EU with regard to cross-border distribution of collective investment funds - Main contents

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This page contains a limited version of this dossier in the EU Monitor.

dossier	COM(2018)92 - Amendment of Directive 2009/65/EC Directive 2011/61/EU with regard to cross-border distribution of collective investment ...
source	COM(2018)92
date	12-03-2018

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

The Commission has today adopted a package of measures to deepen the Capital Markets Union (‘CMU’) together with the Communication "Completing Capital Markets Union by 2019 – time to accelerate delivery". The package includes this proposal and a proposal for a regulation on facilitating the cross-border distribution of collective investment funds, which also amends Regulations (No) 345/2013 ¹ and 346/2013 ² , as well as a proposal for an enabling EU framework on covered bonds, a proposal for an enabling framework on European crowdfunding service providers (ECSP)for businesses , a proposal on the law applicable to the third-party effects of assignments of claims, and a Communication on the applicable law to the proprietary effects of transactions in securities.

This proposal amends certain provisions in Directive 2009/65/EC ³ and Directive 2011/61/EU ⁴ with the purpose of reducing regulatory barriers to the cross-border distribution of investment funds in the EU. These new measures are expected to reduce the cost for fund managers of going cross-border and should support more cross-border marketing of investment funds. Increased competition in the EU will help to give investors more choice and better value.

This proposal was scheduled in the Commission Work Programme 2018 ⁵ and should be seen in the broader context of the CMU action plan ⁶ and the CMU Mid-Term Review ⁷ , to establish a genuine internal capital market by addressing fragmentation in the capital markets, removing regulatory barriers to the financing of the economy and increasing the supply of capital to businesses. Regulatory barriers, namely Member States’ marketing requirements, regulatory fees and administrative and notification requirements represent a significant disincentive to the cross-border distribution of funds. These barriers were identified in response to the Green Paper on Capital Markets Union ⁸ , the Call for Evidence on the EU regulatory framework for financial services ⁹ and the public consultation on barriers to the cross-border distribution of investment funds ¹⁰ .

Investment funds are investment products created with the sole purpose of pooling investors’ capital and investing that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities. In the EU, investment funds can be categorised as undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs) managed by alternative investment fund managers. UCITS are covered by Directive 2009/65/EC and AIFs are covered by Directive 2011/61/EU. Directive 2011/61/EU is complemented by four fund frameworks:

·Regulation (No) 345/2013 on European venture capital funds,

·Regulation (No) 346/2013 on European social entrepreneurship funds,

·Regulation 2015/460 ¹¹ on European long-term investment funds and

·Regulation 2017/1131 ¹² on money market funds.

The shared purpose of these rules is notably to make cross-border distribution easier while ensuring a high level of investor protection.

Rules for EU investment funds allow fund managers to distribute and, with some exceptions, also to manage their funds across the EU. While EU investment funds have seen rapid growth, with a total of EUR 14 310 billion in assets under management in June 2017 ¹³ , the EU investment fund market is still predominantly organised as a national market: 70 % of all assets under management are held by investment funds registered for sale only in their domestic market ¹⁴ . Only 37 % of UCITS and about 3 % of AIFs are registered for sale in more than three Member States. Compared to the United States, the EU market is smaller in terms of assets under management. However, there are considerably more funds in the EU (58 125 in the EU compared to 15 415 in the US) ¹⁵ . This means EU funds are on average significantly smaller. This has a negative impact on economies of scale, the fees paid by investors and the way in which the internal market operates for investment funds.

This proposal also recognizes that there are other factors outside the scope of this proposal which hold back the cross-border distribution of investment funds in the EU. These factors include national tax regimes applicable to investment funds and investors, vertical distribution channels and cultural preferences for domestic investment products.

• Consistency with existing policy provisions in the policy area

This proposal is presented together with a proposal for a Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013. It contains amendments to certain provisions applicable to the cross-border distribution of investment funds laid down in Directive 2009/65/EC and Directive 2011/61/EU. Such provisions were identified as burdensome or insufficiently clear and allowed the creation of additional requirements (‘gold plating’) when they were transposed into national legal systems. These amendments are consistent with objectives of the Directives, which aim to establish a single market for investment funds and facilitate the cross-border distribution of investment funds. The proposal also aligns the rules between the different legislative frameworks for investment funds. Hence, consistency with existing policy provisions is safeguarded.

• Consistency with other Union policies

The Commission’s top priority is to strengthen the EU economy and stimulate investment to create jobs. A key element of the Investment Plan for Europe ¹⁶ , which aims to strengthen Europe’s economy and encourage investment in all 28 Member States, is creating a deeper single market for capital – a CMU. Deeper and integrated capital markets will improve the access to capital for companies while aiding in the development of new investment opportunities for savers.

This proposal is complementary to this objective and a priority action in the CMU mid-term review ¹⁷ , as it contains measures to remove capital market barriers. It contributes to the development of more integrated capital markets by making it easier for investors, fund managers and invested undertakings to benefit from the single market.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

This legislative action falls within the area of shared competence in accordance with Article 4(2)a of the Treaty on the Functioning of the European Union (TFEU). It aims to facilitate the establishment and the provision of services with the single market, further developing and implementing the general principles of the right of establishment and the freedom to provide services enshrined in Articles 49 and 56 TFEU.

This proposal is based on Articles 53(1) TFEU, which is the legal basis for Directive 2009/65/EC (ex Article 47(2) EC) and Directive 2011/61/EU. The internal market for investment funds is currently prevented from operating to its full potential by regulatory barriers. Such barriers include diverging national implementation of provisions of these two Directives that make it difficult for investment funds to fully benefit from their Treaty freedoms. Certain amendments to the existing rules are proposed to bring more clarity and harmonisation where needed. These amendments aim to address the detrimental effects of the identified obstacles which prevent access to the market for managers who wish to offer their investment funds in another Member State by providing services across borders or by establishing a branch in that other Member State. The proposal suggests aligning the rules applicable to UCITS and AIFMs and also proposes new measures to remove barriers to the cross-border distribution of funds.

• Subsidiarity (for non-exclusive competence)

This proposal complies with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union (TEU).

According to the principle of subsidiarity, Union action may only take place if the envisaged aims cannot be achieved by Member States alone. The identified problem, the existence of regulatory barriers to the cross-border distribution of investment funds, is not limited to the territory of one Member State. Consequently, the proposal’s aim is to ensure that the internal market for the services of investment funds operates smoothly, for example by (further) harmonising the requirements regarding the providing of local facilities to investors in host Member States. Furthermore, uniformity and legal certainty of the exercise of the Treaty freedoms can be better ensured by taking action at EU level.

• Proportionality

This proposal complies with the principle of proportionality as set out in Article 5 TEU. The proposed measures are necessary to achieve the objective of reducing regulatory barriers to cross-border distribution of investment funds within the EU. Remaining regulatory barriers require EU action allowing for a harmonised framework, and cannot be tackled by Member States alone.

The impact assessment accompanying this proposal contains initial estimations on cost savings based on factual and realistic assumptions. The proposal will reduce the compliance burden and costs for investment funds by removing burdensome requirements and the unnecessary complexity and legal uncertainty of the rules that govern the cross-border distribution of funds. Consequently, the proposal does not go beyond what is necessary to tackle the issues at EU level.

• Choice of the instrument

This proposal amends Directive 2009/65/EC and Directive 2011/61/EU. Therefore, the choice of a Directive as an instrument for amending the existing rules laid down in the Directives is the most appropriate to ensure that the identified barriers are eliminated.

The objective of the new procedures on pre-marketing and de-notification introduced by this proposal is in line with the objective of Directive 2009/65/EC and Directive 2011/61/EU, which is to make it easier for collective investment fund managers to access the market. These procedures harmonise divergent practices introduced in some Member States in the areas which have not been harmonised. Taking into account the need for Member States to either supplement, or amend their national laws regulating access of investment fund managers to their markets, a Directive introducing these new procedures in the existing EU legal framework is the most appropriate choice.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex-post evaluations/fitness checks of existing legislation

In preparing this proposal, the Commission carried out an in-depth evaluation of relevant provisions of Directive 2009/65/EC and Directive 2011/61/EU and additional requirements imposed by Member States.

This evaluation showed that despite its relative success, the single market falls short of realising its full potential for the cross-border distribution of investment funds, since the funds still face many barriers. In addition, the existing legal framework does not provide sufficient transparency as regards the legal requirements and administrative practices which fall outside the harmonisation introduced by Directive 2009/65/EC and Directive 2011/61/EU. The Commission’s evaluation revealed that Member States take very different approaches to the requirements and verifications of marketing communications. There is also a wide variation in the fees and charges levied by the national competent authorities for supervisory tasks in accordance with Directive 2009/65/EC and Directive 2011/61/EU. These are all barriers to a wider cross-border distribution of investment funds.

• Stakeholder consultations

Responses to two consultation suggested that regulatory barriers to the cross-border distribution of investment funds prevented the full benefits of the single market from being realised. The first consultation, the Green Paper on Capital Markets Union, was launched on 18 February 2015. The second consultation, the Call for Evidence on the EU regulatory framework for financial services, was launched on 30 September 2015.

Additional information on national practices was sought from competent authorities and the European Securities and Markets Authority (ESMA). At the Commission’s request, ESMA conducted a survey of competent authorities in 2016, requesting details about current national practices in areas such as regulatory fees and marketing requirements.

Based on the input received from the CMU Green Paper and the Call for Evidence and ESMA’s survey, the Commission launched a public consultation on 2 June 2016 on the cross-border distribution of investment funds ¹⁸ . Given the feedback already received, the consultation sought practical examples of the problems faced and evidence of their impact. To receive a high number of replies, the Commission organised roadshows with asset management associations and their members in the main asset management hubs in the EU, i.e. Luxembourg, France, Ireland, the UK, Germany and Belgium. Several meetings and conference calls were held with European and national investor associations, and the consultation was presented to the Financial Services User Group on 15 September 2016. In total, 64 responses were received: 52 from associations or companies, 8 from public authorities or international organisations and 4 from individuals. Most responses indicated that regulatory barriers were a significant disincentive to cross-border distribution.

At the Commission’s request and based on the evidence received, ESMA conducted a follow-up survey in 2017 to obtain further information about specific marketing practices and notification requirements in Member States.

The Commission also organised meetings with the investment fund industry and European investor associations for more information. A questionnaire was sent on 30 May 2017 to eight trade bodies on the various areas covered by the cross-border distribution of investment funds. There was a particular focus on quantifying the costs caused by the regulatory barriers to cross-border distribution and determining the potential benefits of removing these barriers for asset managers and investors. Feedback suggested that the costs due to regulatory barriers are substantial: they amount to 1 to 4 % of the overall expenses of an investment fund. Also, a targeted survey of 60 equally represented small, medium-sized and large investment funds based on a randomised stratified sampling procedure was conducted in October 2017. The survey confirmed the relevance of the regulatory barriers and the need for action at EU level.

The Commission also consulted stakeholders in June and July 2017 through an inception impact assessment ¹⁹ . The five responses received from asset managers, their associations and financial advisors’ associations supported the Commission initiative to reduce the barriers to the cross-border distribution of investment funds.

• Collection and use of expertise

The Commission relied on information and data from Morningstar ²⁰ , the European Fund and Asset Management Association (EFAMA) and market reports and studies by private companies. Additionally, academic literature was reviewed, in particular literature on the impact of cross-border distribution on competition and expected consumer behaviour.

• Impact assessment

An impact assessment was carried out to prepare this initiative.

On 1 December 2017, the Regulatory Scrutiny Board delivered a positive opinion with recommendations to further improve the draft impact assessment report. The draft report was subsequently modified to take into account the Board’s comments ²¹ . The main changes recommended by the Board related to:

·factors that affect cross-border distribution not covered by the initiative,

·a description in the baseline of recent initiatives that have an (indirect) impact on the cross-border distribution of funds,

·the structure, presentation, assessment and comparison of the options, and

·the presentation, documentation and qualification of the quantitative methods and their results.

The revised impact assessment report and an executive summary of the impact assessment report are published with this proposal ²² .

The impact assessment report considers a range of policy options. Based on their assessment, the policy choices are as follows:
The proposal covers the following amendments:
(1)Amendments to Directive 2009/65/EC (Article 1)
(2)Amendments to AIFMD (Article 2)

1. The impact assessment report considers a range of policy options. Based on their assessment, the policy choices are as follows:

(a)National marketing requirements should be more transparent at national and EU level. In addition, the definition of pre-marketing in Directive 2011/61/EU should be harmonised, and the process of checking marketing material should be framed more clearly.

(b)Regulatory fees should be more transparent at EU level, and high-level principles should be introduced to ensure more consistency in the way regulatory fees are determined.

(c)The choice of facilities to support local investors should be left to managers of investment funds, with safeguards for investors.

(d)The procedures and requirements for updating notifications and de-notification of the use of the marketing passport should be harmonised more.

Together, the policy choices significantly reduce regulatory barriers. They increase the potential to have more funds marketed cross-border, improve competition, lower market fragmentation and give investors more choice in the EU. The policy choices also have indirect benefits because of their social and environmental impact. More cross-border distribution should lead to more opportunities to invest in investment funds pursuing social or environmental goals. This is turn could accelerate growth in these areas.

For all investment funds currently marketed on a cross-border basis in the EU, the policy choices together are expected to save an annual EUR 306 to 440 million in costs (recurrent costs). The savings in one-off costs is expected to be even higher: EUR 378 to 467 million. These cost reductions should act as incentives to develop more cross-border activities and support a more integrated single market for investment funds.

This Directive covers policy choices (c) and (d). The Regulation which is proposed separately covers policy choices (a) and (b).

• Regulatory fitness and simplification

This proposal should lead to significant cost reductions for managers of investment funds that distribute, or intend to distribute, their funds cross-border in the EU. These cost reductions will in particular have a positive effect on managers of funds who either manage a smaller number of investment funds or investment funds with less significant assets under management, since they have a smaller base over which they can spread the costs.

Although this proposal does not directly target small and medium-sized enterprises (SMEs), SMEs will indirectly benefit from this proposal. Increased cross-border distribution of investment funds will in fact accelerate the growth of EU investment funds and their investments in SMEs, in particular from venture capital funds.

• Fundamental rights

The proposal promotes rights enshrined in the Charter of Fundamental Rights (the ‘Charter’). The main objective of this initiative is to facilitate the right to provide services in any Member State, as prescribed by Article 15(2) of the Charter, ensuring that there is no discrimination, even indirect, on grounds of nationality (further implementing Article 21(2) of the Charter). Finally, prohibition of abuse of rights, namely of the freedom to provide services, will be duly considered, as prescribed by Article 54 of the Charter.

4. BUDGETARY IMPLICATIONS

The proposal does not have a budgetary impact for the Commission.

5. OTHER ELEMENTS

·Evaluation

An evaluation of this Directive and the Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013 will be conducted 36 months after the date for transposition of this Directive. The Commission will rely on a public consultation and discussions with ESMA and the competent authorities.

• Detailed explanation of the specific provisions of the proposal

2. The proposal covers the following amendments:

3. (1)Amendments to Directive 2009/65/EC (Article 1)

Article 77 of Directive 2009/65/EC is proposed to be deleted. The enhanced requirements for the marketing communication are laid down in the proposal for a Regulation on facilitation of cross-border distribution of funds. These principles established for marketing communications will apply to all asset managers who market their funds, irrespective of their type. This change will ensure a level playing field and the same level of investor protection across Member States.

Article 91(3) of Directive 2009/65/EC is proposed to be deleted. This provision requires Member States to ensure that their national laws, regulations and administrative provisions governing cross-border marketing of UCITS within their territories are easily accessible from a distance, by electronic means and in a language customary in the sphere of international finance. A parallel proposal for a Regulation on the facilitation of cross-border distribution of funds provides for specific rules on the transparency of national laws and requirements applicable to marketing communications with respect to all collective investment funds. These new rules will ensure that comprehensive, clear and up-to date information is collected and published by ESMA.

Article 92 of Directive 2009/65/EC is proposed to be amended. This provision does not impose the obligation on UCITS to have local facilities in each Member State where UCITS are marketed. However, in practice many Member States require facilities on their territory for making payments to unit-holders, repurchasing or redeeming units and making available the information which funds are required to provide. A few Member States also require these local facilities to perform additional tasks, like handling complaints or serving as a local distributor or being the legal representative (including dealing with the national competent authority).

Requirements to have local facilities are costly and have limited added value given the use of digital technology. Therefore, this proposal bans the imposition of physical presence. While requiring that facilities are established in each Member State where marketing activities are carried out and which serve situations such as making subscriptions, making payments or repurchasing or redeeming units, this proposal allows fund managers to use electronic or other means of distance communication with investors. The information and means of communication should be available to investors in the official languages of the Member State where the investor is located.

Amendments to Articles 17 and 93 of Directive 2009/65/EC aim to align national procedures for changes to the notification procedure for UCITS across funds types and across Member States. In particular, a precise time frame for communicating the competent authorities’ decisions is necessary to ensure uniform rules and make the procedures applicable to collective fund managers more efficient. A precise time frame is also necessary to ensure that procedures governing changes to the information provided by AIFMs in the notification process are aligned with Directive 2011/61/EU.

A new Article 93a is added to Directive 2009/65/EC to complement the notification procedures with the conditions for UCITS who decide to stop their marketing activities in a Member State. Asset managers are allowed to de-notify the marketing of their UCITS only if a maximum of 10 investors who hold up to 1 % of assets under management of this UCITS have invested in this UCITS in an identified Member State. The competent authorities of the home Member State of this UCITS will verify the compliance with this requirement, including the transparency and publication requirement for investors and the repurchase offer. All obligations to inform will continue to apply to remaining investors after de-notification of the marketing activities in a Member State.

4. (2)Amendments to AIFMD (Article 2)

It is proposed to add a pre-marketing definition in Article 4(1) of Directive 2011/61/EU and to insert Article 30a laying down the conditions under which an EU AIFM can engage in pre-marketing activities. It is important to provide sufficient safeguards against potential circumvention of the requirements of Directive 2011/61/EU that apply when marketing AIFs in the home Member State or across the border in another Member State. AIFM is therefore allowed to test an investment idea or an investment strategy with professional investors but may not promote an established AIF without notification, as prescribed by the Directive. Moreover, when professional investors revert to the AIFMs following their pre-marketing activities, a subscription to the units or shares of an AIF that is ultimately established or of a similar AIF managed by that AIFM will be considered the result of marketing.

Article 32a is inserted in Directive 2011/61/EU to complement the notification procedures with the procedure and conditions for AIFMs who wish to discontinue their marketing activities in a particular Member State. An AIFM can be authorised to de-notify the marketing of an EU AIF it manages only if there are a maximum of 10 investors who hold up to 1 % of assets under management of this AIF in an identified Member State. The AIFM must notify to competent authorities of its home Member State how it fulfils the conditions for de-notification and for a public notice of the de-notification. The AIFM must also notify the authorities of the offers presented to the investors to repurchase units and shares of the AIF that is no longer going to be marketed in their Member State. All transparency requirements that investors must fulfil pursuant to Directive 2011/61/EU will continue to apply to investors who retain their investment after de-notification of the marketing activities in the selected Member State.

Article 43a is inserted in Directive 2011/61/EU to ensure a consistent treatment of retail investors regardless of the type of fund in which they decide to invest. Where Member States allow AIFMs to market units or shares of AIFs in their territories to retail investors, those AIFMs should also make facilities available to retail investors to serve situations such as making subscriptions, making payments or repurchasing or redeeming units. For this purpose, AIFMs will be able to use electronic or other means of distance communication.

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Contents

1.

The impact assessment report considers a range of policy options. Based on their assessment, the policy choices are as follows:

2.

The proposal covers the following amendments:

3.

(1)Amendments to Directive 2009/65/EC (Article 1)

4.

(2)Amendments to AIFMD (Article 2)