As part of the overall plan toward achieving capital markets union ("CMU"), the European institutions are increasingly focused on the streamlining and convergence of regulation in the asset management and financial services landscape.
In its April 2016 response to the EU Commission green paper on retail financial products, ESMA had pointed to inconsistencies among the UCITS, AIFMD, PRIIPs and MiFID II frameworks citing, for example, variations in costs disclosure requirements under PRIIPs, MiFID II and the UCITS KIID.
ESMA followed up this theme in its January 2017 Opinion with regard to the scope of supervisory authority product intervention powers under the Markets in Financial Investments Regulation (600/2014) (MiFIR) calling for a consistent application of these powers to include fund management companies which may provide certain MiFID services (which are currently exempt from MiFIR), in order to reduce the risk of regulatory arbitrage. Such arbitrage may arise where a type of fund that is restricted or banned under MiFIR could be distributed through fund management companies if they decided to market or distribute the funds themselves.
The Opinion notes that where there are financial group structures containing MiFID firms and fund management companies, if a restriction was applied to the MiFID firm, the group could circumvent the ban by channelling the marketing of the product subject to the restriction through the fund management companies within the group, which would be outside the scope of the MiFIR intervention power. (There are of course other means which state supervisory authorities could use to prevent such marketing abuses, but not under MiFIR).
In publishing its 2017 Supervisory Convergence Work Programme on 9 February, ESMA indicated that it would continue to devote more and more resources to supervisory convergence and, in particular, to the sound, efficient and consistent application of the AIFMD. A wide range of activities will be undertaken in this context in 2017, in particular on delegation arrangements including:
Common approaches to delegation of collective portfolio management and depositary functions under the UCITS Directive and AIFMD, including promoting a common understanding of the “substance” requirements for UCITS management companies and AIFMs;
Follow-up to the consultation on asset segregation under AIFMD;
Development of a common procedure for the operation of the powers to impose leverage limits on an AIFM or group of AIFMs;
Information gathering and sharing of experiences on supervisory actions in relation to liquidity management tools; and
Development of common practices on fees and expenses of investment funds (subject to resource availability).
Work will also continue to support the consistent application of the UCITS framework, with consideration given to the development of common approaches to the rules on eligible assets in the UCITS Directive.
On 24 March 2017, the European Commission re-published a report, which assesses how to tackle national barriers to capital flow, with a view to accelerating the CMU. The report lists a roadmap of proposed actions together with possible deadlines and the Commission invited Member States to discuss and agree on the actions set out in the roadmap within the timeframes suggested.
In relation to investment funds, the roadmap of proposed actions makes a number of suggestions including that:
Member States should continue reviewing national rules with a view to promoting common understanding and regulatory convergence of pre-marketing and reverse solicitation by Q4 2017.
Member States should ensure that all fund notification-related fees should be published in a comprehensive and user-friendly manner on a single website by Member States by Q4 2017.
An expert group, together with ESMA, should consider setting up a single public domain for fee-related information, in the form of a comparative website or a central repository.
The report also discussed the barriers to the cross-border distribution of investment funds, noting that despite the success of the marketing passport the distribution of funds remains geographically limited and that the reasons for this include: marketing requirements and disparities in national rules and supervisory approaches; administrative arrangements; and regulatory fees for cross-border marketing. It also raised the question of residence and location requirements for managers in certain jurisdictions, suggesting that they should be removed where they are not justified, suitable or proportionate.
In light of these developments at EU level, industry can expect to see a continued forward movement towards regulatory convergence in the asset management space.
Contributed by Patricia Taylor of William Fry.