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
The consultation sought to achieve three things:
- Reduce barriers and inefficiencies to cross border distribution of funds across the E.U.
- Increase competition between investment funds leading to more choice and lower costs for investors
- 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:
- Local information/paying agents
- Exiting a member country from marketing efforts
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.
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.
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.
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.
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