Yet another step by Brussels to ease financing to business across the EU comes with measures to facilitate the cross-border distribution of investment funds, notably UCITS and AIFs. The aim is to reduce national regulatory barriers. This includes tackling high administrative fees imposed by some national jurisdictions.
The legislative move comprises proposals by the European Commission for a Directive to amend certain existing measures – the 2009 rules concerning UCITS and the 2011 Directive on Alternative Investment Funds. The upgrades are complemented by an amending regulation related to venture capital and European social entrepreneurship funds.
The cross-border investment initiative is one of a series of elements to boost the EU’s flagship Capital Markets Union (CMU) programme. Its launch date early this year coincided with caustic comments heard during a Brussels conference on CMU. Speakers talked of “slow progress”, “significant hurdles” and being “happy not to be involved”.
Recently, at a conference, John Berrigan, deputy director of the European Commission’s FISMA directorate general, described the CMU as “essential”, but said it was “a long-term project”.
Justification for the new proposals includes solving problems faced by asset managers. As set out in a Commission staff working document, these can start with them being up against “very complex” processes. Fund managers had indicated, in a survey, that it is even difficult to find out and understand what the regulatory fees in a certain host member state are. The information was often not available on the website of the national supervisor and, if it was, it might be set out only in the local language.
A European Parliament report (PE 615.675), reflects the Commission position that ongoing regulatory fees for a UCITS can vary from zero to €10,275 and from zero to €15,000 for an AIF. Compliance with requirements to have local facilities in the member state targeted for distribution may also be a drag. Fees can be around €5,500 per fund and per jurisdiction and can go up to €20,000 a year where funds are marketed to retail investors, such as in Italy. As Josina Kamerling, EMEA head of regulatory outreach at the CFA Institute and a Dutch national, expresses it, they put “lood in je benen” (lead in your legs).
Despite this, according to the impact report, investment funds have seen rapid growth.
However, full potential in terms of cross-border distribution has still not been exploited, the report finds. Only 37% of UCITS were registered for sale to more than three member states. For AIFs, available data suggests that only about 3% of AIFs were registered for sale in more than three member states.
Hence, eliminating unjustified regulatory barriers and reducing costs for investors would support having fund managers engaging more in the cross-border distribution of their funds. As stated in the Parliament paper, the objective for UCITS is to lay the basis for a single market for both types of fund.
The current state of play is that the cross-border proposals have moved comparatively quickly to consideration by national governments in the Council of the EU, under the Bulgarian presidency. Matters have been “proceeding well”, a source tells IPE. At the time of writing, negotiations were already starting in the Parliament. Timing of the application of the packages into law across the EU has yet to be discussed.
Two major interest parties both appear to be positive. But the European Fund and Asset Management Association (EFAMA) and the Alternative Investment Management Association (AIMA) imply that current initiatives should only be seen as a first step along the road.
EFAMA “fully supports” the Commission’s intended objective but its report is by no means short of points of censure. The association, which represents €15.6trn through its member associations and corporate members, cites two key points in the proposed directive that it says need to be addressed. One is to call for an expansion of the pre-marketing conditions for AIFs.
It also criticises the imposition of “numerical” conditions that would discourage managers from marketing funds in a given host EU jurisdiction by complicating the cessation of marketing activities.
Here, Federico Cupelli, senior regulatory policy adviser at EFAMA, condemns “arbitrary and one-size-fit-all thresholds governing the de-notification requirements and applied to a very diverse range of fund products blocking their marketing across borders”. He goes on to condemn such “overly complicated and impractical distribution rules” as liable to “exact a heavy toll in terms of reduced fund choice for European fund providers”.
EFAMA also expresses preference for the gradual removal of distribution barriers to be carried out at level 3 (committees of national supervisors), by the European Securities and Markets Authority (ESMA). This, it argues, would foster “greater regulatory convergence amongst member states”. It is possible that the association’s evaluation could result in one amendment after another in the Council and Parliamentary deliberations.
For AIMA, Jennifer Wood, global head of asset management regulation and sound practices, the Commission is focusing on addressing aspects relating to fund marketing via the passporting provisions in the UCITS Directive and on AIFMD provisions on trading of hedge fund assets rather than marketing alternative investment funds via national private placement regimes. She recommends that the Brussels authorities should continue working with what she describes at the “narrow confines of what’s been proposed by the Commission”.
Other reforms could follow in the review of AIFMD, she suggests. This is being handled by KPMG under contract with the Commission, with a report expected later this year.
The Commission’s cross-border proposals, along with two others, mark the end of its long series of measures to support its CMU programme. The other two, also from this year, relate to facilitating the funding of SMEs and one linked to sovereign debt issues. A communication document on support to local and regional development is still in the pipeline.