One of the European Commission’s work streams under the Capital Markets Union (CMU) Action Plan is to review and address national barriers to the cross border distribution of investment funds.
The Commission says that cross-border investment funds have an important role to play in achieving the aim of CMU – the mobilisation and deepening of Europe’s capital market. If funds can do business more easily cross border, they can achieve better economies of scale and compete to deliver better value and innovation for consumers.
According to official statistics, about 80% of UCITS and 40% of AIFs are marketed cross border, but a third of these are marketed into only one Member State, which is mainly the State in which the investment manager is domiciled. Another third are marketed into no more than four other Member States. Also, UCITS are significantly smaller than US mutual funds, whose average size is almost seven times larger than the average size of UCITS.
The Commission has identified six broad categories of national barriers. Their proposed removal will test Member States’ commitment to the principle of harmonization enshrined in the UCITS and AIF passports and to CMU. And some barriers, such as taxation, are unlikely to be quickly addressed.
Marketing: host Member States can set national requirements on financial promotion and consumer protection, and the provision of materials on an on-going basis. This gives rise to initial research costs for firms and to additional ongoing costs.
Distribution costs and regulatory fees: EU funds can be subject to regulatory fees imposed by home and host Member States that vary significantly in scale and calculation.
Administrative arrangements: a number of Member States impose special administrative arrangements intended to make it easier for investors to subscribe, redeem and receive payments from funds. As part of its background work in producing the final Regulatory Technical Standards for ELTIFs , ESMA researched such requirements and its findings are telling. In some States, these additional requirements are extensive and include, for example, the need to use certain institutions and the provision of additional information to both the regulator and investors. In particular, a number of these requirements do not recognise the increasing use of online banking facilities by investors.
Distribution networks: the Commission notes the increasing use of online platforms to distribute funds and wants to understand the barriers that hinder their use cross border.
Notification processes: where fund documentation has to be updated or modified, managers are required to give written notice to the host regulator, adding costs and time to the process.
Taxation: differential tax treatments can create barriers to cross border business. The Commission seeks feedback on how to promote best practice and to avoid discriminatory tax treatment.
The paper largely comprises a string of questions – 141 in total – addressed to investment managers, distributors, investors and national regulators. It is not clear how the voice of retail investors will be directly heard through this consultation.
Responses are required by 2 October and will inform the Commission’s assessment on taking action to address the barriers. No mechanisms or timescales are indicated at this stage.