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Cross-border business meets major crossroads

Cross-border investment funds meet major crossroads

Global regulatory change is set to enable or restrict cross-border funds distribution.


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Four way road

The regulation of the cross-border distribution of funds or investment management services – whether enabling or restricting – is closely watched by the investment industry.

While the cross-border fund passport has spread to other funds and other parts of the globe, recent obstacles to passporting have appeared in Asia and Europe, and a much more significant obstacle looms on the close horizon: “Brexit”. At the same time, some regulators remain intent on opening-up their capital markets.

CMU mid term review infographic

Slow, steady growth of regional and bilateral funds passports

Highlights of progress in developing passport schemes include:

  • Activity under the Mainland China-Hong Kong Mutual Recognition of Funds has, if anything, slowed down. Only a handful of Hong Kong funds have been approved for distribution in mainland China and there have been no new approvals for months. 
  • Progress on the agreement to formalise the Asian Region Funds Passport, which combines the initial signatories Australia, New Zealand, Singapore, and South Korea, with the Philippines and Thailand, has been slow.
  • In terms of the Association of South-East Asian Nations Collective Investment Scheme Framework, there has been little or no new activity since last year. 
  • There has been more progress in bilateral agreements, though, including schemes between the People’s Bank of China and Ireland and between Hong Kong’s SFC and the Swiss Financial Market Supervisory Authority.
  • But the European Commission has yet to activate the passports for non-EU funds and non-EU fund management companies under the AIFMD.

Brexit: global impact on cross-border business

The global investment and fund management industry now faces potentially the single biggest impact on cross-border financial services in a generation: “Brexit”. Not only UK firms, but investment and fund management firms within the other EU Member States (“EU27”) and elsewhere will be impacted. Much business takes place from and to the UK via EU regulatory passports. In only a few instances are such passports available to non-EU firms and there are increasing signs that the ability to delegate whole functions out of a fund’s home Member State will be tightened.

With a diversity of “third country” provisions under different pieces of EU legislation, and some having no formal “equivalence” regime, unless the final trade agreement between the EU and the UK includes arrangements for UK firms to continue to benefit from all EU passports, Brexit will result in EU27-UK cross-border business being prohibited or restricted.

In addition to the sector’s three main regulatory passports (UCITS, AIFMD and MiFID), EU investment and fund managers benefit from a number of other passports, protections and activities that will be impacted by Brexit. For instance, post-Brexit, UK financial instruments and UK regulated markets will no longer be EU/EEA instruments and markets, requiring many investment managers to adjust their clients’ portfolios to reflect investment constraints within their mandates.

EU determined Brexit won’t derail Capital Markets Union

The EU is determined not to let Brexit cause its plans for Capital Markets Union (CMU) to meander or fail. It called for an acceleration of the reforms, starting with the long overdue securitisation package and implementing the Prospectus Regulation. The Commission also launched a Mid-term Review and consultation process on 20 January 2017 to help address national barriers to the cross-border distribution of investment funds.

The Commission’s research findings, announced in March 2017, were that the cross-border fund market is successful but remains geographically limited and it identified six categories of national barriers. Their proposed removal will test Member States’ commitment to CMU and to the principles of harmonisation enshrined in the UCITS Directive and AIFMD.

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