Asset managers have long complained of the distribution challenges across EU member states. UCITS and the Alternative Investment Fund Managers Directive (AIFMD) theoretically negate additional, member state regulatory and administrative hurdles for managers marketing across the EU. There are standardised rules and EU-agreed principles governing distribution but divergences and gold-plating have occurred in many areas, which has hamstrung a number of firms’ cross-border marketing and distribution efforts. It is something the New City Initiative (NCI) has highlighted repeatedly in industry debates. An NCI white paper – published in conjunction with Open Europe in July 2015 – acknowledged these challenges.
Our survey was based on qualitative interviews conducted with lawyers across the EU, fund managers with cross-border marketing interests, and compliance consultants, coupled with publicly available information. The survey found that a typical UCITS manager would incur €1.5 million of additional initial costs, and on-going additional annual maintenance costs of €1.4 million if they market across all EU member states (plus Switzerland) due to extra regulatory and administrative requirements across individual countries. Asset managers are directly or indirectly affected by EU regulations costing around £2 billion a year, it added. Yet, they are still unable to market freely across EU member states. The announcement therefore on June 2, 2016 that a consultation on the Capital Markets Union (CMU) project would like to review and analyse the distribution challenges facing European fund managers is something the NCI strongly welcomes.
The consultation will seek industry comment on a number of perceived hindrances affecting asset managers including marketing restrictions; distribution costs and regulatory fees; administrative impediments; analysis on distribution networks such as online platforms which have grown in abundance yet are not referenced in UCITS or AIFMD; and taxation obligations in individual member states. The CMU seeks to bring about uniformity across capital markets, which the European Commission feels will help bring about greater non-bank financing and funding into the real economy, in what should help drive a Europe-wide recovery.
Streamlining all of these regulatory requirements would allow for quicker, easier and more cost effective distribution to occur at fund managers. It will also facilitate diversification and investor choice. Many small to mid-sized managers find navigating the multitude of individual requirements and obligations across the EU to be time-consuming and costly. Oftentimes, these costs must be borne prior to raising capital, putting the financial stability of the fund manager in jeopardy. Large asset managers can shoulder these costs by hiring more staff or external corporate counsel. This is not always possible at smaller managers due to cost constraints, often exacerbated by pre-existing regulations. By easing distribution barriers, the EC will enable more small to mid-sized managers to market and enable competition to flourish.
Fund managers have an excellent opportunity to contribute to this debate and the NCI strongly encourages manager participation in this consultation across all levels. The CMU is an example of thoughtful regulation, and by discussing with regulators the challenges faced in the EU’s cross-border fund distribution environment, managers have an excellent opportunity to shape regulation for the better. A withdrawal of gold-plating – be it additional reporting requirements or registration costs - would lead to cost savings and improve consumer choice.
For further information about the CMU project, or to participate in the consultation, please click here.