Explanatory Memorandum to COM(2018)110 - Facilitating cross-border distribution of collective investment funds - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2018)110 - Facilitating cross-border distribution of collective investment funds. |
|---|---|
| source | COM(2018)110  |
| date | 12-03-2018 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The Commission has today adopted a package of measures to deepen the Capital Markets Union (‘CMU’) together with the Communication "Completing Capital Markets Union by 2019 – time to accelerate delivery". The package includes this proposal and a proposal for a Directive amending Directive 2009/65/EC 1 and Directive 2011/61/EU 2 with regard to cross-border distribution of collective investment funds, as well as a proposal for an enabling EU framework on covered bonds, a proposal for an enabling framework on European crowdfunding service providers (ECSP)for businesses, a proposal on the law applicable to the third-party effects of assignments of claims, and a Communication on the applicable law to the proprietary effects of transactions in securities.
This proposal is expected to reduce the cost of going cross-border and should support a more integrated single market for investment funds. Increased competition in the EU will help to give investors more choice and better value.
This proposal was scheduled in the Commission Work Programme 2018 3 and should be seen in the broader context of the CMU action plan 4 and the CMU Mid-Term Review 5 , to establish a genuine internal capital market by addressing fragmentation in the capital markets, removing regulatory barriers to the financing of the economy and increasing the supply of capital to businesses. Regulatory barriers, namely Member States’ marketing requirements, regulatory fees and administrative and notification requirements represent a significant disincentive to the cross-border distribution of funds. These barriers were identified in response to the Green Paper on Capital Markets Union 6 , the Call for Evidence on the EU regulatory framework for financial services 7 and the public consultation on barriers to the cross-border distribution of investment funds 8 .
Investment funds are investment products created with the sole purpose of pooling investors’ capital, and investing that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities. In the EU, investment funds can be categorised as undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs) managed by alternative investment fund managers (AIFMs). UCITS are covered by Directive 2009/65/EC, and AIFs are covered by Directive 2011/61/EU. Directive 2011/61/EU is complemented by four fund frameworks:
·Regulation (No) 345/2013 9 on European venture capital funds,
·Regulation (No) 346/2013 10 on European social entrepreneurship funds,
·Regulation 2015/760 11 on European long-term investment funds and
·Regulation 2017/1131 12 on money market funds.
The shared purpose of these rules is notably to make cross-border distribution easier while ensuring a high level of investor protection.
Rules for EU investment funds allow managers of investment funds to distribute, and with some exceptions, also to manage their funds across the EU. While EU investment funds have seen rapid growth, with a total of EUR 14 310 billion in assets under management in June 2017 13 , the EU investment fund market is still predominantly organised as a national market: 70 % of all assets under management are held by investment funds authorised or registered for distribution only in their domestic market. Only 37 % of UCITS and about 3 % of AIFs are registered for distribution in more than three Member States. Compared to the United States, the EU market is smaller in terms of assets under management. However, there are considerably more funds in the EU (58 125 in the EU compared to 15 415 in the US) 14 . This means EU funds are on average significantly smaller. This has a negative impact on economies of scale, the fees paid by investors, and the way in which the internal market operates for investment funds.
This proposal also recognises that there are also other factors outside its scope which are holding back the cross-border distribution of investment funds in the EU. These factors include national tax regimes applicable to investment funds and investors, vertical distribution channels and cultural preferences for domestic investment products.
• Consistency with existing policy provisions in the policy area
This proposal is presented together with a Directive amending Directive 2009/65/EC and Directive 2011/61/EU with regard to cross-border distribution of collective investment funds. It focuses solely on cross-border distribution of investment funds. It introduces new or amends existing elements of the relevant legislation. These new elements or amendments are consistent with objectives of the existing policy provisions in the policy area, which aim to establish a single market for investment funds and facilitate the cross-border distribution of investment funds. The proposal also aligns the rules for different types of investment funds. Hence, consistency with existing policy provisions is safeguarded.
• Consistency with other Union policies
The Commission’s top priority is to strengthen the EU economy and stimulate investment to create jobs. A key element of the Investment Plan for Europe 15 , which aims to strengthen Europe’s economy and encourage investment in all 28 Member States, is creating a deeper single market for capital – a CMU. Deeper and integrated capital markets will improve the access to capital for companies while aiding in the development of new investment opportunities for savers.
This proposal is complementary to this objective and a priority action in the CMU mid-term review 16 , as it contains measures to remove capital market barriers. It contributes to the development of more integrated capital markets by making it easier for investors, fund managers and invested undertakings to benefit from the single market.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal falls within the area of shared competence in accordance with Article 4(2)(a) of the Treaty on the Functioning of the European Union (TFEU).
The legal basis for action is Article 114 TFEU. The choice of this legal base reflects the crucial role that a harmonised passporting regime plays in the operating of an internal market for investment funds.
It is vital to make it easier for investment funds to provide services and thus to achieve a more competitive and integrated internal market within the Union. Regulatory barriers to cross-border distribution currently prevent the internal market for investment funds from operating properly. The regulatory barriers fragment the internal market and make it difficult for investment funds to fully benefit from the internal market. Therefore, to ensure that the internal market for investment funds operates properly and to improve the conditions in which it operates, a regulatory framework that reduces barriers to the cross-border distribution of investment funds at Union level is necessary. That is why the proposal aims to harmonise the behavioural requirements for investment funds, i.e. marketing communications to potential investors, and transparency of the provisions falling outside the fields governed by Directive 2009/65/EC and Directive 2011/61/EU, thus allowing for the facilitation of a cross-border passport mechanism.
• Subsidiarity (for non-exclusive competence)
This proposal complies with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union (TEU).
Harmonising EU rules on marketing communications to potential investors and bringing more transparency to the provisions falling outside the fields can be conducive to the development of more integrated capital markets for investment funds throughout the Union. The aim of the proposal is thus to ensure that the internal market for the services of investment funds operates smoothly. This is not limited to the territory of one Member State and cannot be achieved by the Member States at national level. Also, the proposal creates additional tasks for the European Securities and Markets Authority (ESMA) established under Regulation (EU) No 1095/2010 17 which cannot be achieved by Member States acting individually.
• Proportionality
This proposal complies with the principle of proportionality as set out in Article 5 TEU.
The impact assessment contains initial estimations on cost savings based on factual and realistic assumptions. The proposal will reduce the compliance burden and costs for investment funds by increasing transparency. Although the development and maintenance of ESMA databases require input from the competent authorities in the Member States (notably notifications to ESMA), the financial efforts expected from Member States will be limited. The data gathered will allow ESMA to better perform its convergence role. Increased competition in the investment funds sector will have a positive effect on the choice available to investors and on Member States’ economies.
• Choice of the instrument
This proposal includes provisions which give investment funds more legal certainty to provide services. The lack of transparency of regulatory barriers observed in Member States would not be solved solely by amending Directive 2009/65/EC and Directive 2011/61/EU, as this could give rise to an uneven implementation.
Moreover, those rules proposed in this Regulation which addressed to ESMA and the national authorities, are technical in nature and self-standing. The proposal aims to increase transparency on the rules and procedures applicable to (cross-border) marketing of investment funds and regulatory fees and charges levied by national competent authorities. A directly applicable regulation, providing full harmonisation, is necessary to achieve these policy objectives. A regulation is also a suitable legal means to task ESMA to develop and maintain databases on national marketing communication rules, applicable fees and charges as well as for storing notifications. A Regulation, therefore, should best deliver maximum harmonisation avoiding divergences and thus ensuring greater regulatory convergence.
It is also proposed to introduce limited changes to Regulation (EU) No 345/2013 and Regulation (No) 346/2013 to mirror an introduction of the notion and conditions for pre-marketing in a separate directive proposing amendments to Directive 2011/61/EU. Amendments to the Regulations therefore must be introduced by a Regulation.
In addition, it is proposed to introduce limited changes to Directive 2009/65/EC and Directive 2011/61/EU with regard to cross-border distribution of collective investment funds. For this purpose, this proposal is presented together with a Directive amending those Directives (which is proposed separately).
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
In preparing this proposal, the Commission has carried out an in-depth evaluation of relevant provisions of Directive 2009/65/EC and Directive 2011/61/EU and additional requirements imposed by Member States.
This evaluation showed that despite its relative success, the single market falls short of realising its full potential for the cross-border distribution of investment funds since the funds still face many barriers. In addition, the legal requirements and administrative practices which fall outside the harmonisation introduced by Directive 2009/65/EC and Directive 2011/61/EU lack transparency. The Commission’s evaluation revealed that Member States take very different approaches to the requirements and verifications of marketing communications. There is also a wide variation in the fees and charges levied by the national competent authorities for supervisory tasks in accordance with Directive 2009/65/EC and Directive 2011/61/EU. These are all barriers to a wider cross-border distribution of investment funds.
• Stakeholder consultations
Responses to two consultations suggested that regulatory barriers to the cross-border distribution of investment funds prevented the full benefits of the single market from being realised. The first consultation, the Green Paper on Capital Markets Union, was launched on 18 February 2015. The second consultation, the Call for Evidence on the EU regulatory framework for financial services, was launched on 30 September 2015.
Additional information on national practices was sought from competent authorities and ESMA. At the Commission’s request, ESMA conducted a survey of competent authorities in 2016, requesting details about current national practices in areas such as regulatory fees and marketing requirements.
Based on the input received from the CMU Green Paper and the Call for Evidence and ESMA’s survey, the Commission launched a public consultation on 2 June 2016 on the cross border distribution of investment funds 18 . Given the feedback already received, the consultation sought practical examples of the problems faced and evidence of their impact. To receive a high number of replies, the Commission organised roadshows with asset management associations and their members in the main asset management hubs in the EU, i.e. Luxembourg, France, Ireland, the UK, Germany and Belgium. Several meetings and conference calls were held with European and national investor associations, and the consultation was presented to the Financial Services User Group on 15 September 2016. In total, 64 responses were received: 52 from associations or companies, 8 from public authorities or international organisations and 4 from individuals. Most responses indicated that regulatory barriers were a significant disincentive to cross-border distribution.
At the Commission’s request and based on the evidence received, ESMA conducted a follow-up survey in 2017 to obtain further information about specific marketing practices and notification requirements in Member States.
The Commission also organised meetings with the investment fund industry and European investor associations for more information. A questionnaire was sent on 30 May 2017 to eight trade bodies on the various areas covered by the cross-border distribution of investment funds. There was a particular focus on quantifying the costs caused by the regulatory barriers to cross-border distribution and determining the potential benefits of removing these barriers for asset managers and investors. Feedback suggested that the costs due to regulatory barriers are substantial: they amount to 1 to 4 % of the overall expenses of an investment fund. Also, a targeted survey of 60 equally represented small, medium-sized and large investment funds based on a randomised stratified sampling procedure was conducted in October 2017. The survey confirmed the relevance of the regulatory barriers and the need for action at EU level.
The Commission also consulted stakeholders in June and July 2017 through an inception impact assessment 19 . The five responses received from asset managers, their associations and financial advisors’ associations supported the Commission initiative to reduce the barriers to the cross-border distribution of investment funds.
• Collection and use of expertise
The Commission relied on information and data from Morningstar 20 , the European Fund and Asset Management Association (EFAMA) and market reports and studies by private companies. Additionally, academic literature was reviewed, in particular literature on the impact of cross-border distribution on competition and expected consumer behaviour.
• Impact assessment
An impact assessment was carried out to prepare this initiative.
On 1 December 2017, the Regulatory Scrutiny Board delivered a positive opinion with recommendations to further improve the draft impact assessment report. The draft report was subsequently modified to take into account the Board’s comments 21 . The main changes recommended by the Board related to:
·factors that affect cross-border distribution not covered by the initiative,
·a description in the baseline of recent initiatives that have an (indirect) impact on the cross-border distribution of funds,
·the structure, presentation, assessment and comparison of the options and
·the presentation, documentation and the qualification of the quantitative methods and their results.
The revised impact assessment report and an executive summary of the impact assessment report are published with this proposal 22 .
Contents
The impact assessment report considers a range of policy options. Based on their assessment, the policy choices are as follows:
(a)National marketing requirements should be more transparent at national and EU level. In addition, the definition of pre-marketing in Directive 2011/61/EU should be harmonised, and the process of checking marketing material should be framed more clearly.
(b)Regulatory fees should be more transparent at EU level, and high-level principles should be introduced to ensure more consistency in the way regulatory fees are determined.
(c)The choice of facilities to support local investors should be left to managers of investment funds, with safeguards for investors.
(d)The procedures and requirements for updating notifications and de-notification of the use of the marketing passport should be harmonised more.
Together, the policy choices significantly reduce regulatory barriers. They increase the potential to have more funds marketed cross-border, improve competition, lower market fragmentation and give investors more choice in the EU. The policy choices also have indirect benefits because of their social and environmental impact. More cross-border distribution should lead to more opportunities to invest in investment funds pursuing social or environmental goals. This in turn could accelerate growth in these areas.
For all investment funds currently marketed on a cross-border basis in the EU, the policy choices together are expected to save an annual EUR 306 to 440 million in costs (recurrent costs). The savings in one-off costs is expected to be even higher: EUR 378 to 467 million. These cost reductions should act as incentives to develop more cross-border activities and support a more integrated single market for investment funds.
This Regulation covers policy choices (a) and (b). The Directive amending Directive 2009/65/EC and Directive 2011/61/EU which is proposed separately covers policy choices (c) and (d).
• Regulatory fitness and simplification
This proposal should lead to significant cost reductions for managers of investment funds that distribute, or intend to distribute, their funds cross-border in the EU. These cost reductions will in particular have a positive effect on managers of funds who either manage a smaller number of investment funds or investment funds with less significant assets under management, since they have a smaller base over which they can spread the costs.
Although this proposal does not directly target small and medium sized enterprises (SMEs), the SMEs will indirectly benefit from this proposal. Increased cross-border distribution of investment funds will in fact accelerate the growth of EU investment funds and their investments in SMEs, in particular from venture capital funds.
• Fundamental rights
The EU is committed to high standards of protection of fundamental rights. In this context, the proposal is not likely to have a direct impact on those rights, as listed in the Charter of Fundamental Rights of the European Union.
4. BUDGETARY IMPLICATIONS
·prepare regulatory and implementing technical standards, and
·develop and maintain databases that the public can use for free.
The specific budgetary implications for ESMA are assessed in the financial statement accompanying this proposal.
Pending the recent review of the European Supervisory Authorities, the proposal has implications for the Union budget in the form of the Commission’s 40 % share in financing ESMA.
5. OTHER ELEMENTS
·Evaluation
An evaluation of this Regulation and the proposal for a Directive amending Directive 2009/65/EC and 2011/61/EU with regard to cross-border distribution of collective investment funds will be conducted five years after the entry into force of this Regulation. The Commission will rely on a public consultation and discussions with ESMA and competent authorities.
·Detailed explanation of the specific provisions of the proposal
Article 1 introduces the definitions.
Article 2 on requirements on marketing communications contains principles which marketing communications must fulfil, namely (i) the communications are identifiable as such, (ii) present the risks and rewards of purchasing units or shares of AIFs and UCITS in an equally prominent manner and (iii) all information included in marketing communications is fair, clear and not misleading. It is broadly based on Article 77 of Directive 2009/65/EC and extends the scope of application to Directive 2011/61/EU.
Articles 3 and 4 introduce a transparency framework for national provisions on marketing requirements. The competent authorities will publish online all applicable national laws, regulations and administrative provisions governing marketing rules for AIFs and UCITS, and their summaries, in at least a language customary in the sphere of international finance, requesting the publication in that language next to the official languages or one of the official languages used in a given Member State. ESMA will be notified of this information and will publish and maintain on its website a dedicated central database. To streamline the information flows between the competent authorities and ESMA, Article 3 lays down an empowerment for implementing technical standards to determine standard forms, templates and procedures for the notifications.
Under Article 5, where competent authorities require systematic notification of marketing communications in order to verify compliance of such communications with relevant national provisions on marketing requirements, the competent authorities must decide within 10 working days. The verification may not constitute a prior condition for marketing. Article 5 also establishes that the competent authorities must apply and publish applicable procedures ensuring transparent and non-discriminatory treatment regardless of the origin of the verified investment fund. The competent authorities each year must inform ESMA of the decisions rejecting or requesting adaptations to marketing communications. To ensure a coherent treatment of retail investors, these requirements should also be applied by AIFMs where Member States allow them to market units or shares of AIFs to retail investors in their territories.
Article 6 lays down that where the competent authority levies fees or charges, such fees or charges must be proportionate to supervisory tasks carried out, and the relevant invoices must be sent to the registered offices of the AIFMs or UCITS management companies.
Article 7 sets out that the competent authorities have to publish and maintain on their websites central databases on the fees or charges or relevant calculation methodologies. The information is to be made available in at least a language customary in the sphere of international finance. The system provides for notifications by competent authorities of the relevant information. To streamline the information flows between the competent authorities and ESMA, ESMA must develop implementing technical standards to determine standard forms, templates and procedures for the notifications.
Article 8 entrusts ESMA with the task of publishing and maintaining online an interactive central database with the fees or charges charged by the competent authorities, or, where applicable, with the calculation methodologies used.
Article 9, as part of the interactive central database introduced by Article 8, provides for an interactive tool on fees and charges that allows the user to perform online calculations.
Article 10 introduces a requirement on ESMA to publish and maintain on its website a central database on all AIFMs, UCITS management companies, AIFs and UCITS. This database builds on information received by ESMA in accordance with Article 6(1) of Directive 2009/65/EC and Article 7(5) of Directive 2011/61/EU and notifications and notification letters received by the competent authorities under those Directives, as notified to ESMA in accordance with Article 11(1) of this Regulation.
Under Article 11 the competent authorities are required to transmit notifications and notification letters referred to in Article 10 to ESMA. To standardise and streamline the information flows between investment funds/AIFMs or UCITS management companies and the competent authorities and the competent authorities and ESMA, this Article also lays down an empowerment for regulatory and implementing technical standards.
Articles 12 and 13 introduce the concept of pre-marketing in Regulation (EU) No 345/2013 and Regulation (EU) No 346/2013. The change would allow managers registered in accordance with those Regulations to target investors by testing their appetite for upcoming investment opportunities or strategies through pre-marketing. This change would warrant a level playing field with managers authorised under Article 6 of Directive 2011/61/EU benefiting from that concept introduced by [reference a Directive amending Directive 2009/65/EC and Directive 2011/61/EU with regard to cross-border distribution of collective investment funds].
Article 14 lays down 60 months after the date for entry into force of this Regulation the Commission shall carry out an evaluation of this Regulation.