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Financing of the EU economy - Reducing fragmentation in the EU funds market

Tackling fragmentation in the investment fund sector

By Gill Neena - MEP, Committee on Economic and Monetary Affairs, European Parliament


Although the whole concept of the free circulation of capital in the EU is already there since the Treaty of Rome, it is interesting that the concept of the capital market union has been on the forefront of the Juncker commission programme, clearly recognising we are not there.

The proposal by the EC since September 2015 has been confined looking at the prospectus regulation and securitisation. But the real problem is that these proposals do not tackle the fragmentation in the investment fund sector. Unless the EU proposals has more ambition and tackle national fragmentation, which is down to variable implementation at national level and gold plating.

The fragmentation is particularly acute in the investment fund sector.

Largely due to differing national taxation regimes. Stakeholders often cite the following concerns:
a. The disparity among domestic withholding tax regimes across Member States and corresponding tax recovery procedures;
b. The preferential tax treatment for domestic funds;
c. The application of double-tax treaty benefits, which turn out to be problematic for funds in certain jurisdictions;

Implementation of this would address the pass porting problem from one member state to another.

To understand the challenges of the EU investment sector a quick comparison with the USA is necessary.

In the EU there are around there are around 33,000 funds in the EU compared to the 8000 similar funds found in the USA. Furthermore, the average European mutual fund is valued at only EUR 222 million, this is one-seventh of the size of a typical US fund E 1.6 billion). Consequently, the total expense ratio, or the cost of managing the funds, is about 50% higher in Europe than in the US — 1.5% as compared to 1%. This is half a % more than in the USA which gives a significant difference in return for the investors.

Of course the European commission is fully aware of the problem. The CMU Action Plan acknowledges that eliminating barriers would incentivise fund managers, increase cross-border marketing and reduce costs for investors. The plan also promotes best practice in relation to addressing tax barriers and developing a code of conduct on withholding tax relief procedures.

These are welcome steps but greater ambition is needed if we are to bridge the gap with the USA capital market. Our shared objective is that the future Facebooks or anyone else could raise capital cheaply and easily in the EU and that is what we are trying to do with the prospectus regulation. At the same time, we need to address the insolvency rules too if we want to achieve this ambition.

The CMU will remain just a theoretical concept and fail to deliver the ambition it aspires to unless the issue of national fragmentation is addressed in a meaningful way.