A recent report from the European Commission (“EC”) covering the final stages of its Capital Markets Union (“CMU”) initiative (a key initiative for Europe) aims to ease managers’ capacity to lend to and invest in European businesses.

The EC’s vice-president Valdis Dombrovskis said “we want to create the right conditions for more funding to flow to the real economy, so that European start-ups and SMEs can get the finance they need to invest, innovate and grow. For this, we need to break down barriers to cross-border investment, improve access to alternative finance, improve the ability of SMEs to tap capital markets, and more”. The EC also wants to enhance the “proportionality of rules” for investment firms, regulating them more appropriately in relation to size and business-type. In addition, the EC wants regulators to provide better guidance on existing EU rules for the treatment of cross-border EU investments and provide an adequate framework for the “amicable resolution of investment disputes”.


The EC’s research findings were that the cross-border fund market is successful but remains geographically limited because of concentrated fund distribution channels in individual Member States, cultural preferences and a lack of incentives to compete across borders. Other reasons identified by the EC include the additional national requirements imposed by Member States when transposing the AIFMD and UCITS Directive.

The EC has identified six categories of national barriers. Their proposed removal will test Member States’ commitment to CMU and to the principles of harmonisation enshrined in the UCITS and AIFMD Directives. The barriers are as follows:

  1. host Member States can set national requirements on financial promotions and consumer protection, giving rise to initial research costs for firms and to additional ongoing costs;
  2. EU funds can be subject to regulatory fees imposed by home and host Member States that vary significantly in scale and calculation methods;
  3. a number of Member States impose special administrative arrangements to make it easier for investors to subscribe, redeem and receive payments from funds. Some Member States force funds to use certain institutions and provide additional information to both the regulator and investors;
  4. despite the increasing use of online platforms to distribute funds nationally, barriers exist across borders;
  5. when fund documentation has to be updated, managers are required to give written notice to the host regulator, adding cost and time to the process; and
  6. different tax treatments create discriminatory barriers to cross-border business.


The EC has reiterated calls for supervisory convergence, a core element of the CMU project, which would see European regulators enforce rules in a more consistent way. The EC’s plans are based on a January review of the CMU initiative, which aims to create an integrated capital market in the European Union by 2019. Broadening financing options for business and increasing the opportunities for investment requires significant change across a range of complex interconnected issues, both regulatory and structural. So far, the EC has tackled mainly the regulatory barriers, with specific proposals to help loosen the financial system, and provide improved access to capital markets for SMEs.

The European Securities and Markets Authority (“ESMA”) has made it clear that retail investors should receive the same level of protection, independent of the location of the firm providing the service. This is seen as important to both to the free movement of services within the EU in general and to the success of the CMU initiative in particular.

Unfortunately, there does not appear to be a clear solution to address the strong national bias among, in particular, retail investors or the predominance of certain types of distribution channels in different Member States. Digital distribution platforms and different generational approaches may smooth out this bias over time.


Critics of the CMU initiative have argued from the outset that national self-interests are the greatest obstacle to Europe having more vibrant capital markets. This concern is already resonating strongly in the debate about cross-border fund distribution.

There are conflicting views between European and national officials. Some believe the figures in the Commission’s report demonstrate that the 30-year old UCITS passport has created the most cross-border market within Europe. Others cite the much higher number of funds, the lower average fund size and higher cost ratios compared with the US as evidence that the single market is not working properly. They say that poorer economies of scale of European funds disadvantage European investors and if funds can do business more easily across borders, they can achieve larger economies of scale and compete to deliver better value and innovation for consumers.

Views differ not only about to what extent there is a problem but how to address it. Some national regulators, for example, have been heard to argue that a fund should not be allowed to export into other Member States if it is not first sold in its own Member State. The same regulators have suggested that all marketing literature should be required to seek pre-approval by each host Member State before it can be issued. Others rightly note that an ex-ante approval process would not sit well with a truly pan-EU market.

It seems that at the heart of some of these comments is a degree of distrust between national regulators. Some say that all Member States need strong gatekeepers, implying that they think others are not. It is not clear how these views will be addressed other than over time and with greater powers given to ESMA to accelerate supervisory convergence.


The debate is especially timely as the industry now faces potentially the single biggest impact on cross-border fund distribution in a generation – Brexit. The loss of the fund and management company passports under the UCITS Directive and the AIFMD will have different impacts in the retail and professional market places in the UK and in firms across Europe. According to Commission statistics, about 80% of UCITS and 40% of AIFs are marketed across borders, but one-third of these are marketed into only one Member State, usually the state in which the investment manager is domiciled. Another third are marketed into no more than four other Member States.


Although the removal of some of these barriers is likely to be a long game, firms should play an active part now in the debate, to help shape the European UCITS market for the next decade. Firms should also make sure they are aware of the potential changes to come by keeping on top of EC and ESMA publications and updates so that firms are in the best position to implement any changes further down the line.

To access the EC’s publications on this, please click here.

For more information, and any guidance or advice on cross-border fund distribution, Cleveland & Co, your External in-house counsel, are here to help.