Despite opposition from two of the European Union's biggest fund jurisdictions, EU finance ministers have backed the introduction of a so-called passport for investment fund managers as part of what is set to become known as the Ucits IV Directive, setting the rules for the cross-border distribution of investment funds throughout Europe.
Ireland and Luxembourg, which between them domicile virtually all of the funds that currently use the Ucits rules to seek investors throughout the EU single market, have found common cause in opposing the introduction of the fund management passport, arguing that the change will divide regulatory responsibility for a fund between the jurisdiction where it is domiciled and the member state in which its management company is located - potentially to the detriment of investors.
At present, in order to for a fund, once authorised in one member state, to be distributed elsewhere in the single market without requiring further approval, the management company must be situated in the same jurisdiction in which the fund is domiciled - generally Ireland or Luxembourg. However, there is very little substance to the management companies in the two countries, and given the choice most EU-based asset managers would carry out the management company functions in their home country.
The planned Ucits IV directive aims significantly to enhance the efficiency of the European fund management industry through other measures, such as speeding up notification procedures for distributing funds in new cross-border markets, easing cross-border fund mergers and authorising master-feeder structures.
Is there an opportunity to establish an alternative EU fund jurisdiction to challenge Ireland and Luxembourg, one taking advantage of the proposed changes to create a more user-friendly, red tape-free environment for managers to locate and service their funds?
There is little time to be lost if they are. The European Parliament is set to approve the new rules quickly with a vote in early 2009, with the EU Council of Ministers giving it the final green light soon afterwards. The final directive is likely to be officially adopted before the middle of next year.
The most likely candidate for a new EU fund jurisdiction would seem to be the UK, where much of the continent's asset management industry is based. However, successive UK governments have a poor track record of implementing EU directives speedily and cleverly in order to capitalise on market opportunities.
Besides, for all the two countries' (unspoken) concerns about losing business, most of Europe's fund servicing infrastructure is built up in Dublin and Luxembourg, and in the current economic environment there may be little appetite right now for reproducing it in a new location unless the business case is extremely compelling.