There has been much discussion around the single market for both goods and services. While there has been considerable progress in creating a free trade area for goods, something which is welcomed by all sides of the current debate, there has been far less actual integration in financial services than the headlines would suggest. Some progress has also been made on the free movement of service providers, but this does not however gain similar widespread support.
Moves have been made by the EU to improve free trade for services. The Services in the Internal Market (Bolkenstein) Directive in 2006 laid out guidelines to prevent national governments from impeding the establishment or provision of cross-border services in a range of sectors excluding finance. The Capital Markets Union, now accelerated to come into operation in 2019 is designed to deepen and further integrate the capital markets of the EU member states by removing barriers to cross-border investment and lower the cost of funding in the EU especially for new and small firms.
On average across the EU 80% of GDP is in services and yet only 21% of cross border business is services. The European Commission itself has recognised the lack of integration in a number of financial services. Specifically in March this year it issued a proposal for a regulation to facilitate the cross-border distribution of collective investment funds. The following narrative, which is taken from the Commission’s proposal, highlights the extent to which a free and single market in financial services is far from reality.
Investment funds are investment products created with the sole purpose of pooling investors’ capital, and investing that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities. In the EU, investment funds are categorised as undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs) managed by alternative investment fund managers (AIFMs).
Rules for EU investment funds allow managers of investment funds to distribute, and with some exceptions, also to manage their funds across the EU. While EU investment funds have seen rapid growth, with a total of EUR 14 310 billion in assets under management in June 2017, the EU investment fund market is still predominantly organised as a national market: 70 % of all assets under management are held by investment funds authorised or registered for distribution only in their domestic market. Only 37 % of UCITS and about 3 % of AIFs are registered for distribution in more than three Member States.
Although part of the constraint on the development of cross border distribution has been financial – the paper estimates that the cost of the necessary registration process for five funds across three countries is approximately €250,000 – the Commission also recognised that other factors including national tax regimes applicable to investment funds and investors, vertical distribution channels and cultural preferences for domestic investment products all contributed to slow progress in creating a more harmonised market.
While there will no doubt be some impact on UK managers and the distribution of their funds into the EU the current “European passport” regime under which we operate does not provide borderless access but comes with specific registration/notification requirements in each country and associated costs.
Paul Brewer is CEO of Rubicon Fund Management, London.