Luxembourg, 6 October 2016

Transcription

1 Luxembourg, 6 October 2016 European Commission Public Consultation on the main barriers to the cross-borders distribution of investment funds across the EU - ALFI responses to Questions 2.1a, 3.2, 3.15a, 4.1, 6.1, 9.3, 9.3a and Due to the limited number of characters (5000 characters) allowed for some of the boxes, we have been unable to insert the full version of our response to some of the questions raised in the consultation, namely questions 2.1a, 3.2, 3.15a, 4.1, 6.1, 9.3, 9.3a. and 10.1, and that are of particular importance to us. Please find below ALFI responses to these questions. 2. General overview Question 2.1a Please expand upon and provide more detail on your response to questions 2.1 and 2.1a - please explain what the issues are and how they limit the cross-border distribution of funds? Please cite the relevant provisions of the legislation concerned if possible: Many asset managers limit the cross-border distribution of their funds as a result of the cost-benefit considerations: the size of the market vs. the cost of entering the market. Thus, although the cost of entering a market may not be too high in itself, the size of the market may mean that the benefit does not outweigh the cost at a certain point in time. Furthermore the lack of public access (in a common language English) to the different marketing - or pre-marketing standards in the target distribution countries or a non-existence of a harmonised definition and application creates a significant level of inefficiency. The deviating fee levels and fee models of the supervisory authorities contribute to additional efforts in the context of the notification and the updates of the notification. Though the level of the fees itself might not be considered as a pivotal barrier element on an isolated basis, the organisational inefficiencies to cope with different fee levels and organisational aspects (front up payments without invoices up to expost invoices) contribute to an overall inefficiency.

2 Costs and/or obstacles may arise at several stages of distribution and may be incurred or could pertain to various aspects of the cross border distribution: 1. Administrative restrictions: Some host countries (e.g. Italy, Poland: UCITS notification) require a national register for their customers (in Italy, it is limited to retail investors). Consequently national service providers have to be appointed and a dedicated process for the outsourcing control and information flow as well as an individual interface to the management company has to be established and additional costs are involved. On this basis, no direct cross border fund unit settlement with the management company or its transfer agent or via intermediaries (e.g. international Clearer) is possible. Basically for an investment fund, any requested administrative arrangement, which is not currently subject to a harmonized approach, should be the object of an analysis to reduce burdens and costs in accessing a market and contribute to an efficient procedure in order to support clients and involved parties. Some countries (Austria, Belgium, Czech Republic, Denmark (Retail distribution), France, Italy, Ireland or Spain UCITS notification) require a paying agent or a representative function (e.g. facility agent) while others do not require such a function. The registration and update of information of appointed distributors with some host regulators (e.g. Italy; UCITS notification) creates a significant burden. Generally, the information about the distribution activity of the national sale points should not be subject to any information obligation of the foreign management company, but limited to a national approach of the regulator in the country of distribution. The technical filing requirements for KIIDS in Belgium with regard to a required certain ZIP packaging requirements create additional efforts. 2. Notification: With regards to UCITS, in part B of the notification letter, information about the distribution in the host country is being provided. From the perspective of the procedure of the notification it should be made clear to the parties involved, which responsibility and control focus will be executed by which party. Comments from a home regulator to change/appoint a paying agent for a host country where this is not being requested, or any attempt or rejections or a limitation to a group of professional investors in a host country where this is permitted are obstacles to be avoided. Furthermore national additional mandatory documents (e.g. Italian subscription form in the area of retail distribution UCITS notification) create needless barriers for an efficient cross border distribution. In Spain an additional information about the number of investors (> 500) in a UCITS can be provided in the context of a notification in order to avoid certain tax disadvantages to customers. 3. Maintenance of notification: In the context of UCITS, the process to update the legal documents (prospectus, KIIDs, reports, etc.) from the management company to the supervisory authority in the target country is not standardized (e.g. the filing of updated KIIDs in the context of distribution to institutional customers or new version of Fund prospectus is not requested in some host countries e.g. Denmark). Next to this information some host countries (e.g. Italy, UCITS) require a significant set of ongoing reporting information such as lists of appointed distributors, funds being authorized at a certain point in time, notices to clients, risk classifications of the funds and use of marketing material. The general information load in such cases should be reduced to an efficient level (e.g. KIIDs, filing not required in FI but in AT, notifications to customers). In Spain certain information can only be provided to the supervisor via the technical communication channel CIFRADOC to the Spanish supervisory authority. 2

3 Also for tax purposes an entity with a Spanish Tax ID has to be mandated in order to transfer fees to the Spanish supervisory authority. In both case the number of service providers being available and the access is quite limited. With regard to the general efforts and costs, maintenance is crucial referring to the lifetime of a Fund or period of time of notification. Consequently harmonisation and simplification (e.g. update filing limited to the home regulator) would significantly contribute to more efficiency. 4. Deregistration notification: The market exit (deregistration) of a fund from a target country is not yet harmonized. Since also the market exit costs can be crucial and contribute to an efficient market and product offer this issue should urgently be harmonized as well. At this point in time some countries (Spain, Belgium, Poland, UCITS) do not permit a deregistration of a fund if some (or a certain number of) clients remain invested. 3. Marketing requirements Question 3.2 Which of the following, if any, is a particular burden which impedes the use of the marketing passport? Please specify what other domestic requirements are a particular burden which impedes the use of the marketing passport: In the context of the use of marketing passports, the following elements are also significant barriers to the cross-border distribution in particular for smaller asset managers: lack of harmonization in relation to the definition of private placement and public offering; requirements to appoint local agents and restrictions on direct marketing / requirements to appoint local intermediaries; the local addendums and local tax supplements ; lack of harmonization in relation to the deadlines and methods for payment of the fees and the different methods of notification of the due fees: (e.g. Spain the obligation to appoint CIFRADOC representative/spanish entity in charge of payments to CNMV who also has to have a Spanish tax ID) lack of harmonization in relation to the documents required (existence of local addenda and disclaimers for respectively the UK, Germany, Greece, Italy); the fund documentation content and format requirements: Specific requirements on fund documentation content, including requirements to add an addendum to the prospectus with specific information for local investors or a local version of the prospectus (e.g. Germany, Italy) in a local official language (or one of the local official languages) despite investors potentially understanding other languages; specific registration and filing requirements such as the maintenance of UCITS registration: filing of written notices for UCITS, the registration of AIFs for marketing to retail investors and the secondary filing in Italy and Spain for example; regulatory reporting (e.g. specific CONSOB reporting in Italy) and tax reporting requirements; 3

4 lack of harmonization in relation to the fees of regulators (initial registration fees and maintenance fees); barriers to the cross-border distribution of AIFs to retail investors. The marketing to certain target groups (e.g. professionals) should be based upon a harmonized approach. In certain countries, the distribution to a limited group of customers, such as professional or institutional investors, is possible and can be notified and this should be a common approach. In line with this approach, the production of documents should be possible in English in order to further open up the market for this target group on an efficient basis. The situation in the context of the use of the AIFMD passport may be illustrated through the following examples giving a view on the impact of the existence of non-harmonised practices. The importance of their impact may vary from country to country. - The German regulator requires specific information regarding Marketing Arrangements that other regulators do not (i.e. confirmation that arrangements have been established to ensure that the information duties specified in articles 22 and 23 AIFMD have been complied with; or confirmation that agreements with distributors have been established, which oblige these distributors to comply with the information duties specified in article 23 AIFMD). On the other hand, the German regulator often provides English translations of its guidelines, which is appreciated by the industry. - Although annex IV AIFMD provides details of the information/documents for the passport notification, many regulators have not yet issued template notification letters. For those that have, in some cases the level of required information varies widely. E.g. the Luxembourg regulator sometimes requires a detailed mapping of article 23 (investor disclosure requirements) vis-à-vis the prospectus/offering memorandum including a copy paste of the actual text. On the other hand, the Irish and UK regulators agree to receive a mapping of where the text can be found in the prospectus/offering memorandum (e.g. only page number and section/title heading). E.g. the Irish regulator requires that for each sub-fund of the AIF, the classification of the breakdown of investment strategy as per annex IV data type 10 of Commission Regulation 448/2013 is mentioned. - Another difference which causes practical issues is the decision by the UK regulator to submit to host state regulators only the information/documents as stated in annex IV of the AIFMD. All other information (e.g. proof of payment for Germany, Austria or France) must be communicated by the AIFM directly to the host state regulator. In this regard, the Luxembourg and Irish regulators are much more flexible and actually require such particular additional information documents to form part of the notification filing. - Guidance/detailed information on the article 32 AIFMD passporting process (i.e. specific country requirements) for many countries is not always available. 4

5 - There is uncertainty regarding the notion of material changes that may cause modifications of fund documentation. In Ireland, for example, it is the AIFM which decides whether the change is material or not. Moreover, the process for the notification of material changes has not yet been clearly defined by many regulators leading to uncertainty in the timing within which such notifications should or must occur. - As far as the overall experience of using the AIFMD passport is concerned, the responsiveness of national regulators and the way of how they can be contacted differs. Moreover, the information on the process was fragmented from one regulator to the other. Still, ALFI has the impression that the overall experience of using the AIFMD passport in Luxembourg, Ireland and the UK is positive. The regulator-to-regulator notification process for marketing funds in another EU Member State (or EEA country) works well. - From a Luxembourg perspective, the creation of guidelines/circulars at a home and host country level providing detailed information on article 32 AIFMD registrations would result in the creation of a more harmonised passporting framework and would also help the promoters to better tailor their internal processes and documentations. - From a UK perspective, the streamlining of the notification process (especially by reducing the number of forms required, the need of the filing of the hard copies of the application documents) would result in a less burdensome process. - From an Irish perspective, the streamlining of the notification form to be in line with the requirements of annex IV AIFMD would result in a less burdensome process. Question 3.15a Please explain your answer to question 3.15 and if appropriate, to what extent do you think they should be harmonised: As explained under question 3.1 aa above, there is no definition of marketing in the UCITS directive and, as for AIFMD the concept of marketing is defined but it is still subject to interpretation. EU funds marketed cross-border are usually required to comply with national requirements set by host Member States, which differ across the EU. Requirements regarding marketing material content and need for a prior approval from the local regulators are different amongst Member States. Greater harmonization would thus allow avoiding multiple versions of the same document, mitigating inconsistencies, and would easily ensure compliance with the relevant regulations. Mandatory disclosures should be defined with more details at an EU level, avoiding risk that local implementation and application of EU rules result in a myriad of different local rules, potentially contradictory from one Member State to another. Significant costs are incurred in researching each EU Member State's financial promotion and consumer protection regime, and providing appropriate materials on an ongoing basis. 5

6 The rules applicable to marketing communications to retail investors should be aligned across EEA Member States also bearing in mind that certain requirements are already subject to some level of harmonisation across the EEA. In particular, under the UCITS Directive, all marketing communications relating to UCITS must: Be clearly identifiable as such Be fair, clear and not misleading Make no statement that contradicts or diminishes the significance of the information contained in the prospectus and the key investor information document Specify where and in which language such information or documents may be obtained by investors or potential investors or how they may obtain access to them In addition, although they have not all been specifically transposed by each Member State, specific rules already apply at EU level to marketing communications for some specific types of UCITS: UCITS with significant exposure to securities issued by public bodies Index tracking UCITS UCITS not investing principally in transferable securities High volatility UCITS Feeder UCITS Money market funds UCITS ETFs Finally, some harmonisation of general marketing rules applicable to all types of products and services, including the marketing materials of investment funds, already exists in several specific directives, namely: Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (MiFID) Distance marketing of financial services directive i.e. Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market the Directive 2006/114/EC of the European Parliament and of the Council of 12 December 2006 concerning misleading and comparative advertising. However, we note that Member States have adopted different approaches and implemented different rules applicable to marketing communications of investment funds in relation to, for example: 6

7 Minimum content of marketing materials Requirements to submit marketing material to competent authorities and, where relevant, obtain prior approval Past performance disclosure Presentation of future performance, where permitted Provision of risk indicators and risk disclosures Specific requirements on warnings or disclaimers Specific requirements on the website. A common understanding would ease the assessment of relevant aspects related to cross-border distribution where feasibility studies made by lawyers or supervisory authorities in each foreign countries are now required. Coordination costs would consequently be reduced and a clear playing field would be created for a comparable product offer to customers. There may be further improvements to be made in terms of both contents and forms of marketing material. As an example, ESMA should ensure that there is no extra local requirement in relation to the mention of the license of the company issuing the marketing material (UK), the mention of the local representative/paying agent (Belgium) or in relation to the pre-filing of the marketing documents with the authorities (France and Italy as an example). For products which are already subject to strict harmonized EU rules in terms of principal features (i.e. mainly the UCITS but also to some extent AIFs), one may question the rationale of keeping host members States competence for defining marketing and the content of marketing documents especially when the requirements applied to the products are already designed with an investor protection perspective and where transparency requirements are already in place (KIID/KID). The application of national consumers protection rules should be sufficient with no need to add specific local requirements in terms of marketing documents. One should also take into account the interconnection with other pieces of legislations (i.e. MiFID) which provided for strict transparency requirements for financial instruments and rules of conduct for financial firms and MiFID 2 which will impose identification of target markets giving additional guidance to an EU single market. If this body of regulations is felt to be incomplete a common and single set of rules on marketing should be developed which would obviate the need for separate and divergent rules at Member States level. In the end, all investors within the EU should be able to access the latest information without hindrances. This would increase their understanding of their investment knowledge (funds they invest in, the developments that may affect them and the wider market environments) and would help them make informed choices which are vital to their continued financial wellbeing. 7

8 4. Costs Question 4.1 What proportion of your overall fund costs relate to regulation and distribution depending on the Member State where the fund is marketing regardless where it is domiciled? If this is not straightforward to obtain, please provide an estimate. Alternatively, please provide man hours spent on each. In relation with UCITS cross border distribution UCITS funds that are passported across the EU, without taking into account regulators fees which are covered under Section 5, are subject to a long list of costs which are driven by local regulatory requirements which goes from translation in local languages to the appointment of local agents, publication of NAVs, provision of tax reporting and local legal advice on specific rules and marketing initiatives. On average, for an umbrella UCITS with 5 sub-funds that are registered in key markets in the EU such as UK, Germany, France, Austria, Italy, Spain the registration and distribution costs may be estimated to 150,000.- to 200,000.- per annum. Tax reporting in the UK, Germany and Austria (also Switzerland) is the first contributor to that amount. Second contributor would be the appointment of local agents, such as paying agents of local representatives. Legal advice on compliance marketing may also be a significant contributor. Local representative and/ or paying agents, who are mandatory in most EU jurisdictions (e.g. UK, Germany, France, Italy, Spain, Austria, Nordic countries, ) and charge on average from 5,000,- to 10,000.- on an annual basis, are rarely used in practice, unless they are performing additional distribution or trading services. The requirement to have local representatives offers little advantage to local investors or regulators. Regulators should have contact names and details at Management Companies in case of issues, they may also contact the home State regulator for queries. Then, from an investor perspective, UCITS IV and other regulations have simplified the process of issuing complaints, including disclosures on how to lodge complaints,, thus such representatives should not be really needed. In order to save costs, requirements to have local representative and paying agents should be waived and replaced by the obligation to appoint a local MiFID distributor in case of retail distribution. Further, such agents provide even less value in case of distribution to professional investors only. In relation with AIFMD cross border distribution Many national regulators levy fees for the marketing of AIFs in their jurisdiction. Depending on the amount of the fee, this additional charge is likely to make the AIFMD passport less attractive. There are substantial differences in fees levied by national regulators for marketing funds in their jurisdictions. In particular, some jurisdictions apply fees at sub-fund level and others only at fund level. Whereas the UK, Irish and Belgian regulator seem to apply no or reasonable fees, the fees levied by the German and Austrian regulators seem to be very high. The fees levied by the Luxembourg, French and Finnish regulators do not seem to be excessive, but still not related to the work performed. Apart from regulatory fees, overall costs for obtaining the AIFM licence are significant, as well as costs for reporting etc. 8

9 In addition, the costs of filing Article 42 AIFMD notifications for AIFs in multiple jurisdictions is significant and each country has specific requirements which requires customisation in delivery of the files and in some cases, in the format. The level of the various types of costs (in particular, legal costs, regulatory fees and administrative arrangements) in relation to the overall fund costs is diversified and can depend on various parameters such as individual price schedules of service providers, frequency of fund prospectus updates as well as the fund volume, etc... The national requirements of host markets (e.g. appointment of Paying Agents, up to the different level of marketing costs) also have a direct impact on the level of costs. Based upon an analysis of a sample of individual funds, the cost level may be evaluated between 1% of the overall fund costs up to 4% of the overall fund costs in some individual situations. Additionally, in case other fees, such as retrocession fees payments that vary from country to country or distribution situations, are excluded from the analysis, the percentage of costs related to the overall fund costs would significantly rise. In our view, a general average figure could be largely misleading as a number of individual aspects (distribution strategy, target market) are important for the cost ratio. All in all, the overall distribution costs as a percentage of the fund costs (not including retrocession fess) are not significant. Still the internal costs of coordinating the legal and organisational aspects of a cross border distribution with deviating requirements of different markets require dedicated resources and any harmonisation would contribute to cost saving aspects. With regards to regulatory costs of asset managers in relation to cross-border distribution, overall, we would rank them by order of importance as follows: 1. Administrative arrangements: mainly the costs of local facilities/local agents (Please also see Section 6.) 2. Marketing requirements: e.g. the obligation to provide translation of documents, specific document and/or supplement (e.g. prospectus supplement), development of multi-market websites, the local marketing communication rules which are not harmonised in the EU, etc 3. External legal costs: third party costs e.g. law firms, consultants, etc 4. Internal legal costs: internal legal analysis 5. Others: e.g. notification and maintenance of notification, filing requirements, translations. With regards to distribution costs intended as both traditional network distribution costs and online network distribution, the most significant costs for asset managers are the cost of sales and promotion (staff, marketing material, roadshows, ) and the cost of the distribution network in the local markets. Cross-border distribution models could thus be classified as follows : traditional network distribution, principally for traditional funds such as UCITS direct distribution, principally for AIF (alternative/professional funds) online network distribution, principally made by the larger/mid-size asset managers Finally, with regards to others costs linked to taxation system, the main costs involved are linked to (i) getting the relevant information and (ii) fulfilling the tax obligations. 9

10 6. Administrative arrangements Question 6.1: What are the main barriers to cross-border marketing in relation to administrative arrangements and obligations in Member States? Please provide tangible examples of where you consider these to be excessive: Filing notifications procedures: Significant barriers to cross-border marketing are embedded in different approaches to filing requirements in the case of updating an existing notification or in the case of market exit. The requirements to update an existing notification in case of amendments of the Prospectus or KIID are not harmonized with regard to the need to file the documents e.g. while the very large majority of the European supervisory authorities require KIIDs to be filed when updated, few regulators such as the one in Denmark and the Netherlands do not require such updated KIIDs to be filed. A market exit is only not possible in certain markets if there are still clients invested in the local market (example: France). Some countries (Spain, Belgium) apply a maximum number of local customers for a fund to be able to apply for deregistration. Also, with regards to article 36 AIFMD notifications, some administrative arrangements are not always clear or easy to handle. It is worth noting that ESMA guidelines in this regard seem to be quite unclear thus leading to different practices among EU Member States. Examples include: The Dutch regulator requires the notification letter for Article 36 AIFMD to be signed by the non-eu AIFM. The German regulator requires additional detailed information on certain points of Article 23 (investor disclosure) including but not limited to a) detailed wording in relation to the leverage provider and prime broker in the case of collateral & asset reuse arrangements; b) detailed wording in relation to the actual types of methodology used for all the main types of investments/ instruments included in the portfolios and c) detailed information on maximum amount of all possible fees. The Danish regulator requires a reciprocity statement from the home state regulator of the non-eu AIFM thereby allowing Danish funds to be sold to institutional investors in the home state of the non-eu AIFM. To the best of our knowledge there is no list available on the Danish regulator website to indicate which countries have already successfully implemented such reciprocity statements. With regards to article 42 AIFMD notifications, some administrative arrangements are also not always clear or easy to handle. Similarly, ESMA guidelines in this regard also seem to be unclear and, while in Luxembourg, the process is straight forward (simple notification letter), this leads to different practices among EU Member States. Examples include Dutch regulator requires the notification letter for Article 42 AIFMD to be signed by the non- EU AIFM. There are also detailed questions regarding the assets under management of the non-eu AIFM to determine the Article 24 reporting frequency 10

11 The Danish regulator requires a reciprocity statement from the home state regulator of the non-eu AIFM thereby allowing Danish funds to be sold to institutional investors in the home state of the non-eu AIFM. To the best of our knowledge there is no list available on the Danish regulator website to indicate which countries have already successfully implemented such reciprocity statements. Some countries require the appointment of local entities even for distribution to institutional investors (e.g. Austria requires a legal representative based in Austria and France requires a centralising agent in France) Irish regulator requires Article 42 notification letter to be signed by the non-eu AIFM. Appointment of local agents: Where EU funds using the marketing passport are sold to retail investors, host Member States sometimes introduce special administrative arrangements intended to make it easier for investors to subscribe, redeem and receive related payments from those funds, as well as receive tailored information to support them in doing so. These are an additional burden that may not always be justified by the value added for local investors. Member States have a wide range of requirements on local agents that must be appointed before an investment fund may be distributed on a cross-border basis into the territory of the State. The roles of local agents in relation to the cross-border distribution of investment funds may include, for example: Local paying agent: o o Making redemption payments to unitholders (e.g. Italy, Spain, Sweden) Receiving subscription payments from client (e.g. Italy, Spain) Local information agent (e.g. France, Italy, Spain, Sweden): o o o Provision of information to unitholders, including NAV prices Provision of documentation to unitholders Publication of documents and information Local representative agent: o o o Legal representative (e.g. France, Spain) Provision of information to competent authorities (e.g. France, Spain) Provision of information to tax authorities (e.g. Spain) Local transfer agent: o Reception of investors orders and communication to central administration / Global transfer agent (e.g. France) Complaints handling. 11

12 Some Member States, the settlement of (retail) orders is required to be locally embedded into a registration structure (e.g. Poland and Italy). The objective of the legislators and competent authorities in each Member State is to protect investors. However, we noticed that those entities sometimes are often not involved in the distribution of the funds or even the fund unit settlement or safeguarding of the assets. Therefore, requirements to appoint local agent(s) are not always justified and most types of local facilities could be provided on a cross-border basis without compromising investors protection. Overall, requirements to appoint local providers to provide local facilities is disproportionate considering: the cost of provision of local facilities, with limited or no tangible additional benefit for investors the emergence of technologies facilitating cross-border communications and electronic transactions. We note that the implementation of new financial technologies (FinTech) will further enhance these possibilities. A core/single set of requirements across the EU would serve to streamline administration and reduce operating expenses on the funds. Typical national requirements for facilities agents and how we recommend these requirements should be updated: Requirement The entity providing the facilities should belong to certain specific categories only. Facilities should include the possibility to directly subscribe to the units or shares of the fund and to make repurchase and redemption requests. Example of how national legislation currently requires the requirement to be met Local bank. In some cases, an affiliate of the management company may fulfil some of the duties Local bank Alternative less costly methods of meeting investor needs The investor does not usually understand the role that a local paying agent plays and does not use them. The investor will seek information on the fund, such as prices or reported amounts on the Internet, from the management company or from their distributor or execution platform. Our experience is that investors do not seek additional information local banks acting as paying agent unless they also fulfil the role of a local distributor. This is only required in a minority of cases where sales occur away from the investor s local distributor or execution only platform. As European legislation has been amended to facilitate cross-border 12

13 The entity should act as a contact point for investors and facilitate the handling of any issues that retail investors have relating to the fund. Facilities should ensure payments to retail investors, including in relation to any distribution of proceeds and capital. Local bank. Sometimes local affiliate of the asset manager e.g. local sales branch Local bank. In some cases, local regulators allow payments directly to the fund s principal transfer agent payments only two key elements are needed in the case of the direct sale: 1. the account details of the UCITS transfer agent this is generally set out in the prospectus and / or application form 2. Account details for making redemption or dividend payments. These should be specified in the UCITS account opening form and the subscriber s identity verified upon account opening to ensure payments can be made without delay. The local bank should be able to select the most efficient way (directly to the UCITS transfer agent or via an intermediary CSD or fund platform). Investors usually contact their local distributor or execution platform to resolve issues they may have. Fund managers typically include clauses in their distribution agreements requiring intermediaries to ensure that investor queries are properly and promptly handled. Investors do not however contact a bank, such as a paying agent, which is not directly linked to the distribution process All European investors now possess an IBAN which facilities effective low costs cross-border payments the need for a local correspondent bank to facilitate cross payments to the fund s transfer agent or registrar is largely redundant. Reducing the number of stages between the end investor s account and the transfer agent should lead to a corresponding decrease in the costs of transacting. In some jurisdictions managers may decide to employ the services of a subtransfer agent to facilitate the management of flows to the transfer agent. We believe this should be an option for the manager rather than mandated as a direct obligation placed on the fund. 13

14 The rules or instruments of incorporation of the fund, its sales document and its latest annual reports should be made available to retail investors through the facilities agent. Local bank. Sometimes local affiliate of the asset manager e.g. local sales branch All distributors are required to make the KIID available to investors on a pre-sale basis We recommend that asset manager terms of business/distribution agreements require intermediaries to make all necessary information about the UCITS available to their clients. This is already current best practice. We recommend that UCITS managers have a website where information can be obtained as is common practice for most managers. Where the UCITS is planning direct sales without a local execution platform or distributor, then in addition to internet site, we recommend the alternative of a low cost / Freephone number to assist investors who require operational support. In the longer term a central filing platform for fund documentation (see answer to could also be opened up to individual investors Operating model: Based on the above, the current distribution operating model is complex, risky and expensive both at the sales and operational levels. In particular, there is no EU harmonised operating model for fund transactions. An EU fund transaction costs a few dozen Euro while a US fund transaction costs a few dozen cents. An EU fund transaction may take several days while a transaction security on a market is settled in a second. As a direct cross border settlement on a very standardized, secure and efficient "delivery vs. payment" scheme does not exist, the Management Company has to appoint local agents and has to ensure the necessary set-up and pay the additional costs. Technology should now be able to deliver, for example, integrated distribution and settlement platforms, etc. The current model needs to evolve towards an efficient straight-through-processing model. The legislators and authorities could play an important role in triggering and facilitating efficient fund transactions. 14

15 For example, Italy has implemented Art 93 of the UCITS IV Directive in a different way than other EU countries: UCITS notified in accordance with Art 93 of the UCITS IV Directive are solely authorised for marketing to qualified (professional) investors. Shall the UCITS be distributed to retail investors, it has to provide a subscription form, appoint a local information / paying agent, upload offering documents on the CONSOB s platform as well as provide relevant financial information on the same platform. On one hand, this approach extends the notification process if the investors target is retail investors; On the other hand, it reduces the marketing arrangements required if marketing is limited to qualified investors. Italy has implemented additional administrative procedures. Further information has to be delivered to the Italian regulator. According to the resolution Nr as of April 2010 a list of publications as well as a list of distributors has to be filed / updated (only in case of retail distribution). Also a list of notified Funds has to be delivered (resolution nr as of December 2012) in order to calculate the CONSOB annual supervisory fees. Marketing rules: Marketing materials provided to retail investors in the EU Member States shall comply with the MiFID Rules. However, beyond such MiFID rules, additional local rules apply. Just to list few examples: Need (or not) of an integration of the entry and exit fees in the historical performance calculation; Different approaches on the performance disclosure period; Chart type; Need (or not) to insert the details of the local agent or of the complaints agent. The different requirements across EU countries pushes asset managers to maintain different templates for fund factsheets, which is increasing the total costs. 9. Taxation Question 9.1a: Please describe the difficulties, including whether they relate to discrimination against UCITS or AIF (including ELTIF, EuVECA or EuSEF) sold on a cross border, and provide examples. Please cite the relevant provisions of the legislation concerned. The difficulties identified in relation to the tax rules that may impair distribution of investment funds on a cross-border basis are as follows: 15

16 1) Access to double tax treaties for investments funds: The difficulty lies in the lack of recognition of investment funds as resident for the purpose of the application of double tax treaties (DTT). The issues (and possible options) for investment funds in accessing treaty benefits have been described and detailed by the Organisation for Economic Co-operation and Development (OECD) in its report The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles adopted by the OECD Committee on Fiscal Affairs on 23 April These questions have also more recently been discussed at OECD level in the framework of Action 6 on Preventing the granting of treaty benefits in inappropriate circumstances and Action 15 on Developing a multilateral instrument to modify bilateral tax treaties of the OECD Base Erosion and Profit Shifting initiative. Despite the work undertaken and discussions held overtime, as of today, no common approach has been defined in relation to access of investment funds to DTTs, even within the EU and between EU Member States. Access of investment funds to DTT therefore remains largely ruled by bilateral treaties as negotiated between contracting States. With regards to Luxembourg, some of the DTTs concluded by Luxembourg with other Member States, such as for example Italy or The Netherlands, do not consider Luxembourg SICAVs as being a resident for DTT purposes which consequently may not benefit from the DTT provisions. Compared to a direct investment made by an investor in the underlying assets that direct investment would benefit from a more favourable tax treatment. Please also note that the non-recognition of DTT eligibility by certain other countries such as for example Norway, Sweden or Spain also extends to non-ucits SICAVs. As to Luxembourg mutual funds (Fonds Commun de Placements, FCPs ), they do not have a legal personality and may therefore not be considered as a resident for the purpose of DTTs concluded between Luxembourg with other countries. In principle, Luxembourg FCPs are considered as tax transparent entities and unit holders should therefore be able to claim and obtain the benefits of DTTs with regard to their investment through the FCP. i.e. reduced DTT withholding tax rates on dividend, interest and/or royalties. In practice, it can however be extremely difficult for investors in widely held funds such as Luxembourg UCITS distributed widely on a cross-border basis to reclaim and obtain the benefit of such reduced withholding rates between their country of residence and the country of investment. Investors investing through an FCP may therefore be in a less advantageous position compared to a direct investment in the same assets. For example, in Italy, investments through a Luxembourg SICAV are more heavily taxed than direct investments, since through a Luxembourg SICAV would not benefit from the Luxembourg/Italy double tax treaty provisions where a direct investment would benefit from these provisions (to the extent the investor is resident in Luxembourg or from another DTT and depending on the country of residence of the investor). 16

17 2) Absence of a harmonized/neutral tax regime in case of investment funds mergers and restructurings The UCITS IV Directive provides for a regulatory framework for cross-border funds mergers and restructurings. It does however not contain any tax related measures. From a tax perspective, the consequences of mergers and other restructurings at the various levels of funds structures (i.e. investors, investment fund and underlying assets) are to be defined in line with national rules of Member States involved in these transactions. Based on national tax provisions, such operations or part of them may be considered as one or more taxable events and would be subject to specific local tax treatment which varies based on the type of investors involved (retail investors, institutional investors), the qualification, at investors level, of the income arising from a merger (capital gain or other) and any specific local tax treatment in each country involved. Example: On fund reorganization, tax discrimination may arise. In Spain a domestic fund merger does not trigger taxation in the hands of a Spanish resident investor. However, a foreign or cross-border merger of funds is considered as a taxable event in the hands of a Spanish resident investor. An EU harmonized tax treatment should aim at (i) providing legal certainty i.e. for example through the introduction of a tax deferral on any gain realized upon a fund restructuring and (ii) reducing tax costs incurred upon mergers for both investors and investment funds involved i.e. legal and advisory costs incurred in assessing in each country an investor is tax resident, the tax impacts of a merger of widely held funds distributed on a cross-border basis. Same comments may apply to the creation of master-feeder structures depending on how the masterfeeder structure is implemented. Some countries may even consider that switches between sub-funds within the same umbrella fund can be considered as a taxable even as for example Spain for UCITS distributed in Spain and having less than 500 investors. Question 9.3: Feedback to earlier consultations has suggested that the levying of withholding taxes by Member States has impeded the cross border distribution of UCITS or AIFs (including ELTIF, EuVECA and EuSEF). Withholding taxes are usually reduced or even eliminated under double taxation treaties. But in practice it has been claimed that it is difficult for non-resident investors to collect any such withholding tax reductions or exemptions due under double taxation treaties. Have you experienced such difficulties? Question 9.3a: Please provide examples of the difficulties with claiming withholding tax relief suggest possible improvements and provide information on any best practices existing in any Member States. Please cite the relevant provisions of the legislation concerned. 1. There are/may be discriminations in the application of withholding taxes regimes at national level. These discriminations may be of legal and/or practical nature. In some cases, difficulties are such that taxpayers forego their reclaims as they would be too costly and time consuming considering the amount of withholding tax to be reclaimed. 17

18 Example 1: Germany: for the time being, the German Tax Authorities are not analysing nor processing the withholding tax reclaims filed under the Aberdeen case law. This is also due to unclear competency allocation between the various administrative levels responsible for taxes in Germany (federal, regional, ) There is also no official communication from German authorities as to when they will start analysing these claims. Such situation creates legal uncertainty for both investment funds and investors. Example 2: Italy: The process to recover withholding taxes paid in excess may take as long as 10 years and be quite costly in terms of follow up of the reclaim process (investment funds have to go through the various level of national jurisdictions) so that it would be undertaken only on the basis of a positive cost/benefit analysis. Very often, investment funds and/or investors forego their right to reclaim withholding taxes due to the uncertain and lengthy process. Example 3: Austria: In Austria, it is required to submit a so called Declaration of Widely held Foreign Investment Funds when reclaiming withholding taxes based on the DTT concluded between Luxembourg and Austria. This may be quite complex and costly due to the difficulty to determine the residence of all investors in particular in the case of widely held funds or publicly traded funds. Furthermore the Austrian tax authorities ask for a certificate of tax residence of each investor. In the case of more than 100 investors, the Austrian tax authorities agreed not to request a certificate of residence for each investor (except if an investor holds more than 10%), but a solid estimate of the number of investors accompanied by the document that outlines the estimation method. As of today, uncertainty however remains on whether such approach taken by Austrian tax authorities will lead to a positive decision or a refund. Example 4: Taiwan: In Taiwan, it is required to file an application for a relief at source on a yearly basis. Further, depending on the amount reclaimed, the tax reclaim may be reviewed by different levels at the local tax authorities which is likely to cause various requests and thus creates a rather burdensome process. Example 5: Poland: The withholding tax reclaim process in Poland is highly formalistic and complex due to the large number of required documents. Almost all of the documentation has to be notarized and apostilled, the claim letter has to be written in Polish and all the documentation that is not in Polish has to be translated. Based on practice, unpredictable queries are received from the Polish tax authorities as well as frequent request for updates and very tight deadlines. Issues encountered in reclaiming withholding taxes, under the Aberdeen case law, are mainly related to the production of specific documentation. A way of improving the reclaim process, under the EU law, would be to accept that documents would be filed in English and to waive their need for formal requirements, such as notarization, where they do not bring added value to the process 18

19 2. Also, tax credits in principle available under double tax treaties may not be used by Luxembourg investment funds as investment funds are not subject to income taxes in Luxembourg nor are these tax credits transferred or transferable to the investors in the fund and are therefore lost. Example 1: Netherlands: A Dutch investment entity having a Fiscal Investment Institution status is subject to Dutch corporate tax at a rate of 15% that can be subsequently credited at the level of the Dutch investor. Example 2: Germany: provided a foreign investment fund complies with its German tax reporting obligations, German investors should be able to benefit from a credit option with regards to taxes levied. Where the foreign investment fund does not meet the reporting requirements, investors should be taxed on the basis of a lump-sum amount. Example 3: France: The French tax authorities allow French SICAV to perform a segregation of the different categories of income received (i.e. couponnage ) when redistributing the income to their shareholders. Based on this technique, investors in a French SICAV should be able to benefit from a tax credit corresponding to the amount of withholding tax suffered by the fund upon receipt of the income. For non-resident investors, the tax credit will be limited in accordance with the provisions of the applicable DTT between the source and investor s country. 3. In some countries, reduced withholding tax rates or exemptions may apply to foreign investment funds provided certain regulatory features are complied with or certain conditions are met. These requirements would not apply to domestic investment funds. Example: Italy: Reduced withholding tax rates and exemptions may be available for foreign investment funds. A 1.375% rate applies where the dividend is a distribution of profits realized in tax periods starting on or after 1 January 2008 provided that the beneficial owner is a company or an entity subject to corporate income tax and is resident in a EU/EEA country that allows an adequate exchange of information with the Italian tax authorities. A full domestic exemption of withholding tax levied on interest income applies to "white list" holders of bonds issued by Italian banks, companies whose shares are listed in EU/EEA regulated markets and multilateral trading facilities, bonds traded in EU/EEA regulated markets and multilateral trading facilities issued by non-listed companies, bonds issued by former Italian public entities converted into joint stock companies, bonds and similar securities which are not traded in regulated markets if held by one or more qualified investors in accordance with art. 100 of Legislative Decree No. 58/1998. A full domestic exemption should further apply to Italian Government Bonds. Example 2: Poland: Since 2011, Luxembourg SICAVs are entitled to benefit from a withholding tax exemption at source in Poland provided certain conditions defined by domestic legislation are met (e.g., fund should be subject to unlimited tax liability). 19