Key takeaways
- The concept of local facilities under UCITS directive has undergone a complete revamp with the introduction of the Cross-border distribution directive. An ambitious legislative endeavor where cost efficiencies and reduction of barriers, for smaller funds to freely distribute in Europe, weave together with digitalization.
- Due to a combination of local tax regimes, market practices and fund distribution dynamics, fund managers willing to enter these markets, or maintain their presence locally, will find that not much has changed when it comes at UCITS local facilities in France and Italy notwithstanding the implementation of the Cross-border distribution directive.
- Ultimately, the persistence of the traditional facilities agent model with physical presence in both countries reflects not a failure of policymakers’ efforts, rather a reaffirmation of market-specific realities. Regulatory change by itself will not be sufficient to dismantle longstanding commercial structures and market preferences.
UCITS Local Facilities in France and Italy. Analog Countries in a Digital Europe.
The concept of local facilities under UCITS directive has undergone a complete revamp with the introduction of the Cross-border distribution directive. An ambitious legislative endeavor where cost efficiencies and reduction of barriers, for smaller funds to freely distribute in Europe, weave together with digitalization. Where most of the member states across the EU 27 implemented the Cross-border distribution directive in principle and on paper, in one with embracing digitalization in the delivery of UCITS local facilities, France and Italy remain exceptions to the norm.
Due to a combination of local tax regimes, market practices and fund distribution dynamics, fund managers willing to enter these markets, or maintain their presence locally, will find that not much has changed when it comes at UCITS local facilities in France and Italy, notwithstanding the implementation of the Cross-border distribution directive.
Fragmentation Persists in the European Single Market
Despite longstanding efforts over time, fragmentation continues to plague European capital markets, whose lag compared to American capital markets, both troubles and embarrasses European policymakers. One of the key contributors to this fragmentation is the persistent protectionism exercised by certain member states in Europe. An approach that both undermines harmonization objectives of legislative frameworks such as the Cross-Border distribution directive and slows down the achievement of some of the main items on the European agenda, like digital and green transition. With the posture adopted by the local regulator on the issue of UCITS Local Facilities in France, this sophisticated market embodies once again the tension between interconnectedness at European level and local market individualism.
Although the Cross-border distribution directive was implemented in France on schedule in July 2021, the AMF has continued to officially recommend practices that reinforce the country’s unique market structure and distribution dynamics, despite the efforts of simplification made at European level. Specifically, the AMF advises that foreign UCITS appoint a UCITS local facilities agent in France from a designated category of licensed French entities, with physical premises. This recommendation is made in stark contrast to the acknowledged principle of the directive to eliminate mandatory local presence for local facilities.
The rationale for this guidance on UCITS local facilities in France lies in the architecture of the local fund distribution model, still deeply reliant on Euroclear. Access to the retail and institutional investor base in France effectively requires participation in this centralized settlement infrastructure, which in turn demands the involvement of local agents that are integral part of this system to take on the role and offer the service of UCITS local facilities in France. As a result, while the Cross-border distribution directive has been implemented, in one with the legal requirements applicable to UCITS local facilities in France, operational and structural expectations as well as functioning of the local market render such new rules inapplicable in practice in France.
Bank-Centric Fund Distribution Model Holds Firm
The landscape of the Italian capital market continues to reflect the deeply ingrained conservatism of its investor base. Risk-averse by tradition, Italian savers have traditionally regarded bank deposits as the one and only investment for their capital. In one with a national pension system that remains historically public in nature, with little incentive for private pension schemes, this overall cultural predisposition contributed to shape the architecture of local fund distribution.
The Italian fund distribution model continues to be bank centric. Local banks remain the primary and exclusive conduit for retail investment access in Italy. Despite the transposition of the Cross-Border distribution directive into Italian law in September 2022, similar to what happened to UCITS local facilities in France, not much seems to have changed also in Italy on that front. Each bank-affiliated distribution channel in Italy continues to maintain its own dedicated paying agent, a model and a local infrastructure imposed on any foreign UCITS admitted to joining the proprietary distribution channel. Same as UCITS local facilities in France, albeit without a formal recommendation by the local regulator, UCITS willing to enter the Italian market will have to appoint a local paying agent, with physical premises, called mostly to perform subscription and redemption duties.
The requirement for an Italian paying agent continues to be driven also by local tax regime nuisances. This piece of the local distribution architecture also acts as a withholding tax agent on behalf of Italian retail clients in foreign European UCITS marketed in Italy. This operational model necessitates that these paying agents subscribe to foreign UCITS funds in their own name — on behalf of end clients — specifically to facilitate also compliance within the local tax regime. Whilst data shows that some of the functions under the remit of the facilities agent are increasingly shared between paying agents and other entities, success in that market remains a function of finding an entry into the local banking system.
Regulatory Alignment Meets Markets Reality In Europe
Should we be surprised that the role of the UCITS facilities agent in France and Italy has remained largely unchanged following the implementation of the Cross-Border Distribution Directive? Not particularly. These jurisdictions, while fully on board with EU harmonization efforts on paper, remain among the most coveted and complex markets to access within the Union. Their highly structured distribution ecosystems continue to create barriers that go well beyond regulation.
France, for instance, maintains a theoretical private placement regime under AIFMD. Yet the AMF has confirmed that no foreign fund has ever successfully been approved for marketing under it. Meanwhile, Italy never adopted a private placement regime under the AIFMD at all. These realities underscore that, despite the efforts of policymakers to remove administrative and procedural hurdles, actual access remains tightly controlled.
High entry and operational costs further deter new entrants, particularly those without established local infrastructure. The subtler aspects of doing business in France and Italy also carry burdens underestimated by those unfamiliar with these markets. Language barriers, cultural expectations and relationship-driven distribution models compound these challenges.
Ultimately, the persistence of the traditional facilities agent model with physical presence in both countries reflects not a failure of policymakers’ efforts, rather a reaffirmation of market-specific realities. Regulatory change by itself will not be sufficient to dismantle longstanding commercial structures and market preferences.
About Veneziano and Partners
Veneziano and Partners is an international consulting boutique specialised in the European regulation of cross-border fund distribution. In catering to a selected group of investment managers, hedge fund managers and financial institution worldwide, the firm offers a custom-made service that is unique and allows its clients to gain competitive advantage in an ever increasingly regulated environment for global registration of UCITS and AIFMD funds.