AMF’s proposals on cross-border distribution issues

French market authority AMF has released a study on the barriers to cross-border distribution of investment funds in Europe.

The research first focuses on the European passporting system which the AMF finds “widely used” and “working well”. Some 80% of European Ucits funds and 40% of alternative investment funds (AIFs) have a cross-border passport in 2016 according to the European commission.

PwC estimates that there were 74,000 European passports at the end of 2014 (Ucits and AIFs combined), including 49,000 from Luxembourg and 15,000 from Ireland.

Preferred destinations of these cross-border funds were Germany, Switzerland and Austria.

Overall, according to PwC figures, 10,430 European funds had passports to provide services in at least three European countries including their domicile at the end of 2014, a number that has constantly risen since 2003.

“Within Europe, the penetration of foreign funds varies considerably from one country to the next, but often accounts for more than half of the funds marketed in a given country. In particular Luxembourg funds are well established in most European countries, including Ireland, which itself exports many funds to other European countries,” the research finds out.

France remains apart in Europe as the market share of French funds in April 2016 (44% according to Lipper) still surpasses these of Luxembourg and Ireland-domiciled funds (38% and 13% respectively).

The AMF points out the annual cost of a fund passport is not a barrier, being very low and representing between 0% and 0.0016% of the average amount of assets under management.

However the study identifies several burdens to cross-border distribution among which remain distribution networks’ preference for their own products, the required adaptation to local consumer profiles, taxation, and the consumer’s national bias.

Understanding tax treatment and the local legal environment represents an additional cost for European funds looking to be marketed outside their territory, the AMF says.

Regarding the consumer’s local bias, the French regulator quotes a survey from the European commission that shows 94% of Europeans interviewed saying they have never bought a financial product outside their country of origin and 80% saying that they would not do so.

The AMF has hence established a number of recommendations to address issues related to cross-border distribution.

It first proposes to modernise marketing networks.

” European funds have already begun to benefit from the digitisation of distribution networks, which has reduced the advantages of a local presence or familiarity with customary retail distribution networks. These technological developments support greater penetration by European funds on domestic markets and should enable the resources of retail investors to be allocated more efficiently,” the AMF assesses.

The French market authority believes the growing use of the internet and social networks in spreading marketing information forms an opportunity for funds “to reach out to the captive customers of the bank networks.”

Another AMF’s proposal dwells in the promotion of the open architecture model in European regulatory policies.

“Stiffer restrictions for distributors of savings products could lead these firms to fall back to closed distribution architectures, offering customers only products created by their own group or by selected partners.

“This would be an unwanted effect of European regulations, which, though intended to offer investors more protection, would end up prompting firms to drastically curtail their ranges,” the French regulator explains, quoting issues encountered with Mifid II and the recently rejected regulatory technical standards of Priips.

The AMF says it remains vital that potential impact on open architecture distribution models should be considered in the studies conducted by European institutions before a new legislation is proposed.

It also backs the idea of harmonising marketing rules in their definition and restrictions. It assesses marketing and pre-marketing rules need to be more comparable within Europe.

As a reminder, the French market authority has given its green light for the pre-marketing of funds in France for the first time this summer in a bid to improve the attractiveness of the French asset management industry and local investments funds to foreign investors.

“The current disparities mean that constraints differ across countries. Clarification is needed to ensure equivalent treatment across the entire area. In the first place, the non-uniformity of marketing rules at European level is one of the European passport’s weak points, a point stressed by ESMA in its review of the AIF passporting system. Even the definition of what constitutes marketing is not the same across Europe,” the AMF highlights.

The French market regulator suggests as well that the opening-up of networks should be accompanied by reforms to FPS supervision in Europe.

“AMF would like to see a shared discussion at European level about these new consumer practices, giving consideration for example to new rules to redefine the notions of territoriality and advice in the digital era.

“Other initiatives could take the form of shared digital supervision rules or a common cooperation and enforcement framework for digital financial services. Having shared rules would also enable Europe to position itself as an international leader on these emerging issues.”

Lastly, the AMF calls for ensuring that all investment funds’ documents proposed to retail investors are clear, written in a language they know. It also promotes an enhancement of financial literacy among European retail investors to give them a better understanding of their investment activities.

“The AMF firmly believes that the host authority is best placed to assess the compliance of marketing and advertising materials within its territory.

“Accordingly, the AMF would like the central role of the national regulatory authorities to be enshrined, to ensure that supply is suited to the characteristics of demand, particularly as regards the marketing documentation of European funds,” the French market regulator estimates.

To read the full research, click here.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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