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Financing of the EU economy - Reducing fragmentation in the EU funds market
Reducing fragmentation in Europe´s fund market
By Klinz Wolf - Chairman, Financial Future
The financial services industry has been fragmented and renationalised to a large extent after the financial crisis 2007/2008. In contrast, the cross-border development of the European fund industry has been quite successful over the last years. The UCITS directives have been instrumental in this respect, but also the launch of the Alternative Investment Fund Managers Directive. UCITS has become a very strong brand known and distributed not only in Europe, but all over the world, notably in Asia and Latin America. The introduction of the UCITS passport has also been a major success, not diminishing the role of Luxemboutg and Dublin as traditional fund centers, but facilitating the European wide distribution of funds.
Despite this positive development of the fund industry there is no reason for complacency. The fund industry is also still fragmented in many ways and the potential of a true single European fund market has not yet been fully exploited. There are several reasons for this: either the rules for the fund industry differ or they are applied differently.
1.Registration of products differs from country to country. All member states agree that retail investors should be protected as much as possible. That means that not all products shpuld be allowed. The national supervisors are responsible for assessing a fund product and eventually banning it, if they consider it harmful. In doing so, they do not violate the European fund passport, but simply preserve the trust of retail investors in the products offered. (Belgium has for instance implemented a four year moratorium for some structured products and registered them anly when in a joint effort of regulators and industry the complexity of the products had been reduced significantly).
2. Tax ist still the sole responsibilty of the member states. Therefore it is no surprise that tax treatment of funds may differ within the EU. The question is only whether there is deliberate tax arbitrage to the detriment of foreign funds. Does the tax treatment of pooled investment funds artificially favour domestic funds serving national investors? If so, does that inhibit the optimal pooling of capital in Europe? Tax is an „extraordinarily sensitive“ area and little action can be expected shortly.
3. Fees of the competent national authorities differ from country to country. This should not come as a surprise, since the costs of regulation differ in many ways (salaries, rents, depth of administration etc.). There is no evidence that charged fees are used as protectionist tool. Nor does the different fee structure/level hinder the cross-bordetr distribution of funds.
4.The marketing activities are still subject to different regimes across Europe. The KYC (know your customer) checks differ. This means higher complexity for fund distributors and investors. On the other hand, the KIID (key investor information document) is a very strong and convincing example of successful supervisory convergence.
PRIPs and MiFID II will have a major impact on the fund industry.
The differences mentioned do not really threaten the further development of the European fund industry. Some differences may disappear as time goes by and as the culture of supervisors/ regulators becomes more and more similar. Other differences (eg. in the tax area) may stay. The level of fragmentation of the industry is not high enough to justify immediate further regulatory action. The amount of regulation over the past years has been enormous and a break right now seems justified.
PRIPs and MiFID II will have a major impact on the fund industry: inducements, core responsibilities and liabilities of distributors and new information requirements. All these effects should be properly assessed before considering new regulatory measures. Sufficient time should also be given to the thorough analysis of new technologies and distribution channels such as the internet, mobile devices and robo-advice.