Last year we commented on a consultation by the European Commission on barriers to cross-border funds distribution. Now, under the Capital Markets Union (CMU) initiative, and with the intention of removing remaining barriers to cross-border fund distribution, the European Commission has issued a directive and a regulation, amending the UCITS Directive and AIFMD. These are part of a wider package of CMU-related proposals, which we outline here.
The Commission seeks to remove barriers to investment created by fragmented national approaches and measures. But some of the key national barriers are deep-rooted. Achieving real change will be a challenge for all stakeholders. Moreover, views still differ not only about to what extent there is a problem but how to address it.
In short, the proposed Directive deletes or amends various articles in the UCITS Directive and AIFMD that relate to the marketing or distribution of funds. The Regulation sets out the proposed new EU framework for facilitating cross-border fund distribution.
In particular, the Directive includes explicit prohibitions on Member States requiring a physical domestic presence by the UCITS management company (ManCo) or AIFM in order to serve investors in their jurisdiction. Electronic or other means of distance communication may be used instead. It also sets out a precise timetable within which national regulators must communicate decisions on changes to a UCITS's notification, and similarly for AIFs. And for managers to be able to de-notify a fund if there are a maximum of 10 investors holding up to 1% of the fund.
The element that has caused immediate concern among fund managers is the introduction of a definition of “pre-marketing” into AIFMD, which seeks to draw a distinction between testing an investment idea or strategy with a professional investor in order to test their interest in an AIF that is not yet established and promoting an established fund without notification in the investor's Member State. Questions have been raised about how this definition might work in practice and whether it could have an indirect impact on the working of other pieces of legislation that refer to marketing but do not define it.
The Regulation sets out a new EU framework and amends relevant provisions in the European Venture Capital Funds and European Social Entrepreneurship Funds Regulations. It sets out requirements on marketing communications, publication of national provisions, verification of marketing communications by national regulators, common principles regarding regulatory fees or charges and their publication, and standardisation of notifications. It also requires ESMA to establish, publish and maintain a database of AIFMs and UCITS ManCos, the AIFs and UCITS they manage, and the Member States in which those funds are marketed. And to establish and publish an interactive database showing national fees and charges.
Of the twelve legislative proposals issued by the Commission under the CMU banner, only three have so far been agreed by the European Parliament and Council. Although the Commission is urging its co_legislators speedily to adopt these latest proposals, it is not certain how quickly that can or will be done. The proposals cover detailed technical points but in relation to marketing, with potential for wide-reaching consequences beyond UCITS and AIFs.
The bigger policy question, though, is whether yet more rules will have the intended effect - to remove unnecessary “red tape”. If relevant provisions are removed from national rule books, after a settling in period, one might hope there to be some benefits for both investors and firms. But it is not clear whether, or how, these proposals can address the strong national bias among retail investors, in particular, for home-grown funds or the structural market differences due to the predominance of certain types of distribution channels in different Member States. Digital distribution platforms and different generational approaches may smooth out these biases over time, rather than more rules.
In the meantime, might more rules actually lead to more red tape?
Key questions for firms: