Tuesday March 13 2018
News Source: Fund Regulation
Focus: Other
Type: General
Country: European Union
On 12th March 2018, the European Commission took a major step towards the development of a Capital Markets Union (CMU) by promoting alternative sources of financing and removing barriers to cross-border investments.
While the CMU will benefit all Member States, it will particularly strengthen the Economic and Monetary Union by promoting private risk-sharing.
Building on progress already achieved since the launch of the CMU in 2015, the proposals will boost the cross-border market for investment funds, promote the EU market for covered bonds as a source of long-term finance and ensure greater certainty for investors in the context of cross-border transactions of securities and claims. The CMU is one of the priorities of the Juncker Commission to strengthen Europe’s economy and stimulate investments to create jobs. It aims to mobilise and channel capital to all businesses in the EU, particularly small and medium enterprises (SMEs) that need resources to expand and thrive.
Quick adoption of these proposals by the European Parliament and the Council will enable businesses and investors to benefit more fully from Single Market opportunities. The Commission also calls on the co-legislators to ensure the speedy adoption of pending key reforms for the completion of the CMU, such as proposals to strengthen capital market supervision, business restructuring and provide new savings opportunities for consumers. Out of the 12 proposals presented by the Commission to establish the building blocks of the CMU, only three have been agreed by the co-legislators at this stage.
European Covered Bonds
The Commission is proposing common rules – consisting of a Directive and a Regulation – for covered bonds. With EUR 2.1 trillion in outstanding amounts, they are currently among the largest debt markets in the EU. European banks are global leaders in this market, which represent an important source of long-term financing in many EU Member States.
Covered bonds are financial instruments backed by a segregated group of loans. They are considered beneficial not only because they fund cost-effective lending, but also because they are particularly safe. However, the EU market is currently fragmented along national lines with differences across Member States.
The proposed rules are based on high-quality standards and best practices. They aim to enhance the use of covered bonds as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed. They will also give investors a wider and safer range of investment opportunities.
At the same time, the proposal seeks to reduce borrowing costs for the economy at large. The Commission estimates that the potential overall annual savings for EU borrowers would be between EUR 1.5 billion and EUR 1.9 billion.
Cross-Border Distribution of Investment Funds
Investment funds are an important tool to channel private savings into the economy and increase funding possibilities for companies. The EU investment funds market amounts to a total of EUR 14.3 trillion. However, this market has not yet achieved its full potential. Just over a third (37%) of UCITS funds and around 3% of alternative investment funds (AIFs) are registered for sale in more than three Member States. This is also due to regulatory barriers that currently hinder the cross-border distribution of investment funds.
The proposal aims to remove these barriers for all kinds of investment funds making cross-border distribution simpler, quicker and cheaper. Increased competition will give investors more choice and better value, while safeguarding a high level of investor protection.
Law Applicable to Cross-border Transactions in Claims and Securities
The assignment of a claim refers to a situation where a creditor transfers the right to claim a debt to another person in exchange of a payment. This system is used by companies to obtain liquidity and access credit. At the moment, there is no legal certainty as to which national law applies when determining who owns a claim after it has been assigned in a cross-border case. The new rules proposed clarify according to which law such disputes are resolved: as a general rule, the law of the country where creditors have their habitual residence would apply, regardless of which Member State’s courts or authorities examine the case. This proposal will promote cross-border investment, access to cheaper credit and prevent systemic risks.
The Commission has also adopted a Communication to clarify which country’s law applies when determining who owns a security in a cross-border transaction. Enhanced legal certainty will promote cross-border investment, access to cheaper credit and market integration.
The Mid-Term Review of the Capital Markets Union Action Plan reported in June 2017 on the progress made so far in bringing the Action Plan forward and set the timeline for new action. In this context the Commission announced that it would publish in Q1 2018 several legislative proposals, notably in the areas of investment funds, covered bonds and dispute resolution.
The proposals consist of a:
- Regulation setting out a harmonised EU framework on required marketing communications; an online transparency framework for national provisions on marketing requirements; verification of compliance with national provisions; fees and charges; an ESMA central database and amendments to the European Venture Capital Funds Regulation 345/2013 and the European Social Entrepreneurship Funds Regulation 346/2013 on pre-marketing; and
- Directive on the cross-border distribution of collective investment funds which will amend the UCITS IV Directive on requirements on physical presence; discontinuation of marketing; and notification procedures for changes to UCITS; and AIFMD on pre-marketing; discontinuation of marketing and consistent treatment of retail investors.
The key features of the proposed reforms include:
- Enhancing transparency by harmonising fund marketing requirements and regulatory fees across the EU. In order to ensure more consistency in how regulatory fees are determined, common high-level principles for the calculation of regulatory levies charged by national competent authorities will be introduced. With regard to the diverging national marketing requirements, a harmonised definition of pre-marketing is to be inserted in AIFMD to allow for certain pre-marketing activities prior to an AIF being established to allow asset managers to test the appetite of potential professional investors for new investment opportunities or strategies through pre-marketing activities.
- Removing the requirement to appoint a local agent when marketing an AIF or a UCITS in a Member State. The choice of how facilities to support local investors are provided (local presence or electronically) is to be left with the asset manager, with certain safeguards being introduced for investors in UCITS.
- Introducing conditions under which marketing of investment funds may be discontinued in a Member State.
- Establishing an enhanced notification procedure with the introduction of further harmonisation of the procedures and requirements for updating notifications and de-notification of use of the marketing passport.
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