How EU fund rules leave gaps in investor protection

Mon Oct 17, 2016 5:06am EDT
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By Danilo Masoni

PAVIA, Italy (Reuters) - Pietro Maffi routinely checks his financial statements and has a good understanding of how his savings are being managed. At least he thought he did until he read the small print.

Maffi, a software engineer from the northern town of Pavia, invests in funds managed by Banca Mediolanum (BMED.MI: Quote), an Italian bank. He knew one of those funds was based not in Italy, but in Ireland. What he didn't know until recently was that the fund uses a fee structure that is not allowed in Italy, and is out of line even with Ireland's own investor protection guidelines, which are non-binding.

That structure meant the fund generated 34.7 million euros in performance fees for Mediolanum in 2015, according to company filings, while the value of Maffi's account fell 0.5 percent.

"The problem is there are so many papers to go through and it's difficult to spot all details," Maffi said as he pored over documents looking for performance fees charged to his account.

Massimo Doris, chief executive of Mediolanum, told Reuters that the bank's fee structure was "perfectly legal" and that the Irish central bank had approved its funds. The Central Bank of Ireland declined to comment on specific cases.

Maffi's difficulties illustrate how Europe's 21 trillion euros ($23 trillion) asset management industry can shop around for regulators, creating gaps in investor protection. Managers can choose to have their funds overseen in another European Union (EU) country that allows them to charge fees that wouldn't be permitted at home. It means they can legally circumvent the rules imposed in their own country.

Under EU single-market rules, funds regulated in one member nation can be marketed across all of the bloc's 28 countries despite differences in rules. Ireland and Luxembourg are the two most coveted jurisdictions, with both offering tax advantages.

In addition, Ireland has regulatory guidelines on fees that are not binding; and Luxembourg has no specific regulations on fees of its own, but says it applies the principles from the International Organisation of Securities Commissions (IOSCO).   Continued...

Pietro Maffi, a software engineer from Italy, poses over his investment statements during an interview with Reuters in a cafe in Pavia, Italy, September 21, 2016. REUTERS/Danilo Masoni