| PAVIA, Italy
PAVIA, Italy Oct 17 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, 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).
Mediolanum chief Doris said the Italian firm had decided to
set up funds in Ireland because of the Central Bank of Ireland's
speedy approval process. He said Mediolanum had not based funds
in Ireland in order to exploit looser fee regulation. Doris said
fees were a significant issue, but long term performance was
more important. "It's much, much, much more important how you
guide clients," he said.
However, he said after receiving Reuters questions that the
bank was now reviewing its fee structure.
As well as going beyond Italian regulations, Mediolanum's
fee structure does not follow the non-binding guidelines in
Ireland. Doris said he had not been aware of the Irish
guidelines, noting that they had only been published on the
central bank's website last year.
He said Mediolanum would take a decision on its fee policy
within a few months. The review was triggered by a recent update
to "good practice" guidelines on fees from the IOSCO. "If we're
going to adjust to the new IOSCO recommendations, it's certain
that we would also be in line with the Central Bank of Ireland's
guidelines," Doris said.
Katie Philpott, a spokeswoman for the Central Bank of
Ireland, said any arrangements on the payment of performance
fees should be consistent with its guidelines. "You have raised
issues of a specific nature which, where appropriate, the
central bank will follow up with entities directly," Philpott
wrote in an email.
Under the EU system, any member state can stop funds from
being sold in its home market if it believes managers have moved
funds abroad in order to bypass its stricter rules. However, the
watchdog overseeing Italian financial markets -the Commissione
Nazionale per le Società e la Borsa (Consob) - declined to
comment when asked if it was concerned about Italian funds being
based abroad and charging fees that would not be allowed at
Performance fees are levied in addition to standard annual
fees for managing funds. Maffi said regulators should require
fund managers to spell out fee structures and their impact
clearly rather than put them in the lengthy detail of a fund
prospectus. His savings vehicle, the Coupon Strategy Collection
LH fund, explained the performance fee in the last part of a
270-page prospectus, and in a separate investor document
published once a year.
The fund charged a fee of 0.8 percent of the fund's gross
asset value if it exceeded a specific investment hurdle each
month. But the hurdle was set low: the fund had to make gains of
more than the euro interbank lending rate - which has been below
0 percent for 17 months.
One of Mediolanum's worst performing funds last year was its
Challenge Emerging Markets Equity Fund SA, which fell 8.3
percent in 2015. It charged a 1.42 percent performance fee,
using the same euro interbank lending rate, Euribor 3
, as its benchmark. It was able to charge the
performance fee because during certain months of the year its
performance was positive.
If based in Italy, Mediolanum's emerging markets fund could
not have charged a performance fee in 2015 because Italian
investor protection rules require such fees to be calculated on
the performance of at least one year.
Luca Enriques, corporate law professor at Oxford University
and a former commissioner at Consob, said regulatory disparities
at a national level need to be ironed out with EU-wide
"The only way to avoid such dysfunction would be to
centralise regulation and enforcement of the rules with ESMA
(the European Securities and Markets Authority)," he said. He
added that the rules would need to offer appropriate investor
protection and be effectively enforced.
ESMA declined to comment on whether fragmented regulation
had harmed investors. It said its role in "developing a single
rulebook for EU financial markets and ensuring the consistent
application of those rules across the EU, ensuring common
approaches, will contribute to enhancing protection for EU
At present a large number of funds take advantage of the
different rules in different jurisdictions. More than 6,000
investment funds have been set up in Ireland's capital, Dublin.
More than 14,000 funds are domiciled in Luxembourg.
Reuters looked at funds in Italy because it has a large and
relatively unsophisticated market of retail investors. Many
Italian savers have been encouraged by local managers or
advisers to invest in funds based in Ireland or Luxembourg.
Reuters has not studied the fee policies of major fund managers
elsewhere in the EU.
Shares of Italy-based managers have been sensitive to issues
concerning performance fees. Mediolanum made 326 million euros
in performance fees last year, or 0.46 percent of its overall
assets under management, a larger proportion than many other big
European managers. That sum was nearly one fifth of Mediolanum's
Italian fund managers Azimut and Banca Generali
, which have based many of their funds in Luxembourg,
charged performance fees of 0.43 percent and 0.31 percent,
respectively, as a proportion of assets under management.
Banca Generali said it started to base funds in Luxembourg
eight years ago because at the time clients paid higher tax on
funds based in Italy. Azimut declined to comment.
For the UK's Henderson Group, performance fees were
0.11 percent of assets under management; for France's Amundi
, 0.01 percent; and for Switzerland's GAM Holding
, 0.07 percent.
($1 = 0.8928 euros)
(Additional reporting by Maria Pia Quaglia; Editing by Mark
Bendeich, Simon Robinson and Richard Woods)