The EU Directive 2019/1160, better known as: “the EU cross-border distribution of collective investment undertakings legislative package” was launched in July 2019, having been initially proposed by the EU Commission a year earlier.
The Directive comes into effect on 2 August 2021 and will affect all UCITS and Alternative Investment Funds (AIFs), meaning fund groups and asset managers operating in different jurisdictions will need to review their operations ahead of its implementation. But, with a number of outstanding questions still remaining unanswered at policy level, this is proving to be a difficult task for many fund groups.
What the Directive sets out to achieve
The Directive sets out a number of different measures which were designed to reduce regulatory barriers to the selling and distribution of investment funds across different jurisdictions in Europe. The Directive was designed to standardise different rules between European territories, improve transparency within the marketplace and provide economies of scale for the asset managers selling investment funds and the end investors who buy them.
The need for greater flexibility within the market was set out by the European Parliament, which found that prior to the development of the regulations, approximately 70% of investment funds were only registered for sale in their own domestic markets. Additionally, only 37% of UCITS funds and 3% of AIFs were registered for distribution in more than three EU member states.
What the Directive will introduce
The Directive and Regulations introduce a number of conditions from 2 August 2021 which will affect all UCITS funds and AIFs.
The Directive will impact:
- The pre-marketing of AIFs
- The provision of local facilities for AIFs and UCITS being marketed to retail investors
- A process to de-notify marketing of an AIF or UCITS in a host Member State
The Regulation will impact:
- Requirements around marketing communications
- Verification of marketing communications
- The publication of a central database containing national marketing requirements, fees and charges
- The creation of a list of AIFs, UCITS and their managers to improve transparency
With just several months until the Directive comes into effect, several updates have been introduced, which are causing a degree of uncertainty for fund groups. Points 1 and 2 of Article 1 of the Directive and the impact it has on Article 92 of Directive 2009/65/EC, are demanding a lot of attention at the moment, with new wording being introduced for Article 92:
- Member States shall ensure that a UCITS makes available, in each Member State where it intends to market its units, facilities to perform the following tasks:
- process subscription, repurchase and redemption orders and make other payments to unit-holders relating to the units of the UCITS, in accordance with the conditions set out in the documents required pursuant to Chapter IX;
- provide investors with information on how orders referred to in point (a) can be made and how repurchase and redemption proceeds are paid;
- facilitate the handling of information and access to procedures and arrangements referred to in Article 15 relating to the investors' exercise of their rights arising from their investment in the UCITS in the Member State where the UCITS is marketed;
- make the information and documents required pursuant to Chapter IX available to investors under the conditions laid down in Article 94, for the purposes of inspection and obtaining copies thereof;
- provide investors with information relevant to the tasks that the facilities perform in a durable medium; and
- act as a contact point for communicating with the competent authorities.
- Member States shall not require a UCITS fund to have a physical presence in the host Member State or to appoint a third party for the purposes of paragraph
- According to point 3 of Article 1, the facilities mentioned in point 1 must be provided in the official language or one of the official languages of the Member State where the UCITS is marketed, or in a language approved by the competent authorities of that Member State.
What questions remain?
The main issue is that although the Directive is to be implemented in just a few months’ time, EU regulators are still unable to provide any clarity regarding how the facility referred to in Point 1 (a) can or must be provided. Specifically, fund groups are requesting further guidance on:
- Does the facility have to be able to satisfy the KYC/AML (Know Your Client/Anti-Money Laundering) requirements of the Host jurisdiction? [The current assumption is that it will]
- If the facility is provided by a third party in the Host jurisdiction, will it be necessary for this entity to hold any type of authorisation in the Host jurisdiction?
The answers to these questions raise an interesting point in respect of what will the requirements be in jurisdictions that currently do not insist on the provision of a physical presence, such as the Netherlands? It may be that the fund will have to appoint a third party when they were not previously required to, if facilitation of the purchase and redemption of shares cannot be handled in any other way.
In addition to the questions regarding point (a) of Article 1, clarity is also required in respect of how the information referred to in points (b)-(e) of the Article will have to be provided to investors. Should this information be included in the fund’s prospectus, in a country specific addendum to the Prospectus or in a standalone document such as the Supplementary Information Document that is currently used in the UK?
For larger asset managers who already have offices in each jurisdiction where their funds are registered, there is probably not too much concern. Their existing physical presence will probably be able to provide the facilities without any major repurposing. However, smaller firms which do not currently have such presence still require more information. It may be the case that the implementation of the new Directive may not allow them to terminate the agreements with Paying Agents, and reduce the costs of cross-border distribution, as they had first hoped.
Unfortunately at the time of writing (May 2021), there remains a degree of uncertainty across different national regulators. It is likely for instance the Autorité des marchés financiers (AMF) will insist on the appointment of a third party, whereas in Denmark (one of the main providers of Paying Agent services), there has been a cessation in taking on new clients, where they have stated their services will no longer be required after 2 August 2021.
The CSSF in Luxembourg meanwhile, has signalled that they are likely to insist that whichever entity provides this facility will have to have a licence of some sort, which is probably likely to be at least a MiFID licence. The BaFin in Germany has also advised that unless it is the fund itself that is providing the facility, the third party will also have to have a licence.
If these two leading regulators are going to impose this type of requirement it is likely that others will follow suit. This will mean that, apart from managers that already have an office in the jurisdictions in which their fund is registered, it looks like it will be business as usual for everyone else and paying agents/facilities agents will still be required.
The GFR team are in constant communication with each of the EU regulators, urgently seeking the required clarification. We are also in contact with our network of European Paying Agents, Distributors and Representatives, to obtain further understanding of the new requirements and to discuss how their services may be re-purposed to meet the new requirements.