Europe continues to shine as a promising region for fund managers. Growth of the fund industry has remained robust this decade despite lackluster economic growth, challenges preserving the EU’s currency union (as demonstrated by the Greek debt crisis) and disconnect among the EU member states (as demonstrated by Brexit). More recently, a resurgence in economic growth is accompanying consistent flows into European funds and ETFs, suggesting the industry can grow beyond €15.9 trillion assets under management in traditional mutual funds, Undertakings for Collective Investment in Transferable Securities (UCITS), and Alternative Investment Funds (AIFs).1

In 2017, net sales of European funds reached a record €937 billion (29% over the previous record set in 2015), as persistent low deposit rates and vibrant global equity markets drew investors to UCITS and AIFs. Also notable in 2017, was the persistent shift to lower-cost investment products, particularly passively-managed long-only funds and ETFs, which experienced global net inflows of $964 billion (up 53% from 2016),2  including $184 billion in Europe.3 Finally, the proliferation of alternative investment products, which delivered record inflows of €202 billion to AIFs in 2017, remain tempered by regulators’ actions in certain markets to limit sales of complex structured products, as was voluntarily enacted in Belgium.4

Although the outlook for growth is favorable, operating in Europe offers many distribution challenges from a regulatory and operational perspective. While UCITS directives continue to strive towards standardized cross-border distribution into multiple domiciles across European and non-European countries, bridging the various distribution needs of local investors requires the ability to operate in multiple languages, currencies, and time zones. More recently, the growth of exchange traded funds (ETFs) in Europe adds new permutations to the distribution landscape, such as the listing of ETFs on multiple securities exchanges, in some cases requiring the holding of ETF positions of the same ETF in more than one depository (please refer to ‘ETFs in Europe’ for additional detail.) From a compliance perspective, subsequent waves of regulation over the past decade have required fund managers make significant investments in expertise and technology to remain compliant while maintaining efficient operations. The most recent of these regulations was the Markets in Financial Instruments Directive II (MiFID II.)


2018 began with the uneven implementation of the MiFID II, with only 11 of 28 EU member states adopting the Directive by its official January 3 commencement date. MiFID II will have substantial effects on the way investment funds are distributed. Investor protection rules addressing product governance, appropriateness, inducements, and disclosures will affect distribution practices, regardless of whether funds are distributed via banks (the primary distribution channel on the continent) or independent financial advisers.

In response to MiFID II and other trends affecting the European landscape, some asset managers are establishing proprietary direct-to-consumer (D2C) platforms to support newer models of fund distribution. By offering execution-only and basic advice, these platforms offer an alternative to traditional bank-led models that limited consumer choice and opportunities for low-cost investment programs. Expanding the options for European investors to access traditional funds and ETFs is expected to bode well for an asset management industry already reaching record levels of assets under management. It also helps ensure that funds are a relevant financial vehicle for younger generations of investors more accustomed to leveraging newer technologies, such as mobile devices, to conduct financial transactions.

Technology is a leading factor changing the investor experience as broader efforts to digitize the fund investment process allows innovation, including mobile accessibility of investment data, “robo-advice,” and other new models of investor/adviser interaction. From an operational perspective, middle and back office service providers play a critical role in ensuring data is accurate and accessible in a digital friendly environment while also providing a flexible, but secure infrastructure to accommodate a broader spectrum of complex products, across a broad array of investment domiciles.

ETFs in Europe

European ETFs create new challenges in cross-border distribution. The largest ETF managers distribute into 14 or more domiciles and 69% of ETFs in Europe are listed on two or more exchanges.5

Compliance: Know Your Distributor

In addition to traditional Know Your Customer (KYC) and Anti-Money Laundering (AML) oversight, attention is increasingly focused on Know Your Distributor (KYD) oversight to ensure that relationships with fund distributors and related sub-distributors comply with relevant local compliance requirements. These requirements become particularly challenging for cross-border funds distributing into multiple jurisdictions. At the core of this issue is the challenge of maintaining the efficiency of omnibus accounts at the distribution intermediary (typically banks in Europe) while delivering the fund promoter sufficient information to equal the standard of KYC applied in D2C distribution. Achieving this goal is complicated by lack of automation and standardization of fund trading information from distribution.6

Tax Transparent Vehicles

Growing demand for more tax efficiency is encouraging more asset managers to leverage the capabilities of certain European fund structures, including Common Contractual Funds (CCFs) and Irish Collective Asset Management Vehicles (ICAVs) in Ireland and Fonds Commun de Placement (FCPs) in Luxembourg.

  • What type of digital services do you offer that complement traditional processing and global markets expertise?
  • How do you support increasingly complex distribution arrangements? Can you provide optimal support for ETF sponsors, including share class hedging, to ensure efficiencies of cross-border distribution into multiple domiciles with different currencies? Can you support the increasing sophistication of ETF strategies, including ETFs in less liquid asset classes, as well as leveraged and inverse ETFs?
  • How can you help me optimize informational flows between fund distributors and fund managers?
  • How can you support compliance for tax transparent funds?

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This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority. BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. © Brown Brothers Harriman & Co. 2018. All rights reserved.
7/2018 IS-04152-2018-07-16 Expiration 7/2020

1 Fund and Asset Management Association
2 Morningstar Direct
3 Morningstar Direct
5 PwC, European ETF Listing and Distribution Poster, September 2017
6 SWIFT for Funds: Addressing Compliance and Automation (