UCITS European Passporting: Some Obstacles Cleared

April 29, 2021
The ability to easily “passport” funds across E.U. borders is a great attraction for asset managers. Here, we discuss the regulations of European Passporting and some of the obstacles that are no longer in the way.

One of the main attractions of UCITS and AIFs is said to be the ability to easily “passport” funds across E.U. borders.  While UCITS continue to gather assets at great pace and scale, experienced managers will know that although the passport grants them entry to other E.U. markets, it’s not quite that simple. A variety of local-country rules and their attendant costs continue to distract and delay fund managers’ plans to enter new markets and give their investors additional product choices.

Similar to its travel document namesake, a fund passport does give the holder the right to travel, by bringing the product outside of your home domicile - which will more often than not be Ireland or Luxembourg. However, the experience of many fund managers has seen funds stand in the entry queue and bemoan the variety of local regulations and costs seemingly pulled from one hat or another.

Festina Lente:  A Brief History

Following persistent and vociferous industry calls that ease of doing business in Europe wasn’t exactly as advertised, the European Commission orchestrated a 2016 consultation on the topic. With an appealing title of Reducing barriers to cross-border distribution of investment funds, it was seen by most as a positive exercise and one which would make the obstacle course that selling funds in Europe a little easier.

The consultation identified the following areas of focus with a view to improvements:

  • Marketing restrictions
  • Distribution costs and regulatory fees
  • Administrative arrangements
  • Distribution networks
  • Notification processes 
  • Taxation

The consultation sought to achieve three things:

  1. Reduce barriers and inefficiencies to cross border distribution of funds across the E.U.
  2. Increase competition between investment funds leading to more choice and lower costs for investors
  3. Simplify regulatory requirements and reduce impact of national requirements on cross border funds

Things can only get better

In June 2019, the Commission published new regulations on facilitating cross border distribution of funds. These new distribution rules applying to UCITS and AIF funds apply as at August 2, 2021 and fall into three main categories:

  1. Pre-Marketing
  2. Local information/paying agents
  3. Exiting a member country from marketing efforts

Pre-Marketing:

The concept of pre-marketing doesn’t exist in many European countries, or it can be defined differently from one jurisdiction to another. Where it works well, such as in France for example, where it was redefined in 2016, both the manager and the investor benefit. Marketing and subsequent sales are an integral aspect of managers’ distribution strategy and the fear of falling foul of the complex point of sale compliance rules has, for many, meant a somewhat reactive sales strategy. Approaches include reverse solicitation, where an asset manager waits for an explicit enquiry from an investor before engaging with them.

The new definition means that a manager can now engage in limited marketing efforts with investors with a view to gauging demand prior to formally creating a product in the first place. They can also register their existing product with the local regulator, and of course submit to their related costs.

The obvious benefit to the manager is that, if done right, identifying investors and developing a market understanding can be achieved more efficiently and as the Commission wanted, provide investors with a cheaper product.

It goes without saying that there remains a need for managers to know, and adhere to, the pre-marketing rules. In simple terms - don’t provide potential investors with documentation that could allow them to own shares and be up front in noting any documentation shared could be altered as the product may not yet be formally established and/or registered with the regulator.

In addition, within two weeks of commencing pre-marketing, the manager should inform the home regulator of where the product is domiciled of such endeavors. There’s also an expectation that a manager will adequately document their pre-marketing efforts.

Local information/paying agents

The bane of many managers’ experience in Europe is the requirement across many jurisdictions to appoint a local agent – at last count, 17 countries sought this use of local agents. A manager’s time is spent locating appropriate candidates, reviewing legal agreements, agreeing costs and establishing oversight parameters. For a widely distributed fund, a manager may be repeating this process over a dozen times.

Though the 2019 Directive stopped short of removing the local agent role, it has addressed it by removing the requirement that the agent needs to be physically present in the country. In practice this means that the tasks possibly undertaken by the agent can now be offered from any other European country, as long as the ‘local’ official language is supported.

In theory, it’s possible for a manager to hire far fewer ‘local’ agents going forward. Although growth of uber-agents providing the services across all European countries hasn’t taken off yet, it might not be far off. While agents in some countries integrate themselves into the day to day workings far more than others, the manager is now in the privileged position to recalibrate it’s agent strategy and centralizing much of that work, and costs (hard and soft spend) across fewer entities.

What’s a ‘nice to have’ versus what’s a ‘must have’?

Managers should take the opportunity now to better understand what each of their already existing agents do for them today. A review of the value add by each agent will help guide the manager to a more informed decision on the extent of the future relationship. If the agents aren’t integral to the account opening, trade placement or settlement process for your Investors, perhaps it’s time to cut them loose and list as replacement with your own Management Company or a third party offering the service across multiple jurisdictions.

Recognising the threat, some agents have already started proactively reaching out to managers reminding them of the pending legislation change and highlighting their own value proposition. 

Deregistration Process

Another positive rule change relates to the process for de-registering a fund from a market. Currently, the process to get out of certain markets can be as laborious as entering. No manager wants to spend too much of their time and effort on a market where they no longer intend to market, and as such this one might be further down a manager’s priority list, nevertheless, it’s good to see the Commission address it.

Under these rule revisions, the future model greatly simplifies the process since the denotification submission is made to the fund’s home market regulator who then works directly with the regulator in the distribution market, freeing the manager from the current obligation. This frees up managers' time, resources, and certain legal costs which often come with having to directly face off with foreign regulators on fund deregistration presently.

ESMA Database

While August 2, 2021 is the date garnering most industry attention, another significant requirement written into the Directive has an extended timeline out to February 2022.

This is the desire to create a centralised location at ESMA where the variety of rules and fees across European regulators related to cross-border funds can be found. The labyrinth of websites and documents a manager has had to navigate through has been central to their cries for help over many years.

Both large and small managers have noted that to ensure both compliance to the local rules, and to forecast their costs, they often had to add another layer of legal assistance to their ecosystem.

By February 2, 2022, ESMA is due to publish a database on cross-border marketing of UCITS and AIFs using information sourced by regulators across Europe. Information will not be published by ESMA before the publication of the central database, so it is appropriate that the provisions of this regulation specifying the information in this regard to be communicated by competent authorities to ESMA, as well as the forms, templates, and procedures for the communication of information, apply as of the date on which the central database must be published on ESMA’s website.

A centralised online location where all UCITS/AIF that are marketed cross border, and all the member states in which their marketing takes place, will also be established. This should provide a far greater level of transparency than is available today, and managers and indeed investors will greatly benefit.

What now?

With August 2, 2021  only a few months away, managers should be setting some time aside to consider what pre-marketing might look like for their products, staff, and targeted investors. As opportunities to raise assets exist across Europe, testing the waters will never have been easier.

Analysing the network of agents (paying, information, facility) to better understand where efficiencies can be gained seems like an obvious expectation for managers as well. With some agents fearing they might be the causalities of a manager’s consolidation, now is the time that open and frank conversations should be held.  

Woman running on platform to catch a train
Up Next
Up Next

Fund Platform Consolidation: Don’t Get Left Behind

The recent spate of consolidation in fund platforms in Europe is raising an important question for many asset managers: are they working with the right platform or have they spread themselves too thin?

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.
This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products.
All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH.
Pursuant to information regarding the provision of applicable services or products by BBH, please note the following:
Brown Brothers Harriman Fund Administration Services (Ireland) Limited and Brown Brothers Harriman Trustee Services (Ireland) Limited are regulated by the Central Bank of Ireland
Brown Brothers Harriman Investor Services Limited is authorised and regulated by the Financial Conduct Authority
Brown Brothers Harriman (Luxembourg) S.C.A is regulated by the Commission de Surveillance du Secteur Financier
All trademarks and service marks included are the property of BBH or their respective owners.
© Brown Brothers Harriman & Co. 2021. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction