Cross-Border 2019 UCITS and Beyond Article

smaller funds means that UCITS often lack economies of scale, which can result in higher costs for the end investor. It can also discourage cross-border distribution because the costs fall disproportionally on smaller funds. According to the European Commission, only 37% of UCITS are sold in more than three EU member states. The EU wants to increase the cross-border distribution of UCITS funds across Europe to try to help tackle the issue of sub-scale funds. As part of its Capital Market Union (CMU) project, the European Commission has proposed: • Removing the ability of individual EU countries to impose physical presence requirements on managers marketing UCITS funds • Harmonizing the rules to notify local regulators about share class changes • Making it easier to discontinue marketing a fund While the rules will not cause a revolution in European distribution, they could have a material impact on the industry. The Commission estimates that the proposed reforms may save the industry €440 million annually in European cross- border distribution costs. Many US managers often find the distribution nuances of local markets across the EU challenging. “US asset managers are accustomed to a single market, currency and tax system,” warns Kelli O’Brien, Director, Custody and Fund Services at Citi. “Navigating through all of those differences in Europe is a really big challenge. As a result, managers frequently pursue a more limited distribution strategy in Europe.” Any move to create a more harmonized single market or remove the marketing physical presence requirements, should make distribution easier. This could help US managers broaden their distribution strategy and attract more European investors. Supporting ESG Growth ESG solutions continue to grow in popularity and Europe is leading the way. In 2017, Europe accounted for 53% of global sustainable investment assets, while the US only accounted for 38%, according to Global Sustainable Investment Alliance. As Jervis Smith, Luxembourg Head of Prime, Futures, and Security Services at Citi, notes, “ESG is now going mainstream. We’re moving beyond retail investor interest and more institutional investors are considering non-financial elements when they make investment decisions.” This is pushing more asset managers to incorporate ESG considerations into their investment process. According to Christopher Christian, Financial Services Partner at Dechert, “Increasingly, we’re seeing the lack of ESG criteria being a reason that managers have been eliminated from the selection process.” To help support the growth of ESG funds, the European Commission has proposed a new regulatory framework for asset management. The proposals include the creation of a standard ESG taxonomy and new low-carbon and positive-carbon impact benchmarks. Many in the industry think this will strengthen ESG products by making it easier for investors to compare and evaluate a fund’s ESG performance. It should also assist in shaking out funds that use the moniker as a marketing tool, which could help further boost investor confidence in the sector. The EU is taking the lead on ESG regulation, which means, according to Sean Tuffy, Head of Market and Regulatory Intelligence, Custody and Fund Services at Citi, “It is very likely that the EU will create what’s going to become the global standard. Even asset managers who don’t have business in the EU should be tracking the potential implications of the EU’s ESG framework.” “US asset managers are accustomed to a single market, currency, and tax system.” — Kelli O’Brien Director, Custody & Fund Services, Citi “We’re moving beyond retail investor interest and more institutional investors are considering non-financial elements when they make investment decisions.” — Jervis Smith Luxembourg Head of Prime, Futures, & Security Services, Citi