- Wolf Klinz – Managing Partner, 3C Consulting and Capital Co. Ltd
- Jean-Marc Goy – Counsel for International Affairs, Commission de Surveillance du Secteur Financier (CSSF)
- James Hopegood – Policy Analyst, DG Financial Stability, Financial Services and Capital Markets Union, European Commission
- Jean-Paul Servais – Chairman, Financial Services and Markets Authority (FSMA), Chairman, IOSCO European Regional Committee & Chairman, Investor Protection and Intermediaries Standing Committee (IPISC) established by ESMA
- Eric Derobert – Manager, Group Head of Communications & Public Af- fairs, CACEIS
- Luis Freitas de Oliveira – Chairman, Capital Group’s Luxembourg domiciled Funds, Capital International Sarl
- Jo Van de Velde – Executive Managing Director, Product Management, Euroclear S.A./N.V.
Differing domestic rules continue to affect cross-border UCITS distribution in the EU but the actual impact of these differences needs to be further assessed
The panellists commended the success of the UCITS directive in developing an EU cross-border fund market and the more recent launch of the Alternative Investment Fund Managers Directive (AIFMD). An industry representative however warned that this success should not be a reason for complacency since the growth of open-ended funds in Europe has not been faster than in the US; there has been major growth in the use of open-ended funds for retirement savings for example in the US, which has not been the case in Europe.
There is a fairly large number of differences in the way rules that impact the fund sector are applied across the EU, some panellists stressed, related for example to fund registration, taxation (e.g. the treatment of withholding tax) or Know Your Customer checks (KYC). These different measures may be perfectly reasonable taken individually but may have significant cumulative impacts for the industry a panellist emphasized. A regulator however considered that these differences have not led to insurmountable problems so far and that they should be further assessed before embarking on new actions, as the time has come for a “regulatory break”. Some differences across EU Member States are also related to the fees charged by the competent authorities; these fees are justified and are a legitimate component of the UCITS framework, a panellist emphasized, since they cover the cost of regulating each market.
Other sources of fragmentation are distribution and investor protection rules that impact investment funds i.e. the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and more particularly MiFID II. In order to ensure that appropriate products are offered to retail investors, some domestic regulators have put in place specific rules to ban products that they consider too complex. The example of a four year moratorium implemented in Belgium to suspend the marketing of some structured products was given; joint work between the industry and the regulators resulted in the complexity of these products being significantly reduced with no negative impact on the volumes of the local structured product market, a regulator explained. Domestic regulators should have the right to prevent potentially dangerous products from being offered to the general public, but such an approach should not be extended to the 95% of the UCITS market which are plain vanilla products a panellist emphasized, as this would strongly hinder the EU cross-border fund market.
The issue of the smaller size of EU funds compared to US ones was also raised; this could be seen as a possible consequence of the fragmentation of EU rules affecting funds A regulator however considered that this comparison was not necessarily appropriate given the other differences that exist between the US which is one nation and the EU which is comprised of 28 different Member States.
Much progress has been made in the automation of cross-border fund transactions in the EU
About 80% of cross-border fund transactions (subscription and redemption of shares) are automated at present. There are no longer any strong incentives to further automate processes from a risk perspective, some panellists stressed, but improving operational efficiency could help to drive costs down and better support the on-going evolutions of fund distribution. The specificities of investment funds, which are a primary market where the amount of shares continuously changes however need to be taken into account. The pre-settlement phase is essential for investment funds, whereas for equities there is a strong focus on the settlement risk related to Delivery vs Payment (DVP) on the day the transaction is settled; more harmonisation is needed in the pre-settlement phase because many distributors still use proprietary formats for example, even if their processes are automated.
The two models that coexist in Europe for processing fund transactions – the Central Securities Depository (CSD) and the Transfer Agent (TA) models – should be preserved as they complement each other, some panellists emphasized. In the CSD model funds are held and settled through a CSD much in the same way as equities and bonds; this model tends to work best in a largely domestic industry. The TA model can better support a more global distribution chain; it is very effective for international transactions as there is no need for intermediaries. In addition, the implementation of TARGET2-Securities (T2S) which notably covers fund transactions should be beneficial in countries where transactions are settled in a CSD and will facilitate cross-border settlement within the EU; international investors however should not be forced to use a CSD or the T2S platform as this would require them to use an intermediary which may reduce the attractiveness of UCITS. Moreover T2S is mainly focused on the Eurozone at present and concerns only the settlement layer of transactions.
Implementing a fund depositary passport was not considered as a priority. The cross-border distribution of funds already works well without such a passport and the main issues that have been raised in the past regarding depositories, notably the harmonisation of their duties and liabilities, have been solved with the UCITS V and AIFMD directives, several panellists stressed.
The UCITS framework is a strong comparative advantage for the EU fund industry in the context of increasing international competition notably in Asia
Since UCITS is very popular in Latin America and the Far East, the Europeans are concerned by the development of rival frameworks in these regions; there may be attempts to lock European products out of some markets or to organise new distribution channels, some panellists emphasized. These new developments are therefore a “new frontier” that needs to be carefully followed.
Three passport projects are indeed currently being developed in Asia: the Asia region fund passport for South Korea, Singapore, Australia and New Zealand; the ASEAN Collective Investment Scheme Framework; and the Hong Kong - Mainland China Mutual Recognition Scheme for mutual funds. The panellists generally believed that the latter one is the most meaningful as it is a step towards opening up the market of Chinese investors and it also ensures that the underlying processing infrastructure is available. A panellist questioned the absence of UCITS funds in the scope covered by this scheme since 70% of the investment funds currently sold in Hong Kong are UCITS. There could also be evolutions at the processing level; currently most of the processing of funds sold in Asia is performed in Europe due to the strong presence of European funds in the region, but Hong Kong may eventually develop a processing capacity for operational synergy reasons. Moreover the difficulty of penetrating the Hong Kong market and operating in it was stressed despite the success of UCITS in this market.
In such a context Europe can claim a strong comparative advantage with UCITS when dealing with the cross-border distribution of funds, since it is superior to any other fund platform, a panellist stated. Europe should not shy away from reciprocity and should take the lead in offering access to its market to Asian funds in order to ensure that UCITS funds continue to have access to those markets. Any protectionist reflex could backfire very badly the speaker believed.
The project to introduce a third-country passport into the AIFMD without reciprocity raised strong scepticism, as it may give third-country alternative investment fund managers an advantage over the European ones. Moreover it was considered that there are no more barriers to access in Europe than in the US or Asia for foreign players wishing to establish themselves in the market.
SummaryThe Chair opened the discussion by emphasizing the success of the European investment funds industry over the recent years and particularly of UCITS which is a “European success story”. UCITS is a very strong brand known and distributed all over the world, notably in Asia and in Latin America. The introduction of the UCITS passport in the EU has proved to be successful and is being copied to a certain extent in Asia. To remain successful in the future, a few shortcomings will have to be overcome, such as some remaining regulatory arbitrage issues and some disharmonised tax treatments within the EU. Also being considered are questions of product design and whether new products are needed to answer investor needs better.
A second element is marketing activities which are still subject to different regimes across Europe. The “Know Your Customer” checks differ, resulting in higher complexity for fund distributors and investors. Moreover Europe must keep its door open to third countries to ensure capital inflow continues. Private placement regimes and third-country passports in the Alternative Investment Fund Managers Directive (AIFMD) could be one way of doing this.
Cross-border fund transaction processing and administrative processes also need to evolve to support cross-border distribution, as they are not yet as efficient as they could and should be. There is a variety of models in Europe for executing and settling fund transactions through Central Securities Depositories (CSDs) and through Transfer Agents (TAs). The question is whether further automation and standardisation would benefit the industry and investors.
1. Remaining issues regarding the cross-border distribution of UCITS funds in the EU
UCITS are a success but this should not be a reason for complacency
The panellists generally commended the success of the UCITS directive in developing an EU cross-border fund market and the more recent launch of the Alternative Investment Fund Managers Directive (AIFMD).
European fund passports are a huge success, a regulator claimed. Luxembourg funds in particular are sometimes marketed cross-border in more than 50, 60 or 70 jurisdictions in the EU and beyond. The initiatives in South East Asia that to a certain extent copy the European passport approach are a proof that it is working well.
Another regulator agreed that UCITS is a real success both at the European and the domestic level. Belgium for example has an open economy where there is a large amount of savings. It has a strong local asset management industry and Belgian investors like to use UCITS for their savings, notably because of the tax advantages, therefore, some level of concentration of assets in local funds could be expected. But according to the latest data, only 21% of all the UCITS publicly offered in Belgium are Belgian funds. This means that the UCITS market is truly European and that the different updates of the UCITS directive have been successful.
An industry representative agreed that although some of the domestic European markets remain flat, new subscriptions are going into cross-border markets. A significant growth of cross-border fund distribution in Europe and also flows growing from Asia can be seen.
An industry representative however warned that a fine line exists between celebrating the success of UCITS and being self-congratulatory or complacent. Despite this success story, the growth of open-ended funds in Europe has not been faster than in the US despite regulatory progress and the changes that have been brought about in Europe. There are reasons for that. The US has seen major growth in the use of open-ended neutral funds for retirement savings and other tax-deferred incentives. In Europe this has lagged behind significantly, which is a mistake the speaker believed.
The cumulative effect of the differences that subsist across domestic fund rules in the EU needs to be further assessed
A regulator considered that even if there are slightly divergent rules across certain EU jurisdictions, these differences have not led so far to insurmountable problems. Moreover, after the recent “enormous amount” of regulation that has been put in place in the field of investment funds, the time has come for a “regulatory break”. It is time now to implement and apply the new rules and then to evaluate how they work in practice and what are their strengths and weaknesses, the regulator suggested. That does not mean that no improvement is necessary, but there should be clear evidence that changes are needed before embarking on new actions. There is indeed a cost factor attached to new rules, often borne by the investors. New rules should only be adopted if it is really proven that they will bring added value.
There have been a fairly large number of relatively small decisions by local regulators that impact the fund sector, an industry representative stressed. These decisions may be perfectly reasonable taken individually and may have achieved the desired policy goals of the local regulators, but when taken cumulatively across the entire European continent they make life relatively hard for the industry. None of them are deal breakers or prevent funds from being distributed cross-border. But cost and complexity are slowly built up and that is something that has to be paid attention to, because there is always” a last straw that breaks the camel’s back”.
Some areas where investment fund rules differ across EU Member States were cited.
A first area is tax. The Chair wondered whether the withholding tax treatment of pooled investment funds does not artificially favour domestic funds serving national investors over cross-border distribution, therefore inhibiting an optimal pooling of capital in Europe.
A policymaker acknowledged that there are issues in relation to pricing when it comes to collective investment schemes depending on the Member States that different share classes come from. Moreover, the ELTIF regulation in relation to tax refers “obliquely” to fiscal advantages. Tax is however an “extraordinarily sensitive” area; more evidence on the exact issues raised by tax differences is needed because nothing will be done if there is no clear evidence.
A second area where rules differ across the EU concerns the fees that are charged by the competent authorities. This is sometimes cited as a barrier to cross-border business but these fees are actually related to the cost of regulation in each jurisdiction, a policymaker emphasized. Regulators must employ qualified staff, they need to rent offices, all of that costs money. If barriers were put in place in order to protect national industries that would create concern, but the cost of regulation is a legitimate part of the “fund landscape”. A successful fund framework must be seen as being regulated and supervised in a meaningful way. That is what the national competent authorities and the UCITS framework are there to do.
The issue of the “substantially smaller” size of EU funds compared to the US ones, as a possible consequence of fragmentation was raised by the Chair. This is a long standing concern, and whether the situation can significantly improve in the future should be clarified.
The smaller average size of assets under management of EU funds compared to the US is an argument that has been used notably by the European Commission to justify that improvements are needed in the European fund market and that more economies of scale should be achieved, a regulator stated. Comparing the size of EU and US funds is however not necessarily appropriate because many differences still exist between the two regions and not only in the field of funds. The EU comprises 28 different Member States and in the European Economic Area there are 31, with many specificities despite the single market, which is not the case for the US which is one nation. This makes the fund landscape in the EU difficult to compare with the US.
An area where UCITS has established a strong example of supervisory convergence is the Key Investor Information Document (KIID), a regulator noted. What has been achieved for UCITS in terms of investor information should be applied to other sectors in the context of PRIIPs, for instance to life insurance, while preserving the specificities of the different markets and products concerned.
Distribution and investor protection rules are another area of regulatory fragmentation that may affect investment funds
Responding to a question from the Chair about the impacts of MiFID II and PRIIPs on fund distribution, a regulator considered that this is an area where there can be “an interesting mix or blend” of European regulation and national implementation taking local market specificities into account. For instance in Belgium an ex-ante supervision of the marketing of investment products, including UCITS, was put in place and this has had very positive results. After 10 years’ experience only very few – 10% - of the claims transmitted to the ombudsman concern UCITS.
Two ideas on which regulators may reflect with the support of the industry were moreover suggested by the panellist.
A first question is whether all products should be allowed in a sound financial sector. Probably not. For the fund industry, and notably UCITS, to grow in an appropriate environment investors must trust the products they invest in. So sometimes regulators have to rule out some products that could potentially be harmful for retail investors, ones that could have a systemic impact or a negative impact for the reputation of the sector; MIFID II offers ESMA and national supervisors the possibility to ban products which are not appropriate. For example, accepting that a risky non-European asset could be repackaged with a European passport seems a very bad idea. Responsibility must be taken by the regulators to ban certain products that are inappropriate for retail investors. In Belgium there is the possibility to do that for some products and this is also part of the mainstream agenda of the FCA.
A second question is how supervisors can work with the industry to improve products that are too complex. For instance in Belgium a moratorium was implemented for four years suspending the marketing of some structured products that were too complex. Many of these products were UCITS sold to retail investors and it was sometimes necessary to compute as many as 12 criteria to calculate the capital protection of the return. Some people could think that this was a breach of the EU passport but this move was supported by the industry. Four years later, the same volume of structured products is still being sold in Belgium, but their complexity has been divided by three. This positive evolution was acknowledged by the ombudsman. The European passport indeed does not mean that actions cannot be engaged against products that are too complex. Preserving the level of trust that investors have in investment products is essential and having simple products that are easy to understand is the right direction to follow, especially when the industry is supportive of this evolution, the regulator claimed.
An industry representative considered that although it is hard to disagree that a regulator should have the right to prevent potentially dangerous funds from reaching the general public, it would be very negative if in trying to do so the entire UCITS industry was affected. A 95 / 5% rule applies to the fund industry; 95% of products are plain vanilla. So if the entire industry has to go through additional checks because of the 5% of products that are deemed too complex, this would not be a positive step forward. For the majority of UCITS funds, a streamlined approval process by local regulators is sufficient.
Regarding the issue of packaging unacceptable products, the PRIIPs regulation gives the European Supervisory Authorities the power to intervene, a policymaker stressed. One of the points about PRIIPs is that all investment products marketed to retail investors whatever their structure i.e. an insurance contract, an alternative investment fund or a structured product will have to have the same standardised three-page document and if the product is very risky, it will have to have a risk warning attached to it.
The future evolutions of distribution and the impact that they may have on the fund sector need to be anticipated
The future developments of fund distribution need to be closely monitored, an industry representative believed, because there needs to be an appropriate balance regarding UCITS between investor protection and an open or at least a “fair” access to distribution. This has been instrumental to the success of UCITS, because UCITS have to be safe but it must also be possible to buy them. In this respect the door should not be closed to developments such as distribution through the internet or mobile devices and robo-advice, some of which are connected to the Capital Markets Union; but these developments should be closely followed with sufficient caution.
From a regulatory standpoint, there are still a few issues to be addressed regarding MiFID II an industry representative believed. The main areas remaining to be tackled regarding investment funds relate to inducements and the core liabilities or responsibilities of promoters and distributors. There is a need for more transparency and more investor information which has an impact on fund distribution; customers must also be given more granularity in the information they receive. Promoters and distributors will have to define target markets but this should not only be done ex ante, it should also be done ex post. Regulators will also need a great deal of information and this can be expected to have a clear impact on the distribution models. More efficiency in terms of information provision will be needed with all the different layers of information required. Otherwise, the risk is missed opportunities. If it seems too complex or difficult e.g. because of information requirements, some promoters may decide not to go into a certain market in order to avoid problems in the future. PRIIPs and particularly MiFID II should have a huge impact throughout the fund distribution system and its different components, not necessarily a negative one, the speaker believed.
The Investor Protection and Intermediaries Standing Committee (IPISC) of ESMA and the board were able to reach a compromise on inducements, with some links with PRIIPs, a regulator mentioned. Now the European Commission has to decide if it wants to endorse the proposal and to what extent.
2. Cross-border fund processing
Much progress has been made in the automation of cross-border fund transactions
The Chair noted that in recent years much progress has been made to improve the automation of fund processing - the processing of cross-border fund transactions in particular - with a level probably around 80% and wondered whether further progress could be made.
In terms of processing within Europe, there is a lively debate about the respective benefits and downsides of the CSD and the Transfer Agent (TA) models, but there is no such thing as “one model against the other”, an industry representative emphasized. The two models complement each other. Even when a CSD is used to process fund orders, an agent is still needed because for every new fund it must be ensured that the underlying assets are deposited with the fund depository. There is a key difference between bond and equity markets, which are typically a secondary market where the outstanding amount of shares is fixed, and the fund industry which is a primary market where the amount of outstanding shares continuously changes. In the case of equities there is a focus on cross-border settlement and Delivery vs Payment (DVP); there is also a clear separation between the trading risk, which is where the CCPs intervene, and what is called the Herstatt risk, which is the settlement risk related to DVP on the day the transaction actually settles. For funds, there is “one open spectrum” of activities and there should be more focus on the pre-settlement part. Things are working well in the pre-settlement phase because it is quite automated, but there is still a need for further standardisation. A distributor can decide which solutions to connect to, but a transfer agent has to cope with all the different solutions that are available; some of them are automated but in a proprietary format. All that fragmentation must be dealt with. In the future there should be more standardisation, more centralisation and more consolidation, as in US, the speaker believed.
Another industry speaker agreed that CSDs and TAs are complementary. Both operate in a relatively complex environment with different distributors and they have to be prepared to receive messages from many different types of “senders”. Some senders may indeed be less automated than others. Automation can always be improved but the industry has reached a plateau and in terms of risk or incidents there are no more real incidents.
In terms of risk an industry speaker agreed that there were no strong incentives to further automate. The issue now is to improve operational efficiency in order to drive costs down.
Automation will hopefully bring prices down, but it may also bring new risks, a policymaker remarked, related to the implementation of new systems or to a higher degree of concentration.
The possible impact of Target 2 Securities (T2S) on fund processing
Responding to a question from the audience about the impact that T2S, which notably covers investment funds, might have on cross-border fund distribution, an industry representative stressed that a number of markets, such as France and Germany, use a CSD for the settlement of fund transactions. The migration to T2S in these markets will not bring much change in the way that fund transactions are handled. Secondly, a number of customers want to settle cross-border funds in a CSD. In such a case, an agent holds those assets under a nominee structure with a transfer agent. That will continue to happen in the T2S world. Where there must be caution, the speaker believed, is regarding international investors who should not be prevented from easily accessing European markets by forcing processes to go through T2S. This would go against the attractiveness of UCITS funds. International investors access European markets through TAs, which is very efficient because there is no need for intermediaries. If transactions are forced into a CSD or another structure, then there must be an intermediary. It is about taking the best of both worlds: the CSD model and the TA one. Then there is the multi-currency aspect. T2S is very much focused on the Eurozone for the time being but about half of UCITS funds are already denominated in foreign currencies.
T2S will certainly help and more fund transactions should go through the platform, another industry representative considered, but there are two limitations. It is obviously not a universal model as it is mainly focused on the Eurozone and some additional European currencies. The second aspect is that it concerns only the settlement layer and not the whole execution process.
Implementing a fund depository passport was not considered as a priority
The depository passport used to be “a hot issue”, an industry representative explained. It could still be implemented, but it is not really an issue today. Cross-border distribution works fairly well in Europe, so there is no real need for a depository passport to further develop it. In addition, much effort has been expended on the AIFMD and UCITS V directives to harmonise the duties, eligibility criteria and liabilities of fund depositories. This has been implemented for AIFs and will soon be done for UCITS. That was the “core need”. There does not seem to be a great expectation from the market or customers to go further and to implement a depository passport.
Another industry representative agreed that there is no strong lobbying for the introduction of a depository passport at present; there is probably no need “to fix something that isn’t broken” and to introduce new rules for depositories. The existing passports are a success – the UCITS fund and management company passports, the alternative investment fund managers passport - and no need is expressed in the market for an additional depository passport.
A policymaker concurred that there is no need to start on a new directive, if the issues have been solved with UCITS V and AIFMD. There are always calls for a regulatory pause, but at the same time there are requests for the EU Commission to tackle certain problems and make regulations more favourable. But if a regulation is reopened there is also the risk that someone sees this as an opportunity to tackle some previously unfinished business, which may have some unintended consequences.
3. Cross-border investment fund distribution outside the EU
The Chair moved the discussion to the current situation regarding cross-border fund distribution outside Europe, and what impact the new passports being developed in Asia in particular may have on the distribution of European funds in the region. Three passport projects are currently being developed in Asia: the Asia region fund passport for South Korea, Singapore, Australia and New Zealand; the ASEAN Collective Investment Scheme Framework; and the Hong Kong - Mainland China Mutual Recognition Scheme for mutual funds.
UCITS has a strong comparative advantage in terms of cross-border distribution
Since UCITS is very popular in Latin America and the Far East, the Europeans are concerned that rivals are developing in these regions and may attempt to lock European products out of some markets, a policymaker believed. With other regions trying to imitate UCITS there is indeed a risk that others will organise new distribution channels, an industry representative emphasized. These new frameworks are therefore a new frontier that needs to be carefully followed.
The ecosystem created in Europe for cross-border distribution is unparalleled, an industry representative stressed, and the UCITS platform has a real comparative advantage for cross-border distribution, superior to any other fund platform. There just needs to be confidence in it. The fact that there are two initiatives in Asia which are somehow trying to imitate the UCITS framework is a testimony to that. However, it is very important that Europe should adopt a very confident attitude when dealing with such issues; reciprocity and taking the lead in offering access to funds from those regions is the only way to ensure that UCITS continue to have access to those markets. They are important growth markets for European asset managers or asset managers operating in Europe. Any protectionist reflex in Europe could backfire very badly. When entering any new country in Asia, Plan A for most asset managers today is to start with a UCITS fund, but if the barriers keep going up, there is a need to switch to Plan B and set up an alternative local platform. It is really important to be visionary. As in any free trade approach, the one with the strongest comparative advantage should be the one driving the agenda for the free trade of goods and services.
The prospects of fund distribution passports in Asia
There are three main drivers for a fund or a management company passport, an industry representative considered. A first one is to facilitate access to the investor base of a given region. The second driver, which is more from an operational and a cost perspective, is increasing the centralisation of manufacturing so that funds can be manufactured out of one country. The third one, from an investor perspective, is to broaden the access that investors have to products and to increase competition in order to drive costs down. With regard to the first element, which is facilitating access to investors, out of the three on-going initiatives in Asia the Hong Kong - Mainland China Mutual Recognition Scheme is the most relevant one, the industry speaker claimed, as it potentially opens up the market of Chinese investors. It is also the most concrete one because it is not just establishing an agreement between two countries; it is also ensuring that the underlying infrastructure is there. The HKMA CMU1 is discussing with China to make sure that the infrastructure is available. For example Euroclear has just opened an account with the CMU to be able to give access to Hong Kong funds but also to China domiciled funds.
The Hong Kong – Mainland China development may also have a local impact on the organisation of processing and administrative activities, the industry speaker added. Today, most of the processing, whether it is TA business or fund depository activities, is performed in Europe because there is a strong inflow from Asia into European funds. When analysing the issue in detail fund by fund and sub-fund by sub-fund there is no justification for positioning processing activities in Hong Kong. From an operational synergy perspective however, if the activity in Hong Kong develops and there are more and more inflows, Hong Kong could possibly start to position itself as a sort of “Asian Luxembourg” in that region. The possible evolution in the future is however very difficult to predict.
An indication that was recently given by a Chinese regulator, a policymaker mentioned, was that the Hong Kong - Mainland China Mutual Recognition scheme can be seen in two ways: as a clear, straightforward threat or as an example of Chinese gradualism because the Chinese market will not be opened up “in one fell swoop”; it will be gradual with pilot areas and tool tests. It may be to Europe’s advantage that it is not the first area being tested. In terms of access and the renminbi quota that companies have, there is transferability, thus large institutions in China that wish to invest outside China can access the money to do so. It is for Europe to demonstrate to China why they should invest in European funds, so there is optimism there as well as threats.
With the Hong Kong - Mainland China Mutual Recognition Scheme, Chinese funds will be recognised in Hong Kong and be able to be marketed to investors there and vice versa, an industry representative remarked. Taking into consideration the fact that over 70% of the investment funds that are currently sold in the jurisdiction of Hong Kong are UCITS, not only from Luxembourg but mostly from there, one cannot help but see a certain incoherence or even an illogical approach there. UCITS funds are eligible to be marketed in Hong Kong to the retail investors, so why should they not be covered by the Hong Kong - Mainland China Mutual Recognition Scheme?
Even though UCITS has achieved a “tremendous penetration” in Hong Kong, it remains one of the most difficult markets outside the EU to register with and then operate a UCITS fund, an industry player emphasized. Quite often the passport is just the first step. The real battle starts after the passport is recognised and the fund starts operating there. One thing is to reach a very high-level agreement on mutual recognition and the other is to ensure that funds can actually be sold and operated throughout their life cycle.
The project to introduce a third-country fund passport in the AIFMD without reciprocity raised strong scepticism
The Chair asked whether the possible introduction through the AIFMD and MiFID II of a third-country fund passport could create an imbalance between the EU, further opening up access to its market, and other non-EU countries where some barriers to access may subsist.
The question of the potential imbalance that the introduction of a third-country passport may create is a very important one, a regulator believed. The concept of a third-country passport for alternative investment fund managers is something that is relatively hard to figure out for supervisory authorities in the EU at this stage. It is surprising that when it was introduced in the AIFMD project, there was no condition of reciprocity, because when looking at other passporting initiatives it is clear that they contain an objective to favour home jurisdictions. There were many articles in the press about a potential “Fortress Europe” and the fact that Europe should not put up barriers, when the AIFMD was being discussed. But there are no more barriers in Europe than in the US or in Asia for example, for entities that want to be active in those markets. If a US entity wants to be active in Europe, it can do so and all big US entities are established in the EU. Europe would be going one step further than the other jurisdictions if a third-country passport for alternative investment fund managers was introduced without a condition of reciprocity. This would give third-country alternative investment fund managers an advantage over the European ones, which is quite a “mind-boggling” approach, the regulator considered.
There have not been any complaints from third-country fund managers about barriers to access domestic EU markets, another regulator added. Belgium for example has a very open economy, so if there was a serious problem it would have been heard about. Europe should not worry about any access problems to its market.
Answering to a question from the audience about the possibility for the EU authorities to add reciprocity as a condition for the AIFMD third-country passport, a regulator mentioned that ESMA is currently debating the issue. A number of ESMA members take the view that reciprocity should be one item to be taken into consideration in this context.
1 The Hong Kong Monetary Authority (HKMA) established the Central Money markets Unit (CMU) in 1990 to provide computerised clearing and settlement facilities for Exchange Fund Bills and Notes. In December 1993, the HKMA extended the service to other Hong Kong dollar debt securities. The CMU offers an efficient, safe and convenient clearing and custodian system for Hong Kong dollar debt instruments. Since December 1994, the CMU has been linked with other regional and international systems. This helps promote Hong Kong dollar debt securities to overseas investors who can use the links to participate in the Hong Kong dollar debt market.
By L. Freitas De Oliveira – Chairman, Capital Group's Luxembourg domiciled Funds, Capital International Sarl
By J-P. Servais – Chairman, Financial Services and Markets Authority (FSMA), Chairman, IOSCO European Regional Committee & Chairman, Investor Protection and Intermediaries Standing Committee (IPISC) established by ESMA
By J. Marc Goy - Counsel for International Affairs, Commission de Surveillance du Secteur Financier (CSSF)
By J. Van de Velde, Executive Managing Director, Product Management, Euroclear SA/NV
By T. Lueder, Head of unit Asset Management, DG Financial Stability, Financial Services and Captial Markets Union, European Commission