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The European Commission's proposals to address the fragmentation and underperformance of EU capital markets, focusing on market integration and efficient supervision, will introduce changes for UCITS and AIFs with a view to simplifying requirements and reducing unnecessary regulatory and administrative burdens.
Fund managers have spent recent months preparing for the transposition and implementation of AIFMD 2.0, the directive amending the Alternative Investment Funds Mangers Directive ("AIFMD") and the UCITS Directive, which is due to be transposed by EU member states by 16 April 2026. The revised investment funds framework, introducing new rules relating to the use of liquidity management tools and a new harmonised regime for loan originating alternative investment funds, has not yet been fully implemented, but it is already being targeted for further changes as a result of the European Commission's ("Commission") market integration package, published on 4 December 2025.
The market integration package includes a proposed directive ("Proposed Directive") amending the AIFMD, UCITS Directive and the Markets in Financial Instruments Directive ("MiFID") and a proposed regulation ("Proposed Regulation") amending the supervisory powers of the European Securities and Markets Authority ("ESMA") and amending the regulation on the cross border distribution of funds ("CBDR"). The overall aim of the package, which forms part of the Savings and Investments Union ("SIU") initiative, is to simplify legislation and reduce the regulatory burden where appropriate, as well as promoting harmonisation and a single market for financial services by minimising the potential for national divergences and "gold-plating".
No direct supervision of large cross-border asset managers
The Commission's proposals follow a communication on the SIU published by the Commission in March this year, which mooted the possibility of direct supervision of large cross-border asset management groups, arising from recommendations in the Letta and Draghi reports on EU competitiveness. While group-level authorisation of asset managers and ESMA direct supervision were considered by the Commission as one of the optional policy responses, it was concluded that this approach would entail higher costs for the sector and its supervisors, outweighing the potential benefits. The Proposed Regulation amending the ESMA founding regulation does not propose direct supervision but focuses instead on stronger convergence and coordination of supervision at EU level. The proposed amendments aim to strengthen the use and effectiveness of ESMA's supervisory convergence tools and to introduce new tools.
Cross border distribution of funds
The Proposed Regulation notes that, under the current framework, the cross border distribution of UCITS and AIFs is mainly governed by directives, allowing for national discretion in many areas. There are therefore diverging rules across member states relating to marketing communications, as well as specific administrative and operational requirements, for example relating to fees, reporting obligations and local physical presence requirements. The Proposed Regulation aims to address these national divergences and to move relevant provisions (with amendments) relating to the cross border marketing of funds from the UCITS Directive and the AIFMD into the CBDR, so that all fund marketing rules are in one place and the potential for transposition differences and national divergence is reduced or eliminated.
The proposed amendments target administrative delays, waiting periods and inefficiencies in the current notification process where funds are marketed in member states other than the home member state. Changes to the passporting regime would require a UCITS or AIF to indicate the member states where it intends to be marketed at the time of authorisation. The home member state will transmit the fund documentation to ESMA through a new data platform upon authorisation and the fund will be permitted to immediately access the listed host markets.
The Proposed Regulation aims to simplify the rules relating to the de-notification of marketing and would also remove the 36 months pre-marketing ban where a fund has issued a marketing de-notification.
ESMA will be empowered to identify and pursue actions to address diverging, duplicative, redundant and deficient supervisory actions hindering the cross-border marketing of funds in the EU. To improve transparency, the CBDR will also be amended to provide that ESMA will centrally publish the fees and charges levied by host member states.
Removing barriers to Distributed Ledger Technology Innovation
The Commission's package recognises the potential of distributed ledger technology ("DLT") and tokenisation of financial instruments to improve financial services for people and businesses in the EU. It is therefore proposed to amend existing legislation to remove barriers and complexities hindering DLT uptake in the EU financial sector. Revisions to the DLT Pilot Regime are designed to encourage increased experimentation while providing input for future policy making.
Amendments to AIFMD and UCITS Directive
The Proposed Directive amends the AIFMD and UCITS Directive with the aim of: (a) removing barriers to the cross-border operations of fund managers and their EU groups; (b) eliminating national discretions that can lead to diverging national requirements and supervisory practices; (c) introducing a depositary passport; and (d) strengthening ESMA's powers to foster supervisory convergence. A summary of the proposed changes is set out in the table below.
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