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German fund management reform may open up market

GERMANY – Proposed changes to legislation on the outsourcing of investment advice by German capital investment companies (KAGs) could open up the country’s institutional investment market for domestic and foreign third-party providers.

Rudolf Siebel at the Frankfurt based BVI funds association, says the planned liberalisation by the German banking supervisory authority BaKred may create the potential for outsourced fund management and accounting services in tandem with KAG providers.

At present, fund management KAGs – the only vehicles through which German based institutions can invest in tax advantaged Spezialfonds - have to retain fund management activity solely within the KAG.
External advisers are only allowed to offer investment recommendations, while investment decisions have to be pre-approved and implemented by the KAG itself.

The cost of setting up a KAG structure in Germany is considered high by foreign investment managers looking to tap into the country’s institutional market.

“ Currently the legal situation hasn’t changed but it is about to change.
“ I expect that this strict position will be softened to provide for other types of fund management or advisory work,” says Siebel.

Siebel says the BaKred has been working on a paper for the last two years with regards to general outsourcing rules for credit institutions.
He explains that section 25a of the banking act, which had included the special legal requirement for credit institutions such as fund managers, is set to be repealed.
“ What we will have for general institutions such as universal banks is a quite liberal regime with respect to outsourcing.
“ At this point we have no indication directly from the BaKred what the wording will be, but it may be something like in Luxembourg where there is only an after trade approval by the KAG.”

In terms of the impact of such change, he concurs that it is likely to broaden the German fund management market:“ I think that this is a reasonable deduction to make.
“ In any case it would make it easier than today to use outside fund management services on the investment side as well as the fund accounting side.
“ That obviously opens up a lot of possibilities for domestic players servicing other KAGs, as well as other players.”

Peter Koenig, executive director at Morgan Stanley Dean Witter in Frankfurt, comments on the potential change:
“ It would make the administrative side of our business much easier.
“ However, I do not expect the legislation to go so far that we could do institutional fund management business in Germany from the UK for instance, at the same standards that we could do for a German entity.
“ If that was the case it would of course be very good news for us.”

Observers say that the BaKred could have their proposals ready by the latter half of the year.





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