On 2 June 2016, the European Commission issued its consultation on the cross-border distribution of funds across the EU seeking evidence on how distribution within the EU could be improved.
The Commission is also seeking input from distributors on barriers to distribution. It highlights the impact of marketing rules, administrative arrangements imposed by host countries, regulatory fees, notification procedures, and taxation as areas for consideration.
The Consultation covers those funds which benefit from an “EU Passport”: UCITS funds, Alternative Investment Funds, European Long Term Investment Funds, European Venture Capital Funds and European Social Entrepreneurship Funds.
The Consultation is part of the drive towards a Capital Markets Union, one of the European Commission’s key priorities. In the introduction to the Consultation, the Commission highlights the important role which cross-border investment funds have to play in allocating capital efficiently across the EU.
The Commission wants to look at ways to make the Passports work even better, particularly for smaller funds. It is seeking feedback from the public, including fund managers, investors, consumer groups, as well as from those who market and sell funds.
The thrust of the Consultation is summed up in the words of Jonathan Hill, Commissioner for Financial Services, Financial Stability and Capital Markets Union: "One of the benefits of the Single Market is that investment funds should be able to do business easily across borders. But at the moment, smaller fund managers are telling us they face challenges when trying to sell their products in different countries. So I want to use this consultation to flush out what the main barriers are to funds operating across borders, so that we can work out how best to overcome them.”
This Consultation seeks feedback in the following areas, noting particular barriers:
- Marketing restrictions: EU funds marketed cross-border are usually required to comply with national requirements set by host Member States, which differ across the EU. Significant costs can be incurred in researching each EU Member State’s financial promotion and consumer protection regime, and providing appropriate materials on an on-going basis.
- Distribution costs and regulatory fees: EU funds can be subject to regulatory fees imposed by home and host Member States that vary significantly in both scale and how they are calculated. The costs themselves and the need to research them are reported as acting as a barrier to cross-border distribution.
- Administrative arrangements: Where EU funds using the marketing passport are sold to retail investors, host Member States sometimes introduce special administrative arrangements intended to make it easier for investors to subscribe, redeem and receive related payments from those funds, as well as receive tailored information to support them in doing so. These are an additional burden that may not always justified by the value added for local investors.
- Distribution networks: With increasing use of online platforms to distribute funds, the Commission wants to understand the barriers that hinder the use of online and direct distribution across borders.
- Notification processes: Where funds are marketed on a cross-border basis and there is a need for documentation to be updated or modified, asset managers are required to give written notice to the competent authority of the host Member State. This can add cost and time to the process.
- Taxation: differential tax treatments can sometimes create barriers to cross border business. Feedback is sought on how best to promote best practice and avoid discriminatory tax treatment.
Responses to the consultation can be made via an online questionnaire by 2 October 2016 at the latest.