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Italy's local paying agents take centre stage

As the eurozone economy continues to gather pace, Italy's attractiveness to foreign investment has increased

Europe's evolving retail investment landscape is changing the way global asset managers approach retail fund distribution across the region. It is also focusing attention on Italy's dynamic market for asset management services and the pivotal role of Local Paying Agents (LPAs), who operate platforms many foreign and non-domiciled asset managers require to distribute their products in Italy.

The second Markets in Financial Instruments Directive (MiFID II), which came into effect on January 3, 2018, has required global asset managers to invest significantly in compliance-related procedures. Meanwhile, staffing and technology requirements are compelling asset managers to decide whether to appoint an LPA to distribute their funds in Italy or to establish a local entity to insource these activities.

Risk-averse Italians

Key insights

  • Italy's retail market for asset management services is growing quickly due to changes in the way households save and invest
  • Foreign-based fund groups should consider whether to appoint a Local Paying Agent to distribute in Italy or set up a local domicile
  • Local Paying Agents have a central role to play in ensuring compliance while making available foreign funds attractive to investors

Italy's retail market for asset management is expanding and diversifying due to apparent long-term changes in the way households save and invest their wealth. As Italy is Europe's third-largest economy with one of the EU's highest savings rates, global-minded asset managers are taking note of trends influencing distribution.

Traditionally, risk-averse Italian households have kept much of their wealth in deposits and sovereign bond funds sold by banks. Since 2012, low returns on these have sparked a broad shift away from the security of bonds towards investment funds, pension funds and life products. Total assets under management in the sector now account for 111 percent of Italy's GDP, sharply up from 57 percent in 2011.1

Italy is a particularly lucrative market for fund managers for several reasons. The average expense ratio for Italian funds is 1.42 percent, versus a European average of 1 percent. Two-thirds of fees paid by Italian investors are used to remunerate the distribution network rather than for operating costs. Similarly, life insurance products in Italy are sold at a higher premium than in other EU jurisdictions.

Foreign funds well positioned

Foreign-based asset managers are well-positioned to serve this growing market because they offer the kind of open-ended funds that are attractive to Italian investors, including funds offering balanced portfolios and diversification.

Low returns have sparked a broad shift away from the security of bonds towards investment funds, pension funds and life products

To illustrate the trend of foreign-based asset managers offering funds in Italy, in 2003, the value of open-ended funds in Italy stood at EUR 529 billion, with 75 percent representing Italian-domiciled funds. In June 2017, this figure rose to EUR 962 billion, but only 26 percent of these were Italian-domiciled funds.

This keen interest in diversified investment funds in Italy has developed despite a persistently sluggish local economy, which has only recently begun to pick up.

Recovering economy, rising wealth

Foreign direct investment flows into Italy – particularly from Germany, France and the United Kingdom – have picked up strongly as convergence within Europe gathers pace and companies seek greater operational integration across the region. While these flows have disproportionately favoured Italy’s more prosperous north, the figures are impressive. Investment projects in Italy were up by 62 percent in 2016,2 the largest increase among large EU economies. The growth corresponds to a 92 percent increase in the number of jobs created, signaling potential growth in domestic savings and investment.

Meanwhile, the financial wealth of households continues to rise and stood at EUR 4.291 billion in 20173

However, admission to Italy's lucrative market for asset management services is not without costs. For example, MiFID II compliance standards are having a far-reaching impact on asset management product manufacturing and distribution across the EU.

Compliance at a cost

MiFID II requirements include implementing procedures that bring transparency to fees and commissions, increased standards on suitability of products for retail investors, and removing potential conflicts of interest between product manufacturing and product distribution.

LPAs enable fund distributors to select the specific funds they want to market to Italian retail investors

Some large global vertically integrated asset managers operate proprietary distribution channels and can more readily meet the new standards by revising internal procedures. Many others, including many offshore-domiciled fund managers, find this cost prohibitive, which make LPAs more attractive.

As distribution platform operators, LPAs can make available fund vehicles, including open-ended collective investment schemes, that are compliant with MiFID II requirements. The use of LPAs enable fund distributors to then select the specific funds they want to market to Italian retail investors.

LPAs also face challenges

LPAs face their own hurdles in meeting the challenges of a market that requires significant investment in new technology, both to accommodate ever-changing compliance requirements and to enhance customer-facing activities.

As scale is important for LPAs, a period of further consolidation may occur as a result of MiFID II requirements, as low margins and rising compliance costs might reduce returns.

From a competitive perspective, LPAs might wish to place as many funds as possible on their respective platforms. The number of funds maximizes the scope of options available to foreign distributors seeking to target local retail investors.

LPAs must then compete to attract distributors by leveraging existing relationships with clients in Italy. Business growth can manifest through existing sales and marketing activities or by acquiring in-house LPAs from Italian financial intermediaries.

LPAs must also help facilitate the activities of distributors and adopt the most efficient model to support their needs. Ultimately, it is the distributor who appoints the LPA, even if the LPA's client is the fund vehicle. To win these mandates, LPAs are likely to remain under pressure to adopt the technologies and improve the service they provide clients through investments. The potential rewards of competing successfully in the Italian market make these efforts worth pursuing.

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Sources

  1. Deloitte (May 2017) Asset Management in Italy: a snapshot in an evolutive context
  2. This is Italy (June 6, 2017) How Italy is Attracting Foreign Investors
  3. Assogestioni (February 27, 2018) The Italian Asset Management Market