The Central Bank of Ireland (CBI), the Irish regulator, has said it welcomes the EU’s ambitious Capital Markets Union (CMU) project but tacitly acknowledged the challenges of pushing it through member states should not be underestimated.
The CMU is an initiative designed to boost non-bank lending into the real economy thereby reducing the reliance on banks. At present, the CMU is little more than a vague action plan of reform although several areas contain more details than others. The first is the European Long Term Investment Funds (ELTIFs) initiative, which creates a new type of infrastructure fund regulated under the Alternative Investment Fund Managers Directive (AIFMD), and available to retail and institutional investors. The second is a framework proposing a harmonisation of the rules governing securitization issuances.
Another area that is being scrutinised is the national barriers and impediments facing fund managers when marketing and distributing their investment vehicles across the EU. “We welcome the CMU but it is going to be a tough challenge pushing it through. We welcome the CMU’s review of the issues facing fund managers when distributing across member states, and we have seen a number of interesting responses to this,” commented Martina Kelly at the CBI.
UCITS IV theoretically removed impediments at a national level to UCITS distribution. While improvements have been made, different member states have introduced barriers around registration, taxation, appointment of local agents and documentation requirements. A paper – “Asset Management in Europe: The Case for Reform” – published by the New City Initiative (NCI), a UK think tank representing asset managers, estimated a UK-based fund manager marketing and distributing into each EU member state plus Switzerland would incur €1.5 million of initial regulatory and administrative costs. The paper added the annual cost of continued cross-border marketing amounted to €1.4 million.
While the AIFMD creates a pan-EU passport for EU domiciled funds and certain third country funds, it is expected similar impediments will emerge too. Lawyers attending GAIM Ops in Dublin last week confirmed national regulators were introducing gold plating to AIFM distribution and conceded it was likely there was going to be a more haphazard approach to member state distribution rules under AIFMD than UCITS. Many hoped that CMU will amend this, but acknowledged that obtaining any agreement could be difficult, given the level of hostility among some member states towards asset managers, particularly hedge funds and private equity.
Comments on the European Commission’s (EC) CMU green paper by the European Fund and Asset Management Association (EFAMA) recommended streamlining regulatory reporting obligations under UCITS, AIFMD and Money Market Funds Regulation (MMF). EFAMA said these reporting requirements occur at different frequencies, have different formats and content, and collectively added enormous unnecessary costs to fund managers offering diverse product sets. The EFAMA response also highlighted the risk indicators for investment funds were different under Solvency II and the Capital Requirements Directive IV (CRD IV), and this too added to the complexity and costs of reporting. Harmonizing these rules under CMU should be a key focus.
While the emergence of a new fund product – ELTIFs – is also welcome, lawyers and fund managers report the vehicle has not yet gained momentum. ELTIFs, which will be launched in December 2015, must invest 70% of their capital into illiquid assets such as infrastructure, real estate and private loans while keeping the remaining 30% in liquid assets which meet UCITS eligibility criteria. These vehicles cannot allow redemptions until at least the half-life of the fund, and even then this is discouraged. It is feared that retail investors might not fully recognize their assets are going to be locked up for seven years, so managers must stress this point during the initial marketing process. However, some are hopeful large private equity managers might launch ELTIFs although they will need to adjust their marketing and distribution models to cater to retail clients.