Digitalisation in EU Fund Distribution
The recent coronavirus outbreak and the ensuing forced digitalisation in the provision of financial services has in our view accelerated a broader digitalisation process already in existence in the EU Fund Distribution ecosystem. A process which was very advanced already in certain parts of the northern hemisphere of Europe, thanking to the very evolved local consumer behaviour, naturally aligned with this process.
In a world where regulation provides the foundational engineering to the environment it regulates, digitalisation had already been embraced in some parts of the copious EU fund distribution related regulation. However, the radical shift involved with digitalisation in our view requires alignment in the consumer behaviour most of all.
In this post we will discuss some of the issues surrounding the requirement for UCITS to have a physical presence in some of the EU host domiciles where they intend to carry out their marketing and how digitalisation will possibly affect this requirement.
What is a facilities agent and why do you need to appoint one?
One of the items to consider when approaching an EU fund distribution project is the appointment of local facilities agents. When acting merely as facilities agents, these entities make available to local investors the main information about a foreign EU fund which, on the basis of the mutual recognition principle, fund promoters or managers are obliged to make available to investors in their home state. Facilities agents are also called in jargon paying agents in some EU domiciles, for that in these cases they deal with subscriptions and redemptions payments to local investors in a foreign EU fund. Most typically, this function is carried out by local credit institutions or investment firms. This is due to licensing requirements imposed on receiving and making payments to retail investors. In cases where intermediation in payments is not required, this service has been also most typically offered by other types of entities and with less stringent local licensing requirements.
In the EU fund distribution environment, facilities agents are required to be appointed in case of EU cross border distribution of UCITS and ELTIFs. Local national regulation might impose the appointment of similar types of entities also in case of marketing of retail alternative investment funds.
The current state of the EU fund distribution regulation on the subject
When tackling the requirement of appointing a facilities agent exclusively from the angle of UCITS, article 92 UCITS directive states the goal of the directive, which is to ensure that UCITS are able to offer facilities in the EU domiciles of distribution for local investors to be able to make and receive payments. In practice, not all member states across Europe had actually implemented this part of the directive with a view to impose the appointment of a local credit institution, which is nevertheless the case in the majority of continental Europe under local marketing rules. In certain southern European domiciles like Italy, for instance, the facilities or paying agent performs also additional functions, like acting as a local withholding tax agent.
However, way before the coronavirus outbreak and the imposed lockdowns, the requirement for appointing a facilities agent with a physical presence was already perceived like a cost and a burden for the evolution of cross-border distribution. In fact, the ELTIF regulation on the point had already signalled that whilst facilities agents are of paramount importance, the essence of the service is to be able to communicate with local investors in their own language, irrespective of whether the service is provided in person, over the telephone or the internet.
There it came lastly the Cross-Border Distribution of Investment Fund Directive with an amendment to the related provisions of the UCITS directive on the facilities agent, aligning those with the ones of the ELTIF regulation and in essence eliminating the requirement of a physical presence for facilities agents. The new version of article 92 UCITS, in fact, does not eliminate altogether the requirement to offer local facilities. It simply abolishes the requirement for these facilities to be mandatorily offered either through physical presence or local office and by a third party other than the UCITS itself or the group which it belongs to.
Under the revision of the Cross-Border Distribution of Investment Funds Directive, the only requirement for the facilities is that these are provided in the local language of the domicile where the UCITS is distributed, irrespective of whether these are made available by the UCITS itself or a third party appointed ad hoc. Also, the new version of article 92 acknowledges that facilities can also be offered electronically or by telephone and not necessarily in person.
Brick and mortar paying agent. A thing of the past?
When we first commented on the amendment made by the Cross-Border Distribution of Investment Funds Directive on the UCITS provisions on facilities agents, we expressed some healthy scepticism on the effects that the new provisions would have had in making EU fund distribution an easier and most importantly less expensive endeavour for fund managers.
These considerations were based mainly on consumer behaviour as well as distribution models in Europe. On the one hand, we had already witnessed in certain northern European countries that consumers dealt with their financial affairs increasingly over the telephone and the internet, without having necessarily to go to physical premises of a bank or other credit institution. On the other, some southern European countries were still very reluctant to embrace fully digitalisation.
Brick and mortar paying agents in our view were there to stay, especially in the EU domiciles where broader distribution channels were not yet digitalised. We did believe though that with consumer behaviours shifting more drastically and rapidly towards digital consumption of financial services, EU fund distribution could follow accordingly on the path towards digitalisation.
As we said at the beginning of this post, we have a feeling that the pandemic could have acted as an accelerator for the process of digitalisation of EU fund distribution.
Of course, we don’t have data as of yet on how consumers will re-engage with the broader economy in a post-pandemic scenario and most countries are either still in lockdown or taking the first steps in the process of easing their restrictions as we speak. We cannot predict with any degree of certainty whether the approach to financial services will be exclusively digital and remote in the future same as we don’t know yet if the trend of digitalisation, already successful in the northern hemisphere of Europe, will accelerate in a post-pandemic scenario also in the rest of southern Europe.
The overall approach of distribution channels will also play a pivotal role in digitalisation. In countries like Italy, for instance, where the process of digitalisation is behind when compared to the rest of Europe, fund distribution channels are also mainly tied to retail banking channels. Digitalisation in the consumption of financial services should start with general banking services first, for fund distribution to cascade more naturally on the same digital path as a consequence.