Distribution of investment funds in Europe: no change before 2020
The distribution of investment funds in Europe will be strongly impacted by the arrival of new players making use of new technologies, particularly blockchain, and European regulations intended to harmonise fairly disparate rules, although probably not within the next two years.
In-depth changes under way
Asset management is going through a period of unprecedented upheaval. The continued low-rate environment, ever-increasing pressure on fees and therefore costs and a still “lively” backdrop of regulatory changes are creating an environment favourable to a revision of the overall balance of the asset management value chain, especially in fund distribution.
New technologies – an opportunity to revise the distribution value chain
At the time of the SGSS survey conducted in Q1 2018, 37% of Asset Manager clients interviewed clearly expressed their desire to have a better knowledge of their end client.
But how can they achieve this objective? By using new technologies, particularly blockchain...
Two initiatives based on blockchain technology have therefore been launched in the last two years to better understand end investors.
Put simply, these initiatives involve creating platforms providing investors with quick and easy access to fund units: from signing an investment contract, to placing subscription-redemption orders, to the settlement of transactions and position retrieval. The objective of these platforms is notably to reduce transaction costs and improve transparency, especially for asset managers, who will have a better understanding of the identity of the holders of their fund units. Under the current system, subscription and redemption orders are aggregated when they are placed by the fund centralising agent (in France) or the transfer agent (in Luxembourg).
37% of Asset Manager clients interviewed clearly expressed their desire to have a better knowledge of their end client.
One goal but different approaches
Although both platforms have the same goal, their implementation processes are not quite the same. Iznes does not use blockchain to route payments for fund units, preferring to use the traditional bank route. Iznes also displays the legal ownership of securities (management companies using this service for some of their funds have changed their fund prospectus to indicate that the registrar is IZNES).
FundsDLT, meanwhile, wants to build a tool to not only accelerate distribution by streamlining this process, but also to significantly reduce administrative procedures relating to fund distribution, notably including KYC.
Technology will therefore certainly simplify the distribution value chain, although the question is now how long that will take...
Fund distribution in Europe is also attracting attention from the regulator, which also wants to simplify a process that is currently not particularly harmonised...
The regulator's desire to facilitate fund distribution in Europe
Currently, 70% of total assets under management are held by investment funds only registered for distribution in their domestic market. Only 37% of UCITS and 3% of alternative investment funds (AIFs) are registered for distribution in more than three member states.
In view of this, and within the framework of the CMU (Capital Markets Union), the European Commission launched a regulatory initiative on 12 March, 2018 to rectify this state of affairs.
The initiative includes a draft regulation and a draft directive.
These draft texts set out a series of amendments to investment fund legislation in order to remove what the Commission calls “barriers to pan-European distribution” in several areas simultaneously:
- The regulatory fees charged by each national regulator: obligation for each national authority to publish the methodology used to calculate these fees with a notification from ESMA, which will also publish this information on its website.
- The creation of a harmonised pre-marketing concept allowing a fund manager to test investors’ appetite for a product before marketing it.
- Harmonisation of the procedure and requirements for the verification of advertising material by the competent national authorities.
- Harmonisation of procedures for notification and withdrawal of a fund from a national fund market.
- Easing of the conditions under which a fund manager must have a physical presence in another country: In a digital world, the Commission proposes that contact with the investor can be made electronically rather than via a local representative.
All these proposals boil down to two key objectives: harmonisation of divergent national rules and reduction in costs borne by the funds.
What is the provisional timetable?
Blockchain-based initiatives depend on the ability of the projects’ initiators to convince investors to adopt their platform and use it to place their redemption and subscription orders, rather than turning to traditional bankers. It is difficult at this stage to say how long this will take...
In terms of regulatory changes, greater clarity is needed concerning the timetable for implementation of these reforms. Once the Council and the European Parliament have examined these proposals, a period of “trialogue” will begin (between the Commission, the Council and Parliament) in order to produce a final text. The texts should then come into force 24 months after their publication in the European Official Journal.
At this stage, there is therefore little doubt that the distribution of funds in Europe is set to change in the coming years.