ELTIFs can be marketed to both professional and retail investors across Europe. In addition to specific suitability tests to be carried out on retail investors, ELTIFs regulation also imposes to appoint a Facilities Agent for ELTIFs in all the EU domiciles where marketing will take place.
The Facilities Agent for ELTIFs is not necessarily a new entry. In fact, we can say that by and large it mimics the functions and the role carried out by the facilities or paying agent provided for under UCITS directive article 92. Because of the sameness of the regulatory aims, the Facilities Agent for ELTIFs is not immune from the criticism raised in the context of the Capital Markets Union towards UCITS facilities agents in a wake to reduce unnecessary burdens to cross border fund distribution in Europe.
In this post, we will briefly discuss some do’s and don’ts of appointing a Facilities Agent for ELTIFs.
Proposal to amend UCITS directive and facilities agent
In March 2018 the European Commission addressed the issue of the facilities agent via a Proposal for a Directive amending the UCITS Directive, with a new version of article 92, opening to the possibility of no longer requiring a physical presence for the facilities agent, provided that the various tasks were performed in the local language of the EU domicile where marketing is carried out.
This proposal is rooted in the evolution affecting the provision of banking services, amongst others, whereby the opportunities for investors to go physically to a branch are shrinking, giving way more and more often to digital alternatives to access banking services. And whilst we don’t necessarily have to think about the so-called millennials, in jargon, who consume exclusively online all types of services, some investors might also prefer to deal over the telephone with their banking needs, rather than in person. The underpinning idea is that by eliminating the requirement to appoint a local physical presence for the local facilities agent for UCITS, it is possible to reduce a burden to cross-border distribution in Europe.
So, what about ELTIFs instead? Is it necessary to appoint a facilities agent for ELTIFs with a local physical presence or not? A Delegated Regulation issued last December 2017 clarifies the infrastructure to be adopted when appointing Facilities Agents for ELTIFs. Managers of ELTIFs shall ensure that the tasks of the facilities agent are performed in the local language or official languages of the EU Member State where the ELTIF is marketed and that those tasks are performed either in person, by telephone or electronically. And whilst the proposal for a UCITS directive states clearly that it should not be required to have a physical presence for the local facilities, ELTIF delegated regulation instead does emphasize the requirement of the local language, leaving a reference to the alternative to provide the facilities also in person.
The main takeaway point here is that the Facilities Agent for ELTIFs appointed doesn’t necessarily have to have a physical presence in the EU domiciles where marketing takes place provided that all the tasks are carried out in the local language.
Who Can Act as Facilities Agent for ELTIFs?
In the UCITS ecosystem, the facilities or paying agent has always been a third-party entity to the UCITS, most commonly a credit institution. In the Proposal for a Directive amending the UCITS Directive, also the UCITS world opens up to the possibility that a management company appointed for the funds can act as facilities agent, subject to compliance with the regulation governing the tasks to be performed. The same approach is also adopted for the ELTIFs, whereby the manager of the ELTIF or an entity within the group can perform the function of facilities agent.
So, whilst it is possible for a fund manager to act as Facilities Agent for an ELTIFs is it safe to do so?
The answer most likely is No.
And the reason lies in the type of permission that a fund manager is required to have to be allowed to provide regulated services directly to retail investors. Most typically, fund managers are avert per se to deal directly with retail investors and, specifically for ELTIFs, the scenario is made more intricate due to the additional requirements imposed on marketing ELTIFs to retail investors. ELTIFs managers are better off entrusting all of these additional functions also to external distributors, clearly evidencing the appointments in written agreements. This is because ELTIFs regulation requires that retail investors are evaluated for suitability of the investment and also receive investment advice before they can invest in ELTIFs. Whilst the regulation is clear that an ELTIF can carry out suitability evaluation and provide investment advice subject to having the relevant regulator permissions in place, this is realistically a task better outsourced to a distributor, that will be also better placed to deal with the ensuing requests of subscription or redemption that a facilities agent would deal with.
Europe has developed a longstanding approach whereby successful concepts are replicated and applied to different scenarios.
ELTIFs regulation is a very eloquent example of this approach, whereby longstanding concepts have been adapted from the UCITS world to the ELTIF. Most of the ELTIFs managers are managers of UCITS as well and possibly have already an existing distribution infrastructure in Europe. Leverage on existing relationship is something that will facilitate the task of creating a marketing and distribution network for these new products.