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Financing of the EU economy - Reducing fragmentation in the EU funds market
Regulatory action can facilitate a Pan-European market for funds
By Roux Cyril - Deputy Governor, Financial Regulation, Central Bank of Ireland
That the European Commission intends to engage in a consultation on barriers to the cross-border distribution of investment funds is a clear indication that there are significant barriers holding back the development of a European single market for funds. There are currently 53,686 funds in Europe compared to 32,805 in the US. One of the potential benefits of CMU is to reduce the barriers to EU-wide marketing of investment funds and the economic cost associated with this number of funds.
Retail investors will remain more familiar with funds closer to home, while linguistic and cultural proximity also play a role in the national bias of distribution agreements. But several issues more specific to investment funds and more amenable to regulatory convergence are also at play. In particular the fees charged by host authorities in respect of passporting notifications can be a barrier to marketing of funds across the Union.
Furthermore, in the case of UCITS, host authorities impose additional marketing and disclosure requirements, in the prospectuses and periodic reports, on the basis of article 91 of the directive singling out “laws, regulations and administrative provisions which do not fall within the field governed by this Directive and which are specifically relevant to the arrangements made for the marketing of units of UCITS”. Moreover, the requirement for local facilities agents now looks quite outdated and less justifiable in terms of cost, in light of advances in technology and payment systems. Where a concern regarding marketing is identified, this is best addressed through a harmonised approach at EU level rather than through local rules.
There are significant barriers holding back the development of a European single market for funds.
In the case of AIFs, cross-border marketing is a relatively new concept. Nevertheless, as flagged by ESMA, two recurring themes emerge in relation to the marketing of AIFs – the definitions in AIFMD of marketing and of professional investors. It is common practice for promoters of certain funds, particularly private equity funds, to test investor interest before committing to establish the fund structure or committing to engage in formal marketing in a particular Member State. Testing may include the circulation of a draft offering document. National competent authorities do not have a consistent approach to these documents as some regard this as marketing, while others do not. A consistent approach, either mandated by regulation or agreed among national competent authorities, would facilitate the development of pan-European AIFs.
AIFMD contains a definition of “professional investor” for the purpose of delineating which funds are AIFs capable of being passported. However many jurisdictions use a broader definition of “professional” in a marketing context. In other words AIFMD has not led Member States to revise their national regimes. The AIFMD definition should be reviewed to take into account of this lack of consensus on whether the current definition is the right one.