Beat UCITS Costs or Die Trying! Governance Aspects of European Crossborder Distribution.
Lately, the CSSF released its official feedback on the issue of UCITS costs and fees. Part of a much larger endeavour spearheaded by ESMA, the contribution from the CSSF comes with not-so-rosy predictions for smaller Luxembourg-domiciled funds.
The CSSF argues that funds fixed costs have a much higher impact when assets under management are low – or low-er – than certain thresholds. One of the inevitable implications of this approach is that smaller funds could see their costs of operation challenged for being undue, undermining consequently their very existence and viability. Burdened by too many costs and with no realistic chance to offer returns to their investors, small funds are not so much of a good idea anymore according to the CSSF.
Fighting excessive and undue costs is clearly an item of good governance. Fund boards are hence called to play a delicate role in challenging the status quo and assessing the viability of structures versus their cost of maintenance. Whilst we don’t disagree with the approach adopted by the CSSF, we are of the view that certain fund costs become undue already for other reasons, related to the evolution of regulation, no matter the assets under management.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with European Crossborder Distribution.
The Capital Markets Union
European Crossborder Distribution notoriously has an impact on UCITS costs and fees. This was clear to the European Commission when dedicating a specific chapter of the Capital Markets Union to reducing hurdles and costs of business, until then intrinsic to European Crossborder distribution. We are referring to all the costs and fees involved in distributing funds Crossborder in Europe. And where the ensuing Crossborder Distribution of Investment Funds Directive did not succeed in making fund distribution easier and cheaper on all fronts in Europe, the new rules stand a good chance to reduce some of the costs related to European Crossborder Distribution.
Good governance plays its role on issues related to European Crossborder distribution. Fund boards expect to receive accurate reporting and information on how the distribution function is carried out as well as be able to oversee the European Crossborder distribution strategy of a fund. And whilst it is true that the incessant pace of the recent regulatory output diverted the attention from cost related issues, as the dust settled on SFDR and ESG related issues, we are now in a better position to revisit old-er themes.
Taking Advantage of New Rules
As the issue of UCITS costs and fees regains momentum and is prioritised in board meetings agendas, costs efficiencies can be achieved by streamlining operations for European Crossborder Distribution. On this point, it has never been a better time to take advantage of new rules introduced under the Crossborder Distribution Directive, especially the ones that contribute to reducing hurdles and costs of distribution. One of these is the new Article 92 UCITS Directive on local facilities agents.
The recent phenomenon of digitalisation is the background to the new regime of local facilities under article 92 UCITS Directive. Digitalisation gained ground in the banking industry and distributions channels alike, with consumer behaviour adapting very rapidly to a new way of consuming these services. The evolution of the regime of local facilities goes in tandem with the progress of digitalisation in the banking space. In a world where we find increasingly more uncommon to manage certain relationships in person, it makes sense to allow for local investors in a foreign UCITS to have a place online where, in their own language, they can find all the information they need on how to redeem their shares or make a complaint, for instance.
The real reason why good governance imposes to scrutinize how UCITS local facilities are offered nowadays is not only for the sake of jumping on the wagon of digitalisation. Ignoring the new rules comes with a hefty price tag and costs related to running operations under the old rules could be deemed undue. Prior to the introduction of the Crossborder Distribution of Investment Funds Directive, the requirement to make available local facilities under article 92 UCITS directive translated, in most EU domiciles, in the appointment of a local credit institution, in charge of making available the local facilities in person and via a brick-and-mortar presence. Costs related to running European Crossborder distribution in the traditional way, appointing local credit institution to offer facilities across European domiciles, can easily reach six figures in cases of pan-European distribution endeavours. As EU member states can no longer impose that a local physical presence is offered when distributing UCITS across Europe, everything done differently today should either be justified by special reasons or else deemed undue.
Conclusions
Keeping the local facilities under the old rules is clearly not value for money anymore. We expect related practices to come increasingly under the scrutiny of fund boards in an effort to give fund investors the best bang for their buck. At the same time, terminating local relationships without having evaluated the impacts on local distribution can turn into a costly mistake. Most often, the reason behind to keep a local credit institution appointed to offer the local facilities for a UCITS in a specific domicile lies in nuisances of local distribution channels or other strategic commercial decisions.
A balancing act of good governance and commercial acumen is indeed required, to ensure that the opportunity for cost savings allowed by the new rules for European Crossborder Distribution does not come at the price of closing certain strategic distribution channels.
Same as for most things, knowledge is power and truth usually lies somewhere in the middle.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with European Crossborder Distribution.