A report commissioned by France’s market regulator, which contains the findings of new research into the barriers to cross-border distribution of investment funds across Europe, reveals that the EU’s existing fund passporting system is “working well”, but that a strong home-market bias remains – reflecting client attitudes – and that proposed regulations could have an impact.
In terms of market share, France leads the way in passporting, with a 44% share of the European passported funds market as of April 2016, according to Lipper data, compared with a 38% stake held by Luxembourg and a 13% share of the market held by Ireland.
The study was conducted for the Autorité des marchés Financiers (AMF) by PwC, and also reveals that, according to European Commission data, some 80% of European UCITS funds and 40% of alternative investment funds (AIFs) currently possess a cross-border passport.
PwC estimates that there were 74,000 European passports in existence at the end of 2014 (UCITS and AIFs combined), including 49,000 from Luxembourg and 15,000 from Ireland.
The preferred destinations of all these cross-border funds were Germany, Switzerland and Austria.
More than 10,000 passports
Overall, according to the PwC data, 10,430 European funds had passports to provide services in at least three European countries, including the country in which they were domiciled, at the end of 2014, a number that has constantly risen since 2003.
“Within Europe, the penetration of foreign funds varies considerably from one country to the next, but often accounts for more than half of the funds marketed in a given country,” the report says.
“In particular Luxembourg funds are well established in most European countries, including Ireland, which itself exports many funds to other European countries.”
Cost ‘not a barrier’
The AMF report points out the annual cost of maintaining a fund passport is not a barrier, being very low, and representing between 0% and 0.0016% of the average amount of assets under management.
However, it identifies several burdens to cross-border distribution, among which remain the distribution networks’ preference for their own products; the necessity of adapting to local consumer profiles; tax issues; and consumers strong home-country bias.
The need to understand and accommodate the applicable tax issues and the local legal environment represents an additional cost for European funds looking to be marketed outside their own territory, the AMF report says.
With respect to the home market bias on the part of consumers, the report quotes from a European Commission survey that shows some 94% of Europeans interviewed said they had never bought a financial product originating outside of their own country, and 80% said they would never do so.
The AMF includes in its report a number of proposals it says would address some of the barriers to passporting that the report flags up:
* Modernise the existing marketing networks that drive cross-border fund sales:
Say the report’s authors: “European funds have already begun to benefit from the digitisation of distribution networks, which has reduced the advantages of a local presence or familiarity with customary retail distribution networks.
“These technological developments support greater penetration by European funds in domestic markets, and should enable the resources of retail investors to be allocated more efficiently.”
* Take advantage of the growing use of the internet and social networks:
The internet and social networks represents an opportunity for fund marketeers “to reach out to the captive customers of the bank networks”
* Promote the open architecture model, in spite of growing regulatory pressures that encourage more closed distribution models:
The AMF says it remains vital that the potential impact on open architecture distribution models be considered by European institutions before any new legislation is proposed. In addition, it backs the idea of harmonising marketing rules in their definition and restrictions, finding that marketing and pre-marketing rules need to be more comparable within Europe.
“Stiffer restrictions for distributors of savings products could lead these [fund management] firms to fall back to closed distribution architectures, offering customers only products created by their own group or by selected partners,” the AMF report’s authors say.
“This would be an unwanted effect of European regulations, which, though intended to offer investors more protection, would end up prompting firms to drastically curtail their ranges,” the French regulator explains in its report, quoting issues encountered with Mifid II and the recently rejected regulatory technical standards of Priips.
Earlier this year, the AMF gave the green light to fund managers to pre-market their funds in France for the first time, a bid to improve the attractiveness of the French asset management industry and local investments funds to foreign investors.
“The current disparities mean that constraints differ across countries,” the AMF said in its report.
“Clarification is needed to ensure equivalent treatment across the entire area.
“In the first place, the non-uniformity of marketing rules at European level is one of the European passport’s weak points, a point stressed by ESMA in its review of the AIF passporting system. Even the definition of what constitutes marketing is not the same across Europe.”
The French market regulator suggests as well that the opening-up of networks should be accompanied by reforms to FPS supervision in Europe.
“AMF would like to see a shared discussion at European level about these new consumer practices, giving consideration for example to new rules to redefine the notions of territoriality and advice in the digital era.
“Other initiatives could take the form of shared digital supervision rules or a common cooperation and enforcement framework for digital financial services. Having shared rules would also enable Europe to position itself as an international leader on these emerging issues.”
Key information documents
Lastly, the AMF report calls for ensuring that all investment funds’ documents presented to retail investors are clear, and written in a language that they know. It also promotes an enhancement of financial literacy among European retail investors, to give them a better understanding of their investment activities.
“The AMF firmly believes that the host authority is best placed to assess the compliance of marketing and advertising materials within its territory,” the report says.
“Accordingly, the AMF would like the central role of the national regulatory authorities to be enshrined, to ensure that supply is suited to the characteristics of demand, particularly as regards the marketing documentation of European funds.”
To read the AMF report, click here.
This article was first published by International Investment‘s sister publication, Investment Europe.