Simplifying the UCITS Marketing Passport Notification  

Buried under the vast amount of documentation produced by ESMA as part of regulatory convergence and other similar exercises, in mid-December 2022 the final report was published on the technical standards containing the template of UCITS marketing passport notification letters. A drop in an ocean of measures governing European crossborder distribution, which nevertheless will contribute very practically to achieving the aims of the Capital Markets Union. 

Our team contributed to the consultation for what concerns the aspects related to the implementing technical standards (ITS) on the content and format of the template for UCITS marketing passport notification letters. The most part of our contribution was then received in the final version of the draft ITS. 

Get in touch here with your contacts at Veneziano & Partners to see how we can help with UCITS Marketing Passport Notification. 

Some Necessary Background 

As discussed previously, the mission of the European Commission with the action plan on the Capital Markets Union, besides being ambitious, is also ever complex. The underpinning aim remains though one and simple – ensuring that European crossborder distribution remains a possibility also for the smaller and less known names. In other words, removing hurdles for crossborder operation throughout Europe, in a delicate balancing act of supervisory needs and related cost of business for market participants.  

Easier said than done, of course. In the practical implementation, fulfilling some of the principles and aims of the Capital Markets Union is an endeavour faced with a myriad of issues. On the one hand, European crossborder distribution is made of many moving parts, sometimes very small. On the other, it is not always possible to envisage the full extent of consequences stemming from a decision to introduce or remove a requirement, for instance. Most often than not, simple and apparently innocuous details might indeed have crippling effects. 

 

A Simple Detail 

And the simple detail this time was found in the draft ITS, containing the new template for the AIF and UCITS marketing passport notification letter. When revamping the template, a section was introduced to specify marketing arrangements. Amongst the new details included in this section, there was also a requirement to specify the contact details of any third-party distributors appointed in the host member state at issue with the specific marketing passport notification.  

Some may agree that indeed this is a simple detail. From a purely regulatory standpoint, it might make sense to request for as many details as possible with regards to the plan to market in a specific European domicile, including the contact details of any third-party distributors. Market practice, on the other hand, tells us that fulfilling that requirement might have crippling effects on the dynamics of European crossborder distribution, preventing access to smaller funds and new entrants to this market, in one with posing also issues from a regulatory perspective.   

 

Premarketing and Third-Party Distributors 

It is a known fact that premarketing – and the related notification – was introduced with the directive on Crossborder Distribution of Investment Funds. It is indeed less known though that in the first couple of iterations of the proposed directive, premarketing was to be extended also to UCITS. In the final version, it was decided to apply premarketing only to AIFs, both European and non. Multiple factors, including that UCITS can only be European domiciled and rarely are object of reverse solicitation in Europe, might have influenced the decision not to include UCITS under the premarketing notification.  

However, as a consequence, UCITS funds can be marketed in a host member state with investors, qualified or retail, only after a marketing passport notification has been submitted. The possibility of discussing with potential investors a potential UCITS strategy, whilst not specifically contemplated as a possibility under the Crossborder distribution directive, seems to us to stretch the boundaries of the concept of marketing authorisation as it currently stands. UCITS are most often a more standardised type of product, where there is little to no room for personalisation of the fund terms for clients. In the case of UCITS, most of the ad hoc accommodation for clients are related to fees and other minor features, which are usually dealt with via the creation of separate share classes under a UCITS compartment.       

Considering that one of the ways to be able to interest a third-party distributor – which is indeed a qualified investor itself – in a UCITS fund is to carry out road shows and presentations, activities which per se amount to marketing already and for which a marketing notification is required beforehand, we can see already how this proposed requirement clashes with the lack of premarketing for UCITS. Anticipating to the moment of the UCITS marketing passport notification the indication of the specific third country distributors would have represented an issue in light of current market practice. The process of selection of UCITS funds by third-party distributors is typically made more successful when the UCITS promoter or manager has already “committed” to that jurisdiction and can demonstrate that the related marketing authorisation has been obtained already.  

Lastly, new entrants and smaller UCITS funds would be clearly at a disadvantage here when compared to more established bigger funds house, with such third-party distribution relationships already in place.  

 

Conclusions 

The road to the achievement of the goals of the Capital Markets Union is paved with good intentions. Capital markets are made vibrant and efficient where more participants can enter the market. And where the set of measures introduced thus far have partially reduced the burden of costs involved in the business of crossborder distribution, these have not been eliminated completely. This makes competition possible in principle but much harder in practice.   

Get in touch here with your contacts at Veneziano & Partners to see how we can help with UCITS Marketing Passport Notification.