By Charles Gubert
National hurdles impeding the pan-EU distribution of fund vehicles offered by EU asset managers should be removed, according to a report published by Open Europe and The New City Initiative (NCI), a think-tank representing the interests of asset managers.
The paper – “Asset Management in Europe: The Case for Reform” – estimates a UK-based fund manager marketing and distributing into all of the other 27 EU member states plus Switzerland would incur approximately €1.5 million in initial regulatory and administrative costs. It added these on-going costs to enable continued cross-border marketing would be around €1.4 million.
“The cost of marketing and distributing a fund across the EU is exponentially high. One must remember that many of these initial costs occur at a time before the manager has even had an opportunity to raise meaningful capital. This is a major impediment, particularly to boutique asset managers, many of whom are already grappling with significant regulatory costs,” said Dominic Johnson, chief executive officer at Somerset Capital Management, an emerging market-focused asset manager, and chairman of the NCI in London.
These added costs include regulatory charges for processing fund passports, and often apply to individual funds, meaning managers have to pay multiple times over if they are distributing more than one fund. Other expenditures include the appointment of local paying agents, fund documentation translation costs and legal fees, which vary in price markedly across jurisdictions.
Other major costs include taxation requirements, particularly in Germany and Austria. A long-only equity manager complained that tax transparency rules in Germany – which are notoriously strict – added another €30,000 in audit fees to his overall marketing costs.
The paper also referenced the challenges of marketing into emerging EU economies, where institutional investors, regulators and service providers may not have the same levels of familiarity and expertise in the fund management industry as more established jurisdictions such as Ireland.
One compliance expert cited in the paper stated that while the regulatory registration process in Slovenia was smooth, ensuring the fund met all of the necessary compliance obligations in advance of registration was onerous. One lawyer quoted also said that registration costs in Bulgaria were low but the appointment of a local paying agent could amount to 20 basis points of the Net Asset Value (NAV) of the fund.
This is despite UCITS IV theoretically prohibiting EU member states from imposing additional barriers to UCITS hoping to distribute across the EU. The paper also advocated EU based asset managers which do not market their funds into other EU member states be exempted from EU regulations given they do not take advantage of the passport. “We believe firmly that managers which do not take advantage of the pan-EU passport and simply market into their home member state should be excused from EU regulation and subjected to a lighter regulatory regime,” commented Johnson.
The paper also proposed increasing the asset threshold by which managers are ensnared under the EU’s Alternative Investment Fund Managers Directive (AIFMD) from €100 million to €500 million. The cost of AIFMD compliance should not be underestimated. A BNY Mellon study, for example, estimated initial AIFMD costs for managers could be around $300,000.
“The cost of AIFMD for small to mid-sized asset managers is high, and as such, increasing the Assets under Management (AuM) threshold for compliance would be welcome. Managers are already facing a number of regulatory costs such as the Markets in Financial Instruments Directive II (MIFID II) and the European Market Infrastructure Regulation (EMIR), and these are all impacting returns,” said Johnson.
Under AIFMD, EU managers can market to institutional investors either through national private placement regimes (NPPR), which vary according to country, or by adopting the pan-EU passport. The latter imposes additional requirements on managers. This includes the obligation to appoint a full-scope depositary bank subject to strict liability, to provide safekeeping of assets, cash-flow monitoring and oversight.
EU managers of non-EU funds utilising NPPR are allowed to appoint a depositary-lite, an entity with a similar mandate to a full-scope depositary, but not subject to strict liability. Non-EU managers marketing non-EU funds are not required to appoint a depositary-lite although some jurisdictions such as Germany have gold-plated the rules, and forced firms to appoint one. Managers must also supply highly detailed Annex IV reports to regulators in each of the jurisdictions where they are marketing although full-scope AIFMs using the passport are only obliged to supply a single Annex IV to their member state of reference.
The European Securities and Markets Authority (ESMA) is due to announce this week whether it will extend the passport to third countries which it believes have equivalent regulatory standards. There is speculation the approval process could be done a country-by-country basis.