ESMA has issued the results of a thematic review of notification frameworks and home-host responsibilities under UCITS and AIFMD. It has identified some supervisory practices that it views as good, but during the course of the review, national regulators (NCAs) raised issues around the day-to-day functioning of the passport frameworks, which were outside the scope of this study. ESMA will carry out further work on identifying, analysing and resolving these issues, with a view to enhancing supervisory convergence among the NCAs. This next stage of work could contribute to the European Commission’s work under Capital Markets Union on barriers to the cross-border distribution of funds.
ESMA’s study found that, although UCITS IV introduced changes to the notification requirements, which were mirrored in the AIFMD, there is still uncertainty about some aspects of the passporting frameworks. Despite the fact that these provisions have been in place for several years, there remain diverging national interpretation of the passports and of the division of powers between home and host NCAs.
A number of other issues emerged during the initial research, including different interpretations of the requirements on risk management of funds operating cross-border, the content of notification documents, the submission of payment receipts and responsibility for marketing literature. The survey did not explore supervisory practices relating to the escalation procedures for non-compliant AIF management companies (AIFMs) operating on a cross-border basis, as there has not yet been a case where a host NCA has had to invoke these procedures.
The report includes some interesting statistics on the extent of cross-border fund management activity. For example, only eight NCAs reported that no UCITS management companies (ManCos) in their territory make use of the management passport, but only four NCAs reported that ten or more ManCos undertake cross-border activity.
Of greater interest may be the very different national supervisory approaches. In some member states, more than one NCA is involved with different aspects of fund or AIFM/ManCo regulation. Some assess at the time of initial authorisation an AIFM’s/ManCo’s suitability to perform cross-border activity. Others carry out regular on-site inspections.
Given the findings, it is unsurprising that ESMA recommends as good practice that:
This review, the extra work to be undertaken and the calls for ESMA (and the other European Supervisory Authorities) to expend more of their resources on supervisory convergence indicate that the differences in approaches among the NCAs is under scrutiny and will steadily be eroded. This should be good news for firms, which currently have to negotiate different national approaches, but it will also diminish opportunities to exploit these differences.