Luxembourg management companies, also known as “ManCos”, are drawing attention to the increasing reporting burden that often lands on their shoulders when European level regulation, such as the cross-border fund distribution directive, is passed. These requirements, they argue, often simply serve to placate national authorities over their lost jurisdiction.
The ManCos claim that Luxembourg’s fund industry is being forced to cope with “a regulatory frenzy” that’s tied with the improvements brought by the EU laws.
The complaints have come to light in discussions over new rules for cross-border distribution of investment funds. EU Directive 2019/1160 is intended to make distribution easier and treat Ucits funds more similarly to alternative investment funds. The directive also applies to alternative investment fund managers principles already applied to Ucits marketing and communication.
Global responsibility for IFMs
The ManCo industry was a-flutter after the publication of the CSSF’s recent FAQ on this cross-border directive. Luxembourg’s supervisor referred to European Securities and Markets Authority (Esma) guidelines that were read as requiring the investment fund managers, or IFMs, to be globally responsible for fund marketing communications worldwide. Guillaume Scaffe, a director in advisory and consulting at Deloitte, explained that while fund managers are not usually located in Luxembourg, they work through ManCos that are commonly based here.
The requirement for generating marketing material is part of the marketing, distribution and compliance function of the ManCo, or the AIFM alternative investment fund manager for the alternative universe, both of which are heavily present in Luxembourg, Scaffe explained.
“What is interesting is that the CSSF, in the FAQ, is mentioning the fact that the investment fund managers are actually the ultimate ones responsible for the consistency actually, even when there is no contract with the marketing intermediaries who could be the creator of the marketing communication,” said Chloé Piquet, a senior manager in regulatory services at Deloitte.
Additional burden
“It’s creating an additional burden on the investment fund manager,” Piquet added. “Because it means that they need to identify all the marketing communications, even ones that they could potentially not be aware of, and make sure that this marketing communication is compliant with the fund documentation.”
Piquet stated that the CSSF interpretation “means that the investment fund manager needs to have a very clear understanding of their distribution network, which includes not only their direct intermediaries, but also potential sub delegates that they may have throughout Europe.”
“Now, they will certainly need to review their contracts to make sure that in terms of marketing and communication, everything is covered,” Piquet said.
Additional layers
The management companies also face varying situations in the other countries where they seek to market the funds, including in the area of marketing communication. “The other national competent authorities in Europe also have some additional layers of regulation on the marketing communication,” explained Piquet.
Where national authorities implementing European directives add on additional rules and regulations that go beyond what EU law requires it gets called “gold-plating,” Scaffe explained.
“In Belgium, the FSMA is extremely demanding in terms of marketing compliance, the FSMA requires adding specific disclosures, a Belgian regulator-specific disclaimer, and there is a specific approval process. It’s the same in France with the AMF,” said Scaffe. “These are all specific gold plating requirements that are extremely complicated to meet.” Both agreed that Luxembourg’s CSSF regulator doesn’t do such things.
National comfort
Piquet explained that as European legislation extends simplified legislative frameworks across Europe, there is often a push back from national competent authorities unhappy they’ve lost a lever they previously had in their national legislation. In order to “somehow give them comfort enough” the directive implements reporting requirements “to give them a sense of ownership and the ability to know what is actually happening on their market,” she said.
Scaffe explained that while European legislation sets out rules, “it doesn’t mean that I cannot add additional layers,” said Scaffe. “And I think that, you know, the problem in Europe, is that there are a lot of aspects that have led at the discretion of the member states, and some are more flexible than some others.”
He pointed to countries like Belgium, France, Germany that he described as “extremely demanding and sensitive” to their investor protection rules regarding the marketing of foreign AIFs to retail investors “and they create additional layers, just to have comfort that there is enough supervision, enough safety for the local investors,” he said.
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