Speakers of the session
Chairman, Financial Future
Joe V. Bannister
Chairman, Board of Governors, Malta Financial Services Authority
MEP, Committee on Economic and Monetary Affairs, European Parliament
Deputy Governor, Financial Regulation, Central Bank of Ireland
Head of Public Affairs, BNP Paribas Securities Services
Managing Director, Global Investment Management, J.P. Morgan AM
Objectives of the sessionThe objective of this roundtable was to discuss the key remaining areas of fragmentation of the EU investment fund market, their impacts for investors and the industry as well as the solutions that could be proposed at the EU level to reduce this fragmentation.
Points of discussion
What are the key areas of fragmentation of the EU fund market and their consequences?
- Are EU fund passports working properly? What are the main differences across the EU in the local rules that affect investment fund cross-border distribution? Are there specific barriers to selling or marketing funds across EU borders? In which cases are these differences or barriers justified?
- How do these differences between national fund rules in the EU affect asset managers and service providers? Are there too many under-performing funds in the EU as a result of such fragmentation? May these differences limit the potential role of asset management in funding the economy? What consequences for investors?
What can be done to reduce the fragmentation of the EU investment fund cross-border market?
- Should policymakers try to tackle barriers individually in each Member State or take a more holistic approach at the EU level e.g. with a single point of registration of funds and authorisation of marketing material in the EU? To what extent may the CMU help in this perspective?
- How can mutual trust be reinforced among supervisors? Should an objective be to increase convergence among supervisory practices in the EU?
- Should the asset management rulebook (i.e. the rules that affect directly or indirectly asset management activities and products) be further streamlined in the EU to simplify it and take potential overlaps out? Which areas should be addressed in priority?
- How will technological innovation change the way in which investment fund processes are handled and how may this affect the asset management rulebook?
Background of the sessionThe UCITS framework has helped to develop the EU cross-border fund market, fuelling retail and institutional investments into the EU economy and across EU countries. Much progress has also been made in the automation of cross-border fund transactions which has reached a ratio of 80%. Investment funds have increased their share of ownership of EU stock markets from less than 10% in the 1990s to 21% in 2012, according to the EU Commission (EC), and they have become an increasingly important holder of corporate bonds in recent years.
The range of cross-border EU fund frameworks has recently been expanded. The AIFMD offers new passporting opportunities for the Alternative Investment Funds (AIFs) managed by management companies authorised in the EU. Moreover new investment fund categories have been launched to complete the range of cross-border funds that may support the financing of the EU economy: European Social Entrepreneurship Funds (EuSEF) and European Venture Capital Funds (EuVECA) have so far had limited success but their framework is due to be reviewed. European Long Term Investment Funds (ELTIF), which are being launched in 2016 have an important role to play in the CMU given their long term characteristics and their objective to foster investment in non-listed companies and infrastructure projects. Furthermore unified distribution and information disclosure rules apply to investment funds in the EU with MiFID II and the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation.
Many market observers however emphasize the current fragmentation of the EU fund market despite these European frameworks and the limitations that this may create for the cross-border expansion of investment funds in the EU. The main barriers to the cross-border distribution of investment funds are due to be assessed by the EC in 2016 as part of the CMU Action Plan.
There are indeed 3 times as many funds in the EU as in the US and EU funds are on average 5 times smaller than in the US. This increases costs for asset managers (the cost of managing funds is considered to be about 50% higher in Europe than in the US) and reduces potential returns for investors. The reduced scalability of EU funds may also impact the competitiveness of the overall European investment fund industry compared to other jurisdictions. This is partly explained by the structural difference between the US (one nation) and the EU (28 different Member States) but the differences in the way marketing and taxation rules that impact the fund sector are applied across the EU are also considered by market players to play an important role. These differences relate for example to fund registration, Know Your Customer checks (KYC), the withholding tax or domestic funds having a tax advantage in some countries over cross-border ones. Specific domestic requirements such as registration fees and local paying agent requirements are also pointed out. Other possible sources of fragmentation are specific domestic applications of distribution and investor protection rules such as PRIIPs and MiFID II with may impose additional prospectus or KIID requirements or specific criteria for identifying complex products. Such issues may be addressed by improved supervisory convergence in the EU some have suggested.
The multiplicity of rules affecting the investment fund sector is another issue. Many different regulations affect directly (e.g. UCITS, AIFMD, MiFID II, PRIIPs…) or indirectly (e.g. SFTR, EMIR…) the sector leading to complexity and potential inconsistencies. Reporting is an area where streamlining would be welcomed by the industry as each regulation has its own requirements, generating a heavy workload. The potential impacts on the asset management sector of new trends related to technological innovation or data management and the related adjustments that may be needed to existing rules should also be approached in a consistent way across the EU.