Article 92 UCITS Directive. A Guide to Digitalisation of Local Facilities 

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Article 92 UCITS Directive. A Guide to Digitalization of Local Facilities 

The European Union is founded on a simple yet powerful principle. That is the freedom of movement within the borders of its single market. Freedom of movement applies to goods, capital, services and people. For what concerns financial products, more namely European investment funds like UCITS and AIFs, these can be offered freely across Europe under the so-called marketing passport. They are treated as goods of financial nature.  

One of the main aims of the European Union is to ensure that free movement, where it exists, can also be enforced in practice. And the first edition of the Capital Markets Union concluded that, whilst on paper UCITS and AIFs could freely move across Europe thanks to the marketing passport, there remained significant obstacles in practice to the exercise of this right. The Crossborder distribution directive was then introduced to address exactly these shortcomings.  

Fast forward nearly a decade from the first introduction of the Capital Markets Union, it is a fair conclusion that the European regulatory framework evolved to accommodate easier distribution of investment funds across Europe. In this context, one of the most interesting reforms is related to article 92 UCITS directive on the provision of local facilities. Leveraging on digitalization, another pillar of the European Union, the revamped provisions now allow for making available digital local facilities when offering UCITS across Europe.   

The Evolution of the Local Facilities under Article 92 UCITS directive 

In its original formulation, Article 92 UCITS directive stated that when offering UCITS in a host member state, the UCITS or its management company had to make available so called local facilities to investors in that member state. Local facilities are a local point of contact for investors and authorities, in charge of dealing with any queries related to redemptions, subscriptions and any other payments, as well as provide information and communications from the fund to investors. Freedom of movement in this context means that you can establish a UCITS in a given European member state and then, thanks to the marketing passport, offer it to investors in member states other than the one of establishment. That is as opposed to have to set up a separate UCITS in each member state where you intend to target investors. It makes sense to offer a presence in loco – the local facilities – to liaise with local investors in their own language in the host member states where distribution takes place. For the local facilities also having a residual element of direct handling of money and payments, it was common practice in certain member states under the old regime for the local facilities to require that a local credit institution was appointed for the role. 

One of the historical issues with article 92 UCITS directive was the interpretation of its provisions. Some member states in Europe have been traditionally strict in imposing that a local credit institution was to be appointed for the role. Some others, instead, did not seem to require that the facilities were truly local, allowing to rely on local distributors or fund administrators instead. For the costs of maintaining local facilities being high per se and increasingly higher in case of pan-European distribution projects – this way hindering in practice freedom of movement – the Crossborder distribution directive reformed the regime to allow for elimination of this invisible barrier.  

The most important element of the reform of article 92 UCITS directive consists in the abolishment of the requirement of a physical presence for the local facilities. These can now be offered also electronically and not necessarily by a third party other than the UCITS management company. At the same time, the new formulation of the related provisions breaks down more clearly the various tasks that comprise the local facilities. Different tasks can be carried out by different entities acting as local facilities agent for the same fund. This is where digitalisation in the provision and consumption of financial services, one of the new pillars of the European Union, comes in support of a more efficient design of the regime of the local facilities.   

The Pros of a Centralized Digital Facilities Agent Service Solution 

The new Article 92 UCITS Directive takes stock of the digital evolution occurring in the dynamics of fund distribution across Europe. Retail investors are dealing increasingly more with their affairs online, investments included. They are also in much closer contact, using the same digital means, with their distributors, to whom they reach out to redeem, subscribe or convert their fund investments. Accordingly, in the new formulation of the provisions on the local facilities, there is an opening to digital and electronic means. The only strict requirement becomes language. Albeit electronic, local facilities must be offered in the local language of the specific host member state. Under the new regime, local facilities look like a website, translated in the local languages of the various host member states of distribution, where investors can download fund documents and inspect other fund information as well as receive guidance via email in their own language on how to exercise the rights ensuing their investment in the specific funds.  

One of the inevitable upsides of the new regime is that digital solutions allow for centralisation and simplification of related distribution operations. In the old regime, where in each host member state a separate entity was appointed to provide the local facilities, there was an operational requirement to manage all these various counterparts, each representing a separate cost centre, documentation and information channel. Under the new regime, with the opening to digital local facilities, most of the operational challenges of the previous approach are resolved because there is only counterpart to make the service available across the entire spectrum of European member states of distribution. This per se is already a good enough reason to consider transitioning to a digital solution for the facilities agent. In addition to streamlining this portion of your distribution operations, there are other reasons that have been driving fund managers to implement the change.   

Undue Costs and Value for Money 

2022 ended with overt threats by ESMA and other national supervisory authorities that smaller UCITS funds, with inefficient fund operations and high-cost structures, might be forced out of business in certain European domiciles. The new Retail Investment Strategy of the European Commission will also introduce a Value for Money assessment for UCITS and AIFs. Undue costs and value for money will soon become pressing issues for all funds, irrespective of their size. A new standard is being set whereby funds allowed to the market will be the ones that can offer real value for money to their investors. It will not only be a matter of managing a fund going forward, rather the ability to do so in a cost-efficient manner.  

In this context of increased attention on funds costs and charges, the transition to a digital solution for the local facilities becomes a forced move for the industry. Whilst European authorities will flesh out the details and the rationale behind the process to evaluate due and proportionate costs for UCITS, the cost of running local facilities under the old regime will clearly not pass the test of value for money. A digital solution for local facilities comes with a price tag that is much lower compared to the cost of hiring a credit institution in a single domicile, which is not even a requirement under the current regime for Crossborder distribution.  

Beware of the Nuisances 

The new version of Article 92 UCITS directive contains a list of the tasks to be offered to investors as part of the local facilities. A word of caution is required here on two of the tasks on the list – i) making payments to investors and ii) acting as a point of contact with local national competent authorities. If nothing else, some considerations on these tasks will help choosing the right partners for the provision of the digital European facilities agent service 

For what concerns the processing of subscription, redemption and conversion orders, along with other payments to investors, the industry standard is set to entrust either the distributor(s) or the administrator of the fund with the related task. This is both permissible under the new provisions governing the local facilities, where different tasks can be entrusted to different entities, as well as the preferred choice for licensing reasons. Whilst dealing with payments to local investors is nevertheless a regulated activity, this does not necessarily need to be carried out by the facilities agent. Nor it requires that a separate entity is appointed specifically for that. In most of the cases under the old regime, local facilities did play a passive role and did not get involved in these payments, which would more naturally follow the distribution channel and be routed either to distributors or administrators. There remain only a handful of member states in Europe that are exception to this rule, mostly in central and southern Europe, where a combination of local rules, market practice and distribution channels makes it necessary to stick to the old regime for what concerns the local facilities.   

For what concerns acting as a point of contact with local authorities, this is an important element that in our view will dictate the choice of the right provider for the service of digital European facilities agent service. Here you want to strike the right balance between a provider that is used to liaise professionally with regulatory authorities and that is not necessarily a law firm. Data management firms, which started to offer the European facilities agent service, are not as well positioned to add any value in dealing with national competent authorities. At the same time, law firms offering this service would come at a much higher price. That would go against the spirit of the provisions – reduce costs for European cross border distribution. The move to a digital European facilities agent service indeed fits in the paradigm shift on costs and fees for UCITS and AIFs taking place in Europe.    

Ready, steady go 

As you get ready to transition to a digital European facilities agent service, experience dictates that the following areas will be affected in the process:  

  • Governance 

Seeking approval from the fund/management company board to transition to a new provider. The exercise likely requires an analysis of the implications in the various domiciles, from a regulatory and commercial perspective.  

  • Legal 

Once the provider of choice for the digital European facilities agent service has been selected, existing providers will have to be terminated. Particular attention needs to be paid to ensure that there is no gap in the service in any European domicile. Fund documentation will have to be updated accordingly. Investors might have to be informed of the change.  

  • Operational 

Appropriate channels of communication, for both fund documentation and nav prices will have to be established with the new provider of digital European facilities agent service. 

  • Regulatory 

In one with submitting the updated fund documentation, the change in local facilities will have also to be notified to the national supervisory authorities of the various domiciles where the fund is distributed and the change has occurred. This change falls under the category of changes in marketing arrangements, which will require a one-month prior notice to national supervisory authorities.  

A final thought on DIY approaches  

The new article 92 UCITS directive allows UCITS managers to offer local facilities themselves. Whilst possible, only a handful of big fund houses so far have made use of this option under the new article 92 UCITS directive. These fund houses, with offices located strategically across Europe, have available a wealth of different languages spoken within their local workforces and might indeed consider to be their own facilities agent for their proprietary funds. Anecdotal evidence tells us though that there are nevertheless concerns at different levels in adopting this approach. On the understanding that the local facilities are mainly offered towards retail investors, some of these firms has seen a host of unnecessary risks in taking a do-it-yourself approach, mostly for regulatory reasons surrounding the perception of being seen dealing with client money or else with retail investors at all. At the same time, not all fund houses want to deal with national competent authorities themselves and would rather entrust a third party with that task.   

 On this point it is worth reminding that having a website with fund documentation is not sufficient for the purposes of qualifying as a facility. The support to local investors is key for the local facilities.