Cross-Border Distribution of UCITS

EXECUTIVE SUMMARY

UCITS have become both a European standard and a respected global brand. The number of UCITS launched continues to grow at an unparalleled pace across Europe, with Luxembourg and Ireland out front and other national domiciled UCITS (such as German, French and British) also increasingly open- ing to cross-border distribution. Pan-European distribution develops in line with changing distribution models from the predominance of a vertically integrated value-chain to third party distribution, and to- day’s most valued distribution model is guided architecture. Further afield, cross-border distribution of UCITS continues to expand worldwide, with new countries opening to UCITS every year.Furthermore the industry is currently eying distribution opportunities in a few big economies that are still closed to distri- bution. Within the European domestic markets, two main competitive fund distribution models coexist: The Transfer Agent model and the Central Security Depository model. Each Member State has developed the model best suited to its national financial industry requirements, however despite functioning well at a domestic level, the fragmentation causes barriers to efficient order routing, settlement and custody in a cross-border environment. Since a few years, a new fund distribution model has emerged to facili- tate cross-border distribution: The global TA model. Although the UCITS Directive’s objective of developing a unified regulatory framework for mutual funds across Europe is largely achieved, asset managers looking to market their funds beyond domestic bor- ders continue to face a number of key issues in terms of: • Administrative and regulatory requirements, as registration and post-registration duties can be oner- ous and time-consuming in certain countries; • Taxation, as they have to ensure compliance with all fiscal obligations in countries where they distribute their products; • Access to reliable and updated information, as there is no pan-European fund database; • Operational workflow, as the growing cross-border business and open architecture trend tends to in- crease operational complexity in an industry where manual processes and lack of standardisation re- main widespread; • Distribution agreements and trailer fee management, as their distribution networks are increasingly complex. However, major initiatives have emerged which aim to tackle these issues, at least at the EU level: • European regulations are constantly adapted to steadily knock down barriers and favour the develop- ment of cross-border distribution, with the recent UCITS IV Directive being a prime example; • Major tax discrimination against foreign UCITS has disappeared in the EU due to pressure from the European authorities; • Under the guidance of the EFAMA, the development of the Fund Processing Passport is opening the way for the electronic communication of operational information on funds; • Numerous steps have been taken over the past years by market place groups, such as SWIFT, ICSDs and other players including transfer agents, to increase the levels of automation and uptake of stand- ards, which has in turn given rise to a broad range of automated fund platforms; • Some service providers have started to position themselves as intermediaries between distributors and promoters/management companies. One of the major challenges to come is putting the theoretical model of full-STP processes for the fund industry into practice. The key benefits for the industry are greater efficiency, reduced operational risk and enhanced service. Industry players must continue working closely together in order to develop and implement the necessary standards and best practices.