The cross-border distribution of funds regime and its divergence across Europe

For a long time, European fund regulation has been extremely complex. Different European member states have taken differing approaches to implementing distribution and marketing rules and, with this, have caused barriers to cross-border fund activities.

In July 2019, the European Commission’s cross-border distribution of funds (CBDF) directive and CBDF regulation were launched. CBDF aims to reduce regulatory barriers to the distribution of investment funds across Europe. To do this, it was designed to improve transparency in legal and administrative requirements and standardise rules between European territories. The CBDF requires both a directive and a regulation because it makes amendments to existing directives, the Undertakings for the Collective Investment in Transferable securities (UCITS) and the Alternative Investment Fund Managers Directive (AIFMD). At the same time, it also impacts regulations, for packaged retail investment and insurance products (PRIIPs) and venture capital and social entrepreneurship fund regulations. With this, CBDF forces firms operating in different regions to review their operations.

On 2 August 2021, CBDF came into effect and introduced several conditions, which will impact all UCITS and alternative investment funds (AIFs). The impacts of the CBDF directive include: the pre-marketing of AIFs, the provision of local facilities for the AIFs and UCITS marketed towards retail investors, and the inclusion of amendments to the process to de-notify the marketing of an AIF or UCITS in a host member state. Meanwhile, the impacts of the CBDF regulation include requirements around marketing communications, verification of market communications, the publication of a central database containing national marketing requirements, fees and charges, and the creation of a list of UCITS, AIFs and fund managers.

How firms wish to distribute their funds internationally is a strategic decision; companies must weigh the added costs and regulatory requirements against the benefits of a wider market. For some, the benefits can massively outweigh the negatives but then come the operational challenges: building teams, developing an understanding of countries interpretation of EU regulations, and understanding how economies may diverge in their implementation of this regulation. Although CBDF intends to make this simpler, it has, in the short term at least, contributed to new discrepancies in fund regulation. Although major economies like France and Germany have fully implemented the CBDF since its effective date of 2 August 2021, not all countries have done so. Some countries have seen implementation delayed as they are currently unable to implement the CBDF, while others have implemented the new rules in different ways. Because of this, CBDF is currently a patchwork across the European Union, with new discrepancies appearing, and firms must navigate this to successfully operate cross-borders.

Asset managers have been faced with the question of whether to outsource or deal with European cross-borders regulations in-house. But third parties, which once offered paying agent services, are withdrawing from the market, interpreting requirements differently, or unable to offer a full coverage of EU directive and regulation requirements. Not everyone has access to local knowledge or skills in cross-border fund registration. At FE fundinfo, we have a team of in-house cross-border distribution specialists who understand cross-border requirements, registering funds internationally and offer knowledge outsourcing.

For more information on how we can help you tie together the patchwork of cross-border fund distribution rules, contact us below.