The Investment Funds Perspective
In our May 2015 publication entitled "EU Capital Markets Union" (which can be accessed here), we outlined that the EU Commission had issued a consultation paper entitled "Building a Capital Markets Union". That consultation paper raised some broad proposals to a single market for capital within the EU. Following the end of the consultation process and its review of over 700 responses, the EU Commission on 30 September 2015 released a further paper entitled "Action Plan on Building a Capital Markets Union" (the "Action Plan"). The Action Plan can be accessed here.
The Action Plan identifies the following priority actions that will be put in place to develop a Capital Markets Union by 2019:
- providing more funding choices for Europe's businesses and SMEs;
- ensuring an appropriate regulatory environment for long term and sustainable investment and financing of Europe's infrastructure;
- increasing investment and choices for retail and institutional investors;
- enhancing the capacity of banks to lend; and
- bringing down cross-border barriers and developing capital markets for all EU Member States.
Overview of Investment Fund Related Matters
The Action Plan, and the Capital Markets Union in general, will impact on the investment funds sector in numerous ways and, over the coming months, Dillon Eustace will provide you with some further detailed analysis of various proposals and the potential impact of these proposals as they relate to the investment funds sector.
However, some of the key matters to be aware of at this early stage include:
- Venture Capital Funds: The EU Commission has recognised that venture capital has a key part to play in providing finance to start-ups and rapidly expanding businesses. The EU has already established an EU venture capital sector through the Regulation on European Venture Capital Funds (EuVECA) and the Regulation on European Social Entrepreneurship Fund (EuSEF). However, the EU Commission has identified limitations in respect of the EuVECA and EuSEF and will be seeking to address these limitations in addition to proposing a range of pan-European venture capital fund-of-funds and multi-country funds. As part of this package to support venture capital the EU Commission will also be reviewing best practices on tax incentives. The EU Commission has released a public consultation on venture capital which will run until 6 January, 2016. The consultation paper can be accessed here. A package of proposals relating to venture capital funds will then be released between Q2 2016 and 2017.
- Loan-Originating Funds: It has been possible to create regulated loan-originating funds (structured as qualifying investor alternative investment funds) in Ireland since October 2014. However, there has been very limited uptake in the creation of such funds primarily due to some of the regulatory requirements imposed by the Central Bank. The Action Plan identifies that some Member States have introduced bespoke regimes into their national frameworks to frame the conditions under which alternative investment funds can originate loans. The Action Plan also notes that EuVECA and European Long Term Investment Funds (ELTIF) can originate loans to a limited extent. The EU Commission will be working to assess the need for a coordinated approach to loan origination by funds and the case for a future EU framework. A proposal is expected in Q4 2016.
- Common Rules on Securitisation: The EU Commission has issued a proposal (which can be accessed here) for a regulation to develop a simple, transparent and standardised securitisation market. The proposed regulation seeks to support investor confidence and make it easier to carry out due diligence. In order to create a harmonised approach to investment in securitisation positions, the proposed regulation will repeal appropriate provisions of AIFMD, the UCITS Directive and EMIR with the provisions of the proposed regulation applicable instead. We would note that the proposed amendment to the UCITS Directive within the current proposed regulation may need to be revised by the EU Commission.
- Covered Bonds: A public consultation document has been issued in respect the creation of a pan-European framework for covered bonds. As part of this consultation the EU Commission is exploring (and seeking feedback) on various measures including repealing the current definition of "covered bond" as set out in the UCITS Directive and instead using an uniform definition. The consultation paper can be accessed here and is open until 6 January, 2016.
- Prospectus Directive: The EU Commission will be looking to modernise the Prospectus Directive (which is typically only applicable for closed-ended funds). The Action Plan recognises the cost in the production of a prospectus for entities wishing to seek access funding through the public offer of debt or equity instruments. It also recognises that prospectuses can be complex and excessively detailed for investors. Accordingly, it is proposed to update when a prospectus is actually needed and to streamline the information required and the approval process. The proposal to modernise the Prospectus Directive is expected in Q4 2015.
- Solvency II: As outlined above, the creation of an appropriate regulatory environment for long term and sustainable investment and financing of Europe's infrastructure is one of the priority areas identified within the Action Plan. The EU Commission is exploring modifications to the Solvency II Delegated Regulation to create incentives and make it easier for insurers to invest in infrastructure projects. This could be done by way of an investment in a European Long Term Investment Fund (ELTIF) which itself invests in infrastructure. An ELTIF is a new cross-border fund vehicle (effective from December 2015) for long term projects and will provide asset managers (primarily alternative investment funds managers or "AIFMs") with the opportunity to provide investors with access to a wide range of assets including infrastructure which may not be available under current investment fund structures. The proposed amendments to the Solvency II Delegated Regulation can be assessed here.
- Review of the Regulatory Framework: We are all aware of the raft of regulatory reforms introduced since the recent financial crisis. The Action Paper notes it is important that EU legislation strikes the right balance between reducing risk and enabling growth and that it does not create barriers that were not intended. On this basis the EU Commission has launched a call for evidence (which can be assessed here) to review the cumulative impact and coherence of the financial legislation adopted in response to the financial crisis. The consultation paper is open until 6 January, 2016.
- Removal of Barriers to Cross-Border Distribution of Investment Funds: The Action Plan notes that market fragmentation is a prevalent issue in the European asset management sector. Factors such as discriminatory tax treatment, varying national requirements on the marketing of investment funds and fees for cross-border notifications have been identified as barriers to efficient cross-border distribution. The Action Plan outlines the EU Commission intends to gather evidence on the main barriers and then seek to eliminate those barriers, through legislation if necessary. A consultation is expected in Q2 2016.
- Facilitating Cross-Border Investment: There are a range of proposals within the Action Plan to address obstacles identified in cross-border investment. The EU Commission will seek to address uncertainly around securities ownership (for example where the security issuer and investor are located in different Member States) in 2017. A review of cross-border clearing and settlement will also be undertaken in 2017. The EU Commission will also be seeking to resolve national barriers to cross-border investment including national "gold-plating" of EU minimum rules or the divergent application of EU rules. A report is expected on this in Q4 2016. The EU Commission will also be reviewing issues related to insolvency (Q4 2016) and cross-border application of local withholding taxes (2017).
As you will see from the above, there are potential opportunities both for asset managers and investors from the range of proposals within the Action Plan.
Whilst the Action Plan is extremely broad in nature only a certain amount of information and detail has been released by the EU Commission so far. The Action Plan outlines a staggered release of information and consultation papers through to 2018. The matters of more immediate relevance are the consultation papers in respect of the Review of the Regulatory Framework, Venture Capital Funds and Covered Bonds which each close on 6 January, 2016.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.