Many of Europe’s financial institutions have been watching the development of the European Commission’s Capital Markets Union (CMU) initiative with great interest, keen to ensure it becomes a reality.
Last year the CMU published a Green Paper consultation and, more recently, the EU Commission launched its ‘Call for Evidence’ exercise. Two key areas that emerged from this were the need to update the current Ucuts framework to make it fit for the 21st century; and the important role the introduction of a depositary passport could play in creating a framework for the provision of a common depositary market across Member States. Addressing these two areas would further integrate EU capital markets and facilitate cross-border distribution of funds.
The current Ucits framework is outdated and often hindered by national gold-plating which leads to a lack of harmonisation. A number of key changes that would not only make it easier to distribute funds across borders but reduce costs for end investors, increase their choice of investment and support the CMU objective of unlocking alternative sources of funding.
First, there is a real need to simplify the Ucits authorisation and notification process. This can be done by harmonising the electronic transmission and filing of updates or amendments to regulatory documents, to enable the single market passport to be obtained through a single Member State filing – similar to the Mifid services passport. In addition, this should be complimented by removing national rules that impede the establishment of Ucits funds by management companies in other Member States.
Further, advocating changes to the master-feeder arrangements under the Ucits Directive. Ucits IV sought to increase efficiencies in the European fund market through greater rationalisation and the generation of economies of scale and one tool to achieve this was the provision for master-feeder structures under the Ucits framework. However, the application of a “10% rule” prevents Ucits – which invest more than 10% in another fund – from investing in a feeder fund. This discourages managers from setting up feeder fund structures as many managers would exclude a key part of their potential investor base. The 10% amended to allow ‘look through’ to the underlying master into which the feeder Ucits/CIU invests such that the 10% rule applies to the master fund.
It would also be apt to end the obligation to appoint a paying agent. These requirements developed at a time when cross-border bank transfers in the EU were slow and expensive and it was difficult to obtain adequate information on a cross-border basis at a time before the internet existed. These requirements, under both the Ucits Directive and the more recent Eltif Regulation, should be updated with rules which reflect the widespread use of the internet, the ease with which cross-border payments can be made and the reality of contemporary distribution models.
Lastly, another key area that could serve as an important foundation of the CMU is creating a framework for a common depositary market in the EU through the introduction of a depositary passport. This would lead to economies of scale with a potentially positive impact on the costs of Ucits for end investors. It would also allow the development and domiciliation of investment funds in more EU Member States, especially in countries that lack providers of depositary services as well as allowing depositaries to provide their services across the EU more efficiently.
The CMU won’t happen overnight and instead it will take a range of short, medium and long term initiatives over a number of years to bring it to fruition. However, updating the Ucits framework to make it fit for the 21st century and the introduction a depositary passport should be two important steps to making the CMU a reality.
Susan Dargan is head of State Street Global Services Offshore (Emea)