EUROPE - The European Court of Justice (ECJ) has ruled that investment restrictions imposed on Austrian severance pay funds restrict the free movement of capital within the European Union.

The case involves the VBV Vorsorgekasse, which faced a six-figure penalty imposed by Austria's financial regulator in June 2010 for having invested in a fund domiciled in Luxembourg.

Until 2011, Austrian severance pay funds - or Vorsorgekassen - were permitted to invest only in funds licensed for distribution in the country, notwithstanding the advent of UCITS funds.

In January 2011, the Administrative Court (VwGH) referred the case to the ECJ for clarification, and the latter has decided (C-39/11) that any such limitation of domicile infringes upon the free movement of capital.

The Austrian regulator argued that these limitations had been put in place initially to ensure the safety of the country's social security system.

But the ECJ ruled that severance pay funds were, in fact, not part of the social security system, as they manage money that is collected from employers but is not specifically earmarked for social security provision.

It argued that severance-pay fund regulations and oversight were already sufficiently strict, and that foreign asset managers should not have to undergo such a complicated process for registering funds in the country.

It also determined that the regulator's requirements had been "disproportionate" for the level of control it sought to exert over the market.

Andreas Csurda, head of Austria's Vorsorgekassen association, told IPE that the law governing severance pay funds - which still excludes non-UCITS funds domiciled outside Austria - would have to be altered - "and this will widen the investment universe".

He added that "several Vorsorgekassen" were currently using foreign-domiciled funds, but conceded that no precise figures were available.

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