Cross Border Distribution and Facilities Agents

One of the promises of the Cross Border Distribution Directive is to remove hurdles to the distribution of UCITS funds in Europe. For the cost of abiding to certain formalities imposed at local level being one of the main obstacles, it is clear how no single measure could help achieve per se the result of more integrated capital markets in Europe.

Whilst we covered already in greater details the topic of local facilities agent under UCITS directive, as well as ELTIF regulation, here we wanted to extend some additional considerations, more strategic in nature, useful to all firms dealing with the changes brought about by the Cross Border Distribution Directive on the topic of local facilities agents.

Get in touch here with your contacts at Veneziano & Partners to see how we can help with Local Facilities Agents and Cross Border Distribution Directive.

What changes with the Cross Border Distribution Directive?

Everyone who has been dealing with distribution of investment funds across Europe is acquainted with the fact that, in certain specific European host domiciles, the requirement to provide facilities to local investors under article 92 of UCITS Directive equals to the appointment of a third party, most typically a local credit institution with a brick-and-mortar presence in the specific EU host domicile. Such appointment usually translates in a yearly fee for the UCITS, or its management company, hence an obstacle for distribution of [smaller] UCITS across Europe, at least in the eyes of the European Commission.

It is useful to add that, in this context, the Cross Border Distribution Directive neither has eliminated the requirement for UCITS funds to provide local facilities in EU host domicile for distribution, nor altered the list of tasks that a local facilities agent should perform. It is a legitimate question the one about the real extent of the changes brough about by the Cross Border Distribution Directive to the current requirement for UCITS funds to provide local facilities.

A fair conclusion might be that the Cross Border Distribution Directive has mostly changed the way that local facilities functions can be performed in the following manner:

• Subjective – because not only an external third party can offer the local facilities agent service, but now also the management company of the UCITS itself. The new version of article 92 UCITS directive opens up also to hybrid models, where the local facilities agent service is provided in concert by the management company of the UCITS, for instance, and a third party of choice.
• Objective – because it can no longer be imposed by local rules implementing UCITS Directive that facilities are rendered in person via a brick-and-mortar local presence and these can now be offered over the telephone and online, provided that these are rendered in the local language of the specific EU host domicile. What does this change mean?It is clear that the Cross Border Distribution Directive hasn’t eliminated tout-court the requirement to provide local facilities in the EU host domiciles where UCITS are distributed. In essence, the real change brought about by the Cross Border Distribution Directive is that the local facilities, in all or part, can now be offered over the telephone and online also by the management company of the UCITS or other company of the group. It is no longer mandatory that these are offered by an external third party, same as it can no longer be imposed that a physical presence is offered as part of the local facility service.This does not mean that local facilities are no longer required to be offered same as it doesn’t mean that facilities can be offered in English, for argument’s sake, to a German investor. The Cross Border Distribution Directive hasn’t changed the requirement that local facilities have to be offered in the language of the specific EU domicile where distribution is taking place.Also, most typically, the task of the local facility required under article 92 of UCITS directive is not limited merely to making available fund documentation or other information to investors. Depending on the EU host domicile at issue, the local facility service can take different connotations and also play a pivotal role in the process and mechanics of distribution in that specific EU host domicile.

Conclusions

Many UCITS managers are currently setting their wheels in motion to implement the requirements under the new version of article 92 UCITS directive on local facilities agents. Will this result in the dismissal of the majority of external third parties, currently offering this service to UCITS fund distributed in Europe? We don’t think so. Will the newly launched and less expensive digital document hosting solutions replace the typical brick-and-mortar credit institution facilities agent? We don’t think so either.

Whilst we believe that challenging the status quo always brings better things, we take the view that the importance of implementing this change medium to low. Smaller managers, who can barely afford the costs inherent to distributing their UCITS across Europe, will of course benefit from being able to achieve some efficiencies in the overall costs of their European cross border distribution endeavors.

Fate loves irony though. It is also our view that bigger and more global firms, the ones with own presence across different markets in Europe as well as multi-lingual capabilities, will be the ones to reap the most benefits – as well as cost efficiencies – from the new requirements under article 92 UCITS Directive on local facilities agents.

One final caveat is of essence. There are some significant blind spots that most UCITS managers, even the bigger sized ones, should take some time to identify when working on the implementation of the new version of article 92 UCITS directive. These are linked to the nature of European cross border distribution and revolve around the value added, mainly from a commercial perspective, of having a specific third party appointed as local facilities agent in some strategic European host domiciles as well as the role that those facilities agent play within the bigger picture of the main European fund platforms.

Get in touch here with your contacts at Veneziano & Partners to see how we can help with Local Facilities Agents and Cross Border Distribution Directive.