afield, and Ireland has also hugely strengthened its funds governance regime in recent years.
However, various pressures including political regularly stalk the delegation issues and could still negatively impact the sub-advisory market, according to some of the participants at a Funds Europe discussion in Dublin.
Less cosmopolitan
Regulators in certain EU countries may prefer to see a less cosmopolitan arrangement than at present, where a fund in Paris or Rotterdam could have key, regulated activities for that fund sitting in Ireland or Luxembourg. Regulators’ reasons may range from a desire to ensure their own effective oversite of their citizen’s money, to simple national rivalry.
“Ireland, like Luxembourg, has the experience and the regulatory framework to monitor and oversee the delegates. It is not a weakness to delegate somewhere else because the key focus should be in the oversight, not where the manager is located”
Whatever the reason, Furio Pietribiasi, CEO of asset manager Mediolanum International Funds, acknowledged political pressure on what is widely known as “delegation”, or the “delegated model”, where various functions involved in fund management can be outsourced to third-party providers elsewhere in the EU, most likely in Ireland and Luxembourg.
“Ireland, like Luxembourg, has the experience and the regulatory framework to monitor and oversee the delegates. It is not a weakness to delegate somewhere else because the key focus should be in the oversight, not where the manager is located.
“But the political pressure is very strong, particularly for some countries. Hopefully there will be a balanced opinion and some foresight in the decision.”
Political protectionism is a concern for Pietribiasi. He said Ireland has been criticised for “taking over” the Ucits trademark. But Ireland has was the country that best interpretated the spirit of the European regulation by creating a standardised solution for the entire bloc, which is what Brussels wanted, he said. Ireland also managed to export the Ucits brand to Asia and the Middle East.
He suggested there was animosity around Ireland’s achievements, saying “it is ridiculous that people are jealous”.
With “CP86” – or Consultation Paper 86, issued by the Central Bank of Ireland to enhance the governance, management, control, and resourcing standards for fund management companies – there is a strong framework designed to control delegation, including intra-company delegation, he added.
Does it deliver value?
His opinion was supported by Lisa Harlow, CEO, Vanguard Group Ireland, who suggested investors’ interests were what primarily mattered. “If we don’t have the end-investor outcomes at the heart of everything we do, it can introduce barriers and unintended consequences. Everything should be judged by whether it serves the citizens of Ireland, Europe and the world through a very strong regulatory platform in Ucits.
“Whether you distribute [funds] directly or through partnerships or sub-advisory, does it deliver the value? Does it protect the Ucits brand and allow us all to do what we do so well with well-governed, strong products for retail investors?”
The popularity of the sub-advisory model is partly investor-driven, too, said Fearghal Woods, head of security services, Ireland, at JP Morgan.
“They want to expand their investment universe but not every manager has a capability in all asset classes, so there will be certain elements sub-advised by specialist managers. This has also led to some consolidation with smaller specialists being acquired by the bigger fund houses, with the other main factor driving consolidation being cost pressures.”
“There is a risk of stagnation in international financial services without the continuous addition of new valued-added services, so the search is always on for outsourcing opportunities”
Ken Somerville, head of fund services, Ireland, at US Bank, concurred that a reason for the sub-advisory boom is the evolution of outsourcing in Ireland. Historically, Ireland’s focus was on back and middle office operations. Latterly, it’s been on management companies – or “ManCos”, the regulated entity of a fund. These are maturing sectors and costs are rationalising. However, newer value-added services will be needed.
“There is a risk of stagnation in international financial services without the continuous addition of new valued-added services, so the search is always on for outsourcing opportunities,” says Somerville. “Having an appetite to diversify in order to provide those opportunities to the funds sector, and of course to provide the accompanying high-quality roles to professionals in the space, is of vital importance to the long-term health of financial services in Ireland.”
Advances in AI
The potential to apply artificial intelligence (AI) to parts of the outsourcing value chain exists and is of great interest to asset managers and their outsourcing partners. However, according to Somerville, the primary use for AI to date has been focused on manually repetitive tasks with little or no added value, such as transcribing emails and phone calls, and producing management reports.
“We’re at an early stage and the learning so far is that AI can be applied to repetitive tasks to take them off the desktop and focus on other areas. But the ability to automate code and make people better data managers will streak right to the top of the use cases.”
The potential to apply AI to tasks further up the value chain is there. But regulation could be a barrier for advancement, suggested Pietribiasi.
“For asset managers in Europe, it is obvious that experimentation with AI is going to be very limited because of all the regulation, especially with generative AI and autonomous AI. But we have to make sure that we are not killing experimentation and seeing talent go elsewhere.”
The human element also needs to be considered, said Vanguard’s Lisa Harlow. “It’s really important as leaders in the industry that we are really engaged, well informed and can understand how to lead our businesses through what is going to be a massive societal change, as well as this huge business opportunity. As with many of these opportunities, there’s a risk factor – cyber risk is amplified by AI.”
She said Vanguard had developed its own staff’s knowledge and had the “right guardrails” in place to promote sensible innovation.
However, it is also important to not underestimate the importance of “operational mundanity”, added Harlow. “If you have enough scale, mundane can be massive. If you save 30 seconds on a retail call, that can be transformational in terms of service quality and operational savings for a large organisation. Sometimes the small wins add up to a large win. And if it’s done in a responsible way, we can all win.”
“From an Irish perspective, it is said we have more data scientists per capita than anywhere in the world. We’ve invested in AI and we have an outsized number of labs building products for a global market”
Another participant in the discussion was Adrian Mulryan, CEO, Invesco Ireland, who said AI would be transformational for investment advisory and that Ireland could be a centre for AI support.
“From an Irish perspective, it is said we have more data scientists per capita than anywhere in the world. We’ve invested in AI and we have an outsized number of labs building products for a global market, so there is an opportunity for us. We are guaranteed to be fast followers but I would hope that we’d also be leaders in terms of how we implement AI.”
Politics & sustainability
There is also a political element to consider with AI that touches on issues such as net zero. There is a huge energy consumption that comes with data centres, said Fearghal Woods of JP Morgan.
“We have all the people and the infrastructure here. This is a Big Data game and we need data centres for this. But the political view and pressures on data centres is challenging.”
For Ireland, the issue is to resolve being a major centre for data centres, while at the same time being a ‘green hub’ for sustainable funds. Invesco’s Mulryan said sustainability is still a very important thematic in Ireland, though client demand has changed, with a repositioning depending on location, performance requirements and the appetite for data.
“Clients have become as good as the managers in terms of understanding the data behind their investments. They look at everything – service quality, performance, provision. Last year we saw a kind of musical chairs in terms of Article 8 and 9 funds. And as ESG enters the private funds market, it will be interesting to see the impact as well as the introduction of the taxonomy and what that means in terms of reporting and the regulatory framework.”
Another exercise in complexity
According to Tara Doyle, partner and head of asset management and investment funds at law firm Matheson, the market is at an inflection point in terms of sustainability regulation. “We have had three to four years of intensive regulation and net zero deadlines and the implementation of legislation that arguably has not been fully thought through. And now we are looking at simplifying it all which will be another exercise in complexity and cost against a global backdrop of countries pulling in very different directions.”
There was a sense of EU leadership in the first wave of ESG regulations, said Doyle. “Now, instead of other jurisdictions following us, they are moving more quickly away from where we are. And if we think of Ireland as a centre for global asset management, it’s a really challenging context because they have to deal with really diverse political and regulatory environments and create products for investors who don’t really have very different views, but all of whom care about their returns.”
Ucits threats and eligible assets
Discussing regulation at the EU level, the panellists sounded caution over “tinkering” with the successful Ucits regime – the investment regulations that have successfully served retail and other investors for over a quarter of a century.
“The proposed review of the Eligible Assets Directive could limit what Ucits can do. And against that backdrop, it’s going to be really important to then have a retail alternative product ready to work in a European context”
Being watched closely right now is the EU’s Eligible Assets Directive review, said Doyle. Last year, Esma – the European Securities & Markets Authority – issued a call for evidence and is due to act on those submissions.
“The proposed review of the Eligible Assets Directive could limit what Ucits can do. And against that backdrop, it’s going to be really important to then have a retail alternative product ready to work in a European context,” said Doyle, in reference to alternative investment funds.
This alternative-investment product at the European level could be the Eltif. Ireland introduced Eltif 2.0 in 2023. The Eltif – or European Long-term Investment Fund – is an EU regulation that should create wider access to private markets investments, potentially even to retail clients with smaller-than-usual pots of money, though Doyle said it remained to be seen if investors’ appetite for alternative assets is adequately served by the Eltif product.
“While this is being reviewed, we don’t have a sense of what Esma thinks in relation to the Eligible Assets Directive and whether it will accord with the Commission’s view. But Ireland is very invested in this because we have a lot of alternative Ucits in this jurisdiction,” said Doyle.
“There is now a risk that we actually break the Ucits model for little gain. We risk tinkering with a well-worked and successful model that regulators have spent years de-risking without any real path to a retail product”
When the Eligible Assets Review was first floated back in 2023, it was widely welcomed as a way to strengthen the base for Ucits said Mulryan. “There is now a risk that we actually break the Ucits model for little gain. We risk tinkering with a well-worked and successful model that regulators have spent years de-risking without any real path to a retail product.”
“Ucits is a great product with a great wrapper that protects investors and we would not want to lose that”
Vanguard’s Lisa Harlow encapsulated the simple view that Irish industry participants have on the issue. “Ucits is a great product with a great wrapper that protects investors and we would not want to lose that. It is important to look at these things but we want to maintain something that is already strong and delivering. Any revisions should be minor and ensure that they still deliver investor protection.”
Exchange-traded funds
Not unrelated to Ucits is another area of regulatory focus: ETF tax reform. Putting ETFs on a level tax playing field across the EU for their tax treatment would mean these low-cost, transparent liquid products would become more available to investors, including Ireland’s own population, which is particularly hurt by ETF tax inefficiency.
“That can only be a good thing for investors, in that it broadens their opportunities,” said Mulryan. “The issue now is the timing [for equal tax treatment] because every year is more time out of the market for the under invested retail investor.”
There was a suggestion, said Fearghal Woods of JP Morgan, that tax changes would be “bled in” over a couple of years via the EU’s annual budget cycle rather than with one big bang or a stand-alone amendment.
“We’d all welcome that. No one is looking for an advantage, it is about levelling the playing field. But to do that, you have to expand the pool. The Department of Finance looked at this in terms of potential lost revenue and the numbers were surprisingly big.”
There is also a governance aspect to consider, said Lisa Harlow. “The tax treatment needs to be efficient, simple and certain. That will encourage good behaviour. If it is complex or uncertain, it can impede it.”
ETF tax reform was vital for making funds more popular and also for social equality, said US Bank’s Ken Somerville.
“The ETF model is partly designed to broaden capital acquisition and to make investing in funds more accessible to more people, which is a desirable outcome. That is the objective – social equality and ensuring we don’t engineer a wealth divide akin to what we have seen in the US where there is a working class living in poverty.
“You can see early indicators here where working people are finding it difficult to acquire property. So there needs to be some kind of springboard where you can get from being educated and working to the point where you can make the most tax-efficient investments. The hard question is about how you reengineer tax benefits. How do you modify your tax structure to enable the working class to invest more easily without it being counter-productive?”
Financial literacy
There is perhaps a messaging issue for the industry to consider, suggested the panel. Whereas ETF tax reform should be seen as a way to make the product more accessible to more investors, there is a danger that any tax change would be seen as a move by EU “elites” to enable the wealthiest citizens to be more tax efficient. The funds industry needs to be separate itself from the so-called “vulture funds” narrative that exists in Ireland.
The US relationship
Finally, the panel discussed geopolitical developments and, more specifically, the relationship with the US in the wake of the tariffs introduced by the current White House regime. The Irish funds industry has enjoyed a unique relationship with the US. But given the ongoing political and economic uncertainty of the current regime, is this relationship under threat?
“It is under threat to be quite honest, or certainly challenged,” said Woods. “I think a lot of the significant players are US-based but they have a European business. To access the European market, distribute products and acquire investors, it is a very different footprint to the US. And US funds have never really been distributed internationally or globally on a large scale.”
However, the hope is that while tariffs will have an economic impact, the strength of the Ucits brand will insulate Ireland from any damage to its business model. “The Ucits brand has made it possible for EU funds to be internationally distributed. Irish funds’ distribution footprint covers 90 countries and I don’t see that being rolled back because it would be too damaging. And I don’t think any of the current administration’s policies will really damage our businesses. They will impact performance and stock selection and there will be a downstream impact but in terms of people’s ability to launch product here, I don’t see a significant impact,” said Woods.
In an asset management context, Ireland is America’s access point to the world, said Mulryan. “We are entering a time where it is geopolitically complicated but I am not seeing anything that is changing what we are doing for our stakeholders, or how we are facing off against our clients and the opportunities to enhance the end-investor experience.”
The industry may be forced to look for some new solutions due to geopolitical events or presidential actions, he said, but it’s not for the first time and perhaps necessity could be the trigger for some longer-term changes. He added that the asset management market is not challenged in the same way that other industries are challenged. There is a level of integration and mutual benefit that separates the funds market from other service markets, said Mulryan.
However, this special relationship is also why Ireland, as well as the UK, could be under serious political pressure in Europe, said Pietribiasi. Amid the uncertainty created by the US political regime, the concern is that Europe forgets the value of Ireland as a gateway to the US and the UK.
“It is therefore fundamental to have an ecosystem that enables competition, innovation, scalability, skills and competency. This is something that Ireland has but nowhere else does. But we cannot afford to be complacent and we need other fund centres to emerge to preserve our competitiveness. The problem is how long that journey might take,” said Pietribiasi.
He said Europe has the ability to leverage the Irish ecosystem so it can actually bring to all EU members that same level of opportunity and access, particularly when it comes to savings and investments.
“Ireland is not a back door, it’s a gateway, much like Luxembourg, and it is talent-driven. There are lots of places I can go for lower tax but you come to Ireland for the talent and the attributes that are provided,” said Pietribiasi.
Vanguard has a long-term perspective on the Irish market, said Harlow. “This year Vanguard is celebrating its 50th anniversary which includes a presence in Ireland since 1998 and we intend to be here in 2098. And we have an increasingly global view. We acknowledge these are interesting times but we feel positive about the domicile. We’ve never had more people here and we intend to use this as a base to serve investors not just in Europe but around the world. Our commitment to this market has never been greater.”
“If a trade war emerges and Europe decides to protect its services as well as its goods, then you can see a scenario where not allowing us access to US investment managers becomes the threat”
The threat to the Irish market goes back to the importance of the delegated model and sub-advisory relationship, said Tara Doyle, of Matheson. “If a trade war emerges and Europe decides to protect its services as well as its goods, then you can see a scenario where not allowing us access to US investment managers becomes the threat.”
Ultimately, the panel agreed that Europe has been at its most successful when it has been an open market. The industry should remain focused on long-term outcomes regardless of the inevitable shocks that will occur on the way.
As Lisa Harlow concluded: “This is a marathon not a sprint. Our role is to be calm, engaged, constructive and anchored to the end-investor outcomes on all of these topics. Collectively we can get through anything.”
Participants:
Tara Doyle, partner and head of asset management and investment funds, Matheson
Lisa Harlow, CEO, Vanguard Group Ireland
Adrian Mulryan, CEO, Invesco Ireland
Furio Pietribiasi, CEO, Mediolanum International Funds
Ken Somerville, head of fund services, Ireland, US Bank
Fearghal Woods, head of security services, Ireland, JP Morgan
Nik Pratt, technology editor, Funds Europe (moderator)
