To what extent have UCITS and AIFMD created market harmonisation and allowed cross-jurisdiction selling? Answers provided by Christopher Jehan of the Guernsey Investment Fund Association.
Question: How widespread is the ability of a fund in one jurisdiction to sell into another or do for example, non-EU managers struggle to access the European investor base?
Christopher Jehan: To take that in reverse I would say that yes, non-EU managers still struggle to access the European investor base. The advent of the Alternative Investment Fund Managers Directive (AIFMD) has certainly improved that for institutional investors but is still limited because the third country passporting is not yet up and running. Therefore, if you’re a non-EU manager it remains difficult and there are quite a few hoops to jump through to actually access European markets with markets needing to be looked at on an individual market basis.
From a more widespread perspective when it comes to jurisdictions such as Hong Kong and Singapore, the ability of non-EU funds to access those markets is more on par with the European UCITS access. Certainly though I would say that within Europe it’s not as difficult as it was and this has been largely due to the AIFMD method of registration.
We know there are companies with UCITS schemes that market into a lot more countries than just the average of three but certainly in Guernsey we’ve seen alternative investment funds register for sale into five countries and so I would say it is doable. I agree that there are countries such as France and Austria that put gold plating on top of basic requirements under Article 42 of the AIFMD. I would also point out that there are major markets such as Spain and Italy that have actually put enormous roadblocks in place. Comparatively the UK and Netherlands are certainly jurisdictions easier to get into but overall there remain fairly significant markets where it’s currently impossible to enter by Article 42.
Question: One school of thought regarding national private placement regimes in the EU is that problems are created by too much variation between them – what are your thoughts Christopher?
Christopher: Taking into consideration everything from timescales for registration to additional requirements such as whether you need a depository, managers have to be compliant with AIFMD just as if they were fully within the regime and allowed to passport there is certainly a significant variation.
The problem is that fee levels for accessing certain markets differ and there is no harmonisation whatsoever for a third country fund. We hope that the current ESMA call for evidence will support the implementation of third country passporting and allow jurisdictions such as Guernsey, Switzerland, Hong Kong and the US access to those European markets on a full passporting basis.
Question: Has the UCITS directive and its passporting system done enough in advancing cross-jurisdiction selling or are managers still struggling to appropriately navigate regional rules and regulations?
Christopher: Definitely not enough has been done to advance cross-jurisdiction selling. Managers think about UCITS as the standard but in a way Europe’s protectionism over UCITS is what’s going to drive more initiatives further afield and there is activity in Asia presently doing just that.
Effectively these are Asia’s tools for developing their own initiatives to rival UCITS in the same way that UCITS is a Europe only club, various Asian countries are creating an Asian only club. If UCITS had been open to this idea of third country passporting then maybe we wouldn’t be seeing the initiatives coming through that we are now.
I am also hearing a rumour about the possibility of Latin American passporting and I think this would make sense because Europe’s got its closed club in UCITS whilst Asia has started to develop its own. We already have a situation where Singapore is playing in two passporting initiatives and therefore, I would say they stand to benefit the most.
In terms of achieving a true cross-jurisdiction selling harmonisation I would say though that Europe is leading the way with UCITS, at some point Europe should have said let’s look at other funds in other jurisdictions that meet the same standard as UCITS and allow a third country route in.
Instead we find ourselves in a situation whereby we have regional passporting flooding in and with regards to Asia, the multiple passporting systems means this is not the same as a single passport mutually recognised In Europe. Who knows, in the long-term the same situation could be reversed with a European passport becoming less recognised in Asia.
Question: Do managers need to be expanding their distribution infrastructure in order to adhere to current and future rules for gathering new, cross-border, assets?
Christopher: This is already happening in larger asset managers and it has been largely driven by the increased need for managers to have people on the ground to actually meet with clients for distribution, rather than being part of an adherence to regulation. Switzerland is perhaps one very interesting difference because, as a result of the new collective investment scheme act, it has a requirement for representative distribution infrastructure in order to be able to sell into Switzerland.
Similarly in other jurisdictions such as Singapore having infrastructure on the ground is important but by contrast AIFMD, the ‘new’ directive on the block, has no such requirement and a sales presence is not needed on the ground, managers are allowed to conduct this remotely. I think that the global spread of offices for large institutions is actually driven by the sales function as opposed to regulatory pressure because as distribution models expand, it makes increasing sense to have people based in specific jurisdictions.
Of course if you have a couple of offices in Asia you wouldn’t necessarily want to have scores of offices because you can get relatively cheap flights to service clients in their relevant countries. As we see regulation in certain jurisdictions develop I suspect we will see a greater drive towards an on-the-ground presence with the purpose of registering funds to sell into those jurisdictions; I may be wrong though and only time will tell.
Christopher Jehan is Chairman of the Technical Committee of the Guernsey Investment Fund Association (GIFA).
An original version of this article appeared in Clear Path Analysis' Fund Formation, Domiciling and Distribution 2015 report, January 2015.