Documents considered by the Committee on 11 July 2018 Contents

4Asset management: cross-border distribution of funds within the Single Market

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; Scrutiny waiver granted for the ECOFIN Council of 13 July 2018; drawn to the attention of the Treasury Committee

Document details

(a) Proposal for a Directive amending Directive 2009/65/EC of the European Parliament and of the Council and Directive 2011/61/EU of the European Parliament and of the Council with regard to cross-border distribution of collective investment funds; (b) Proposal for a Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013

Legal base

(a) Article 53 (1) TFEU; Ordinary Legislative procedure; QMV; (b) Article 114 TFEU; ordinary legislative procedure; QMV



Document Numbers

(a) (39548), 6988/18 + ADDs 1–2, COM(18) 92; (b) (39549), 6987/18 + ADDs 1–2, COM(18) 110

Summary and Committee’s conclusions

4.1As part of its effort to create a Single Market for collective investment funds, the EU has legislated to create a number of types of funds and regulate fund managers, including ’undertakings for collective investment in transferable securities’ (UCITS), funds, aimed at small investors like households, and various types of Alternative Investment Funds (AIFs) such as hedge funds and European Venture Capital Funds. EU legislation for investments funds contains the so-called ‘passport’, allowing funds domiciled in one Member State to be marketed to investors, including individual savers, across the entire Union.

4.2However, use of the ‘passport’ for both UCITS and AIFs is subject to a number of regulatory requirements, for example relating to supervisory fees or restrictions on marketing materials. These rules are often imposed at the discretion of each individual EU Member State, and therefore vary from country to country. Partially as a result of these divergent regulatory practices, and despite the existence of the EU-level regulatory frameworks for UCITS and AIFs, funds remain largely constrained to national markets rather than the Single Market as a whole. EU investment funds representing 70 per cent of the total assets under management (AuM) are registered for sale only in their own Member State.

4.3In 2015 the European Commission announced that—as part of its Capital Markets Union (CMU) programme to increase the supply of capital to businesses (particularly from sources other than banks)—it would seek to address regulatory barriers that prevent funds from effectively using their ‘passport’ under EU law to grow, compete in different national markets, and maximise economies of scale to reduce the cost of investing.24 This was followed by a concrete legislative initiative to reduce the disparity between the way in which Member States regulate in these areas (and therefore make it easier for investment funds to ‘passport’ into new national markets within the European Economic Area).

4.4In practice, the Commission proposals would impose new restrictions on the leeway national regulators would have to set their own rules on the marketing of funds domiciled in another EU country. The new horizontal requirements would affect marketing communications, as well as so-called ‘pre-marketing’ activities,25 supervisory fees, and mandatory notifications to regulators by a fund when it makes changes to its operations. It would also ban Member States from requiring UCITS managers to maintain a physical presence if they ‘passport’ a fund into their territory. Other barriers to cross-border investment, particularly those related to taxation and market structure, were considered “out of scope” of this particular policy initiative.26 We summarised the detailed implications of the legislative proposals in some detail in our Report of 2 May 2018.

4.5The Government has been broadly supportive of the changes to the cross-border distribution of funds within the Single Market, although the Economic Secretary to the Treasury cautioned that any legislative change should “genuinely facilitate market access and […] not impose additional and unnecessary burden on firms across the EU” or “result in limitations on the distribution of funds”. It was particularly concerned about the provisions relating to pre-marketing requirements (which would entail a significant change to the way many funds currently operate by preventing firms from referring to existing funds in draft documents aimed at prospective investors).

4.6In our last Report, we also placed the proposal in the context of the UK’s withdrawal from the EU. The Government is seeking to secure a transitional arrangement, to take effect when the UK formally leaves the EU on 29 March 2019, during which the country would remain bound by EU law and therefore would also stay in the Single Market and the Customs Union. If the changes to the UCITS and AIFM Directives are adopted by the Council and the European Parliament, and become applicable, before the end of that transitional arrangement, they will have to be implemented by the UK. As such, we expressed our support for the Government’s efforts to remain fully involved in the legislative negotiations in Brussels.

4.7However, as and when the UK fully leaves the Single Market, its change of status to a ‘third country’ vis-à-vis the EU means that British UCITS funds and alternative investment funds are likely to have to relocate at least part of their activities to an EEA Member State to continue operating within the Single Market after the UK leaves that market (whether on 29 March 2019 or at the end of any subsequent transitional period).27 In contrast to the European Commission, the Government has not published a substantive assessment or overview of the implications of this change for the asset management industry’s operations in other EU Member States, or its overall functioning.

Developments since May 2018

4.8The Economic Secretary wrote to us on 4 July 2018 to inform us that the Member States were expected to adopt their common position on the proposals — a ‘general approach’ — to facilitate cross-border distribution of funds at a meeting of the ECOFIN Council on 13 July 2018. This amended version of the proposals will serve as the Austrian Presidency’s mandate for negotiations with the European Parliament on the final text of the Regulations.

4.9The Minister’s latest update confirms that Member States are largely agreed on the measures proposed by the Commission, demonstrated by the fact that they have agreed a common negotiating position for talks with the European Parliament within three months of the publication of the draft legal texts. However, the letter notes that “the most concerning aspect” of the proposals — the harmonisation of ‘pre-marketing’ requirements for funds — had been removed by Member States because it “would have restricted legitimate market practices, by preventing firms [from] circulating draft documents referring to existing funds”. The UK also secured support for an amendment that seeks to exempt closed end funds such as private equity from the new requirement for funds to offer to buy back units from existing investors if they cease to market in a particular EU country.

4.10 The changes made by the Member States are not yet final, as they also need to be agreed with the European Parliament under the ordinary legislative procedure. The Parliament’s Economic & Monetary Affairs Committee (ECON) has not yet published a timetable for its consideration of the draft legislation, so its position on the issues referred to above is not yet clear. Similarly, until there is more certainty about the proposals’ eventual entry into force we cannot be certain if this new legislation might have to be implemented in the UK during the proposed post-Brexit transitional period.28

4.11We thank the Minister for his update on progress in the discussions around fund distribution within the Single Market. In view of the possibility that the UCITS and AIFM Directives (as amended by the recent Commission proposals) will have to be applied in the UK under the post-Brexit transitional arrangement, and given the continued uncertainty about the extent of regulatory alignment under any future UK-EU financial services agreement (for example if the UK sought an ‘equivalence’ arrangement under the AIFMD), we retain the proposals under scrutiny.

4.12In light of the changes to the legal texts which the Treasury has secured, we are content to grant the Minister a scrutiny waiver ahead of the ECOFIN Council on 13 July, enabling the Government to support the General Approach. We also draw these latest developments to the attention of the Treasury Committee.

4.13We have also considered again the implications of Brexit for the UK asset management sector more generally. We continue to take the view that the extent to which UK-based fund managers can continue serving EU clients on a cross-border basis after Brexit will largely depend on:

4.14While the Government is largely supportive of the current framework around delegation by EU firms to non-EU firms, it also wants to go further in terms of bilateral market access. The Chancellor has been pushing for a new financial services trade agreement with the EU to maintain a similar level of market access to that enjoyed by the UK at present, based on mutual recognition of regulatory outcomes. Given that this approach has not been positively received in Brussels, we remain concerned about the lack of detail about its specific proposals. We hope the upcoming White Paper will provide more information in this regard, with a view to a detailed proposition being developed with the EU that can be included in the political declaration on the future partnership that is to be annexed to the Withdrawal Agreement.

4.15It is also still unclear if the Government, as a fall-back, could seek ‘equivalence’ in specific areas — for example under the Alternative Investment Fund Managers Directive — if a broader financial services agreement with the EU fails to materialise for whatever reason. We note that the Chancellor has dismissed equivalence as “piecemeal, unilateral and unpredictable” and unable to “provide the stability that a well-regulated market requires”.30 While we do not disagree with that assessment, it is not clear what other options the Government considers available if the mutual recognition proposals are not taken further.

4.16In absence of a preferential trade agreement or ‘equivalence’ decision, the Treasury and industry would have to settle for an abrupt transition of British financial services providers from ‘Single Market’ recognition of their licences to pure ‘third country’ status without any type of privileged access to the EU market (and therefore giving it less access overall than competitors in the US, Hong Kong and Australia, all of which have a number of equivalence decisions already in place). The Committee will continue to report to the Treasury Committee and the House more widely about developments on EU legislative files which are relevant in this regard.

Full details of the documents

(a) Proposal for a Directive amending Directive 2009/65/EC of the European Parliament and of the Council and Directive 2011/61/EU of the European Parliament and of the Council with regard to cross-border distribution of collective investment funds: (39548), 6988/18 + ADDs 1–2, COM(18) 92; (b) Proposal for a Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013: (39549), 6987/18 + ADDs 1–2, COM(18) 110.

Previous Committee Reports

See Twenty-Sixth Report HC 301–xxv (2017–19), chapter 3 (2 May 2018).

24 European Commission document COM(2015) 468, “Action Plan on Building a Capital Markets Union”, p. 24.

25 The proposed Regulation would introduce a legal definition of, and restrictions on, “pre-marketing” for alternative investment funds (but not UCITS funds, because pre-marketing — in the Commission’s view — should be targeted only at professional investors and not retail investors). The amendment would provide a clear legal basis for AIF managers to test investors’ appetite for upcoming investment opportunities without triggering any notification requirement (which is currently the case in some Member States).

26 The Commission argued that tax and market structure should not be addressed in these proposals because they would respectively require a different legal basis (matters of tax being subject to a unanimity requirement among all Member States, compared to the qualified majority for Single Market issues) or because work is already underway at EU-level to make the market structures for distribution and intermediation channels for investment funds more efficient.

27 The draft Withdrawal Agreement contains provisions for a transitional arrangement, lasting until 31 December 2020, during which the UK would effectively stay in the Customs Union and the Single Market.

28 Under the draft Withdrawal Agreement, the UK would continue applying EU legislation during a transitional period to temporarily remove the need for new customs and regulatory controls on UK-EU trade. That arrangement is due to last from 30 March 2019 until 31 December 2020.

29 We have noted with concern that the European Commission and the European Securities & Markets Authority (ESMA) have repeatedly hinted that the delegation of asset management services by EU funds to non-EU entities could be restricted. We welcome the Minister’s remarks in his latest letter in support of existing delegation practices.

Published: 17 July 2018