The European Commission has issued a consultation document seeking input from fund managers, investors and consumer representatives on how the cross-border distribution of funds in the EU can be improved. The consultation stems from the European Commission's focus on the Capital Markets Union, the aim of which is to strengthen Europe's economy and to encourage investment in all the Member States.
The European Commission (the "Commission") has launched a consultation on the cross-border distribution of funds in the EU and how the process can be improved. If the process can be improved this will aid the success of the Capital Markets Union ("CMU"), as funds grow and become more efficient, while also allocating capital more efficiently across the EU.
Cross-Border Distribution of Funds
UCITS (Undertaking for Collective Investment in Transferable Securities) can make use of a marketing passport whereby there is no restriction on their sale across the EU. UCITS currently enjoy assets under management of approximately €8 trillion and around 80% of UCITS are marketed cross-border.
However, improvements can be made. The average value of a UCITS is €200 million, whereas the average value of corresponding mutual funds in the US is seven times that figure. In addition, only one third of UCITS are sold in another Member State.
In addition, alternative investment funds ("AIFs") have approximately €5 trillion assets under management but only 40% of them are marketed cross-border.
A total of 57% of funds (UCITS and AIFs) are marketed cross-border.
Feedback Sought
The Commission seeks feedback in the following areas:
- marketing restrictions in Member States that might impede cross-border distribution;
- distribution costs and regulatory fees that might be viewed as barriers to cross-border distribution;
- administrative arrangements imposed in certain Member States and whether these add any real value to retail investors;
- barriers encountered when trying to make use of online platforms to distribute funds;
- cost and time implications when competent authorities need to be notified of changes to fund documentation; and
- barriers encountered in respect of differential tax treatment and how to avoid discriminatory tax treatment.
Role of UCITS and the CMU
UCITS are regarded as the most highly regulated funds. It appears that rather than acting as a disincentive, the dramatic change in appetite for risk following recent market developments has resulted in an increase in demand for regulated products such as UCITS.
The robust risk management exercised by UCITS, coupled with its internationally recognised brand, could prove to be the most effective method for the Commission to engage in a further deepening of the single market.
Impact of Brexit on Distribution
Post Brexit, UCITS domiciled in the UK will not be permitted to market in the EU via a passport. Similarly, the passport available to UK AIFMs will be unavailable and national private placement regimes may be the only option available.
Comment
A possible increase in cross-border distribution of investment funds is certainly good news for the Irish market. Ireland is recognised as a leading domicile for investment funds.
Fund managers are showing a growing interest in re-domiciling their unregulated funds to Ireland. The Commission's consultation paves the way for a more streamlined and fund-friendly cross-border distribution process, which we hope will result in significant advantages for the Irish market. The Brexit result also presents the possible re-domiciliation of UK UCITS to Ireland if cross-border distribution of such funds in the EU is to continue.
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