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
harmonization 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.