European Commission's Consultation on Cross-Border Investment Fund Distribution
Both UCITS and AIFs can be sold on a public offering basis across Europe using marketing passports. Albeit the use of marketing passports has proved popular among some asset managers, the European Commission (the "Commission") is of the view that more can be done to deepen the single market for investment funds, noting, that: "one third of UCITS that are marketed cross-border are only sold in one member state in addition to their home country."
In an effort to identify the main barriers to investment funds operating in a Member State other than their own home state and to improve the passport system, the Commission issued a public consultation (the "Consultation") in June of this year seeking industry views on the cross-border distribution of investment funds. This article considers the background to the Consultation, provides an overview of its content, briefly outlines the response of Irish Funds to the Consultation and provides some concluding remarks.
During February 2015, the Commission issued a green paper called: "Building a Capital Markets Union", seeking to promote increased funding for European businesses and generate growth, thereby emulating the strength of the US capital markets. Amongst other matters, the green paper looked at the role that entities authorised under the UCITS Directive and AIFMD can play by boosting investment in European businesses via investment funds and recognised the need to reduce costs for the cross-border marketing of investment funds, thereby potentially increasing the AuM of investment funds.
In support of the creation of a Capital Markets Union (CMU) in the EU, the Consultation builds on this aspect of the green paper by inviting views on policy measures, in the area of cross-border distribution, which could be developed and implemented to streamline the marketing process.
Overview of the Consultation
On 2 June 2016, the Commission launched the Consultation to gather views on the key barriers to cross-border investment fund distribution with the aim of improving the passport system for investment funds, so that they can more easily compete in different markets. In noting that the cross-border marketing of investment funds has an important role to play in achieving CMU, the European Commission stated: "If funds can do business more easily cross border, they can grow and become more efficient, allocate capital efficiently across the EU, and compete within national markets to deliver better value and greater innovation for consumers."
Feedback was requested from interested parties in the following main areas:
- Marketing requirements of host member states; for example, requirements regarding the content of communications;
- Marketing costs, in terms of costs to comply with regulation and distribution, and regulatory fees;
- Administrative arrangements; for example, a requirement for UCITS to appoint a paying agent located in a host member state;
- Direct and online distribution of investment funds;
- Varying notification processes when competent authorities require to be notified of changes to investment fund documentation; and
- Differential tax treatment.
The consultation period for responses closed during October 2016.
Irish Funds Response
Irish Funds responded to the public consultation by identifying and drawing the attention of the European Commission to some of the barriers to the cross-border distribution of investment funds, including:
- Additional marketing requirements imposed by host member states in which cross-border marketing is taking place;
- Level of regulatory fees imposed by host member states to permit cross-border marketing to take place;
- Differences in the tax reporting requirements of various host member states.
The Irish Funds response also identified potential enhancements to the cross-border marketing process, including:
- Information regarding investment fund registration and marketing requirements in all member states to be maintained online in a central location;
- A uniform registration and annual maintenance process, such as an EU standardised registration form with specific market appendices, to be implemented;
- Removal of any requirement for a local paying agent or information agent when investment funds are being marketed to institutional investors.
It is encouraging that the Commission initiated a public consultation in this area. As a result of the helpful contribution of Irish Funds, and other interested parties, to this debate, it is to be hoped that the Commission leads the development of meaningful measures, which help to reduce barriers to cross-border distribution of investment funds. We await the outcome of the Consultation with interest.
David Naughton is an Associate in the Asset Management & Investment Funds Department of William Fry.