Citi 2018 FinReg Outlook

CROSS-BORDER DISTRIBUTION ISSUES A major policy initiative in the EU is the ongoing work on the Capital Markets Union (CMU) project. The CMU’s objective is to strengthen the EU’s capital markets to encourage more cross-border activity. As part of the CMU work, the European Commission has been looking for ways to encourage more cross-border sales of UCITS and AIFMD funds. Despite its global success, there are still challenges in selling UCITS across the EU due to a number of local barriers. These include fees imposed by local regulators, additional national requirements around selling financial products, and local paying agent requests to process subscriptions and redemptions. AIFMD funds face these challenges and more. For example, the local language requirements for documentation, such as applications or prospectuses, vary by country. A further complication is that the timeline for passport approvals is not uniform. The cumulative effect of these rules is additional costs for investors and less efficient distribution across the EU for both UCITS and AIFMD funds. For asset managers, the focus on improving cross-border distribution will be welcome. The question is, how quickly action can be taken? For UCITS funds, it is a matter of fine-tuning certain elements. On the AIFMD front, removing the barriers to distribution requires heavier lifting, which may entail changes to the primary legislation. UCITS DELEGATION A potential flashpoint in the UCITS review is the substance requirements in the framework. Currently, the UCITS framework contains no substance rules. Instead, the requirements are determined by the local regulators, which decide the appropriate level of governance and oversight for the UCITS funds they authorize. In practice, this has led to a lot of asset management activities, including portfolio management, being delegated to countries outside of the fund domicile. Checking the Tires: Reviewing UCITS and AIFMD The EU’s review of AIFMD and UCITS offers potential opportunities and pitfalls for the asset management industry. This year, the regulatory frameworks that govern EU investment funds, Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD), will be reviewed by EU policymakers. These reviews offer potential opportunities and pitfalls for the asset management industry. The following items will be crucial for the industry to watch. SEAN TUFFY Head of Market and Regulatory Intelligence, EMEA, Custody & Fund Services EMEA 11 10 Citi Custody & Fund Services – FinReg Outlook 2018