EUROPEAN COMMISSION Brussels,12.3.2018 SWD(2018) 54 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and (EU) No 346/2013. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directive 2009/65/EC of the European Parliament and of the Council and Directive 2011/61/EU of the European Parliament and of the Council with regard to cross-border distribution of collective investment funds. {COM(2018) 92 final}

{COM(2018) 110 final}



{SWD(2018) 55 final}



Table of Contents GLOSSARY 1. Introduction: Political and Legal Context 1.1. Background 1.2. The EU investment fund market and its legal framework 2. PROBLEM DEFINITION 2.1. In-scope problem drivers 2.1.1. Marketing requirements 2.1.2. Regulatory fees 2.1.3. Administrative requirements 2.1.4. Notification requirements 2.1.5. Out-of-scope problem drivers 2.2. Problems 2.3. Consequences 2.4. Groups affected by the problem 2.5. Baseline scenario 2.6. Evaluation 3. THE EU'S RIGHT TO ACT AND JUSTIFICATION

4. OBJECTIVES 5. POLICY OPTIONS AND ANALYSIS OF IMPACT 5.1. Methodology 5.2. Options addressing differences regarding national marketing requirements 5.3. Options addressing lack of transparency over national requirements 5.4. Options regarding differences and complexity of how regulatory fees are set and their collection 5.5. Options regarding administrative requirements (local facilities) under the UCITS Directive 5.6. Options regarding notification requirements 6. OVERALL IMPACT OF THE PROPOSED OPTIONS 7. OTHER SPECIFIC IMPACTS OF THE RETAINED POLICY OPTIONS 8. MONITORING AND EVALUATION ANNEX 1: Procedural information ANNEX 2: Stakeholder consultation ANNEX 3: Who is affected by the initiative and how? ANNEX 4: Methodological approach, analytical methods, and limitations ANNEX 5: Evaluation of relevant provisions in AIFM and UCITS Directives ANNEX 6: Statistical analysis of impact on cross-border distribution ANNEX 7: Synopsis report open consultation on cross-border distribution of funds ANNEX 9: Number of investment funds (broken down by Member State, data source and type) ANNEX 10: Statistical data from ESMA on cross-border marketing activity

ANNEX 11: Mapping of the regulatory fees charged in the EEA ANNEX 12: Costs and cost reductions



GLOSSARY Alternative Investment Fund (AIF): is a legal structure to pool assets and hold investments. It usually has no economic life on its own; the key decisions in relation to the management and marketing of AIF are taken by the AIFM. AIF span a wide range of legal structures, including closed and open-end funds and partnerships. Alternative Investment Fund Manager (AIFM): is responsible for the management of investment portfolios of AIFs. Typical tasks include, for example, the provision of internal governance structures, risk management, the delegation of functions to third parties and relations with investors. Alternative Investment Fund Manager Directive (AIFMD): The AIFMD was voted by the co-legislator in 2011 and entered into application in July 2013. This Directive covers managers of alternative investment schemes designed for professional investors. AIFs are funds that are not regulated by the UCITS Directive. They include hedge funds, private equity funds, real estate funds and a wide range of other types of institutional funds. Anti-Money Laundering (AML) Directive: The main objectives of the AMLD are to strengthen the internal market by reducing complexity across borders and to safeguard the interests of society from criminality and terrorist acts. Assets under management: value of assets that an investment company manages on behalf of investors. Asset weighted expense ratio: weighted average is simply a matter of calculating the expense ratio you are incurring on two or more funds. It takes into account not only the different expense ratios that apply to each fund, but also the amount of your holdings. Capital Market Union (CMU): CMU is a plan of the European Commission to mobilise capital in Europe. It will channel it to all companies, including SMEs, and infrastructure projects that need it to expand and create jobs. Competent authority: Any organization that has the legally delegated or invested authority, capacity, or power to perform a designated function. In this impact assessment it refers to the body which is in charge of supervising securities markets. ELTIF: European Long Term Investment Fund. EFAMA: European Funds and Asset Managers Association ESMA: The European Securities and Markets Authority (ESMA) was founded as a direct result of the recommendations of the 2009 de Larosière report which called for the establishment of a European System of Financial Supervision (ESFS) as decentralised network. It began operations on 1 January 2011 and replaced the Committee of European Securities Regulators (CESR). ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union's financial system by enhancing the protection of investors and promoting stable and orderly financial markets. It achieves this by: assessing risks to investors, markets and financial stability, completing a single rulebook for EU financial markets, promoting supervisory convergence. As well as fostering supervisory convergence amongst securities regulators by working closely with the other European Supervisory Authorities competent in the field of banking (European Banking Authority – EBA) and Insurance and occupational pensions (European Insurance and Occupational Pensions Authority - EIOPA). http://www.esma.europa.eu EuSEF: European Social Entrepreneurship Fund. EuVECA: European Venture Capital Fund.

Expense ratio: the expense ratio is the annual fee that funds charge. Home competent authority: refers to the competent authority of the Member State where the fund is domiciled or authorised/registered. Host competent authority: refers to the competent authority of the Member State where the fund is marketed other than the Member State where the fund is domiciled or authorised/registered. Key information Document (KID): refers to the document under the PRIIP Regulation, containing the key information necessary for retail investors to make an informed investment decision and compare different PRIIPs. Key Investor information Document (KIID): refers to the document under the UCITS Directive containing appropriate information about the essential characteristics of the UCITS concerned, which is to be provided to investors so that they are reasonably able to understand the nature and the risks of the investment product that is being offered to them. Know Your Customers (KYC): is a process to confirm a customer's identification and profile. MiFID: This Directive is a cornerstone of the EU' regulation of financial markets. The directive was initially introduced in 2011 and reviewed once. It governs the provision of investment services in financial instruments by banks and investment firms and the operation of traditional stock exchanges and alternative trading venues. MiFID 2: The Directive on markets in financial instruments was voted 15 May 2014 amending the Directives of 2002 and 2011. MiFIR: The Regulation on markets in financial instruments was voted 15 May 2014 which complements MiFID 2. MMF: Money Market Funds are collective undertakings that invest in short-term assets and have distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment. Net Asset Value (NAV): value of a fund's total assets, minus its liabilities. The NAV per share is used to determine prices available to investors for redemptions and subscriptions. Open-ended fund: is a collective investment scheme which can issue and redeem shares at any time. Investors can buy or sell shares directly from the fund. PRIIPs: Packaged Retail Investment and Insurance Products. Round Trip Fund: means the situation where a manager domiciles a fund in another Member State and then distributes it only back into the market where the management company is domiciled. Transferable security: means classes of securities which are negotiable on the capital market such as shares in companies and other investments equivalent to shares in companies, partnerships or other entities or capital return and interest investments known as bonds. UCITS: Undertakings for Collective Investment in Transferable Securities, a standardised and regulated type of asset pooling. UCITS Directive: the UCITS Directive is the main European framework covering retail collective investment schemes. The first UCITS Directive was adopted in 1985, and since then the framework has continuously developed. The last amendment took place in 2014 with the UCITS V Directive, where the role and mission of the depositary was clarified and strengthened. The UCITS Directive is seen as the benchmark in terms of retail investment funds, as the Directive requires strict diversification rules and eligible assets are restrictive to transferable securities in order to ensure that retail investors can easily redeem their investment.



1.Introduction: Political and Legal Context 1.1.Background

The initiative under consideration aims at reducing the regulatory barriers to cross-border distribution of investment funds within the EU, by addressing unnecessary complexity and legal uncertainty associated with cross-border distribution. This should reduce the cost of going cross-border and should support deepening the single market for EU investment funds. This initiative fits in with the more general objective of creating a deeper single market for capital – a Capital Markets Union (CMU) – which is one of the European Commission’s priorities. It is also a key element of the Investment Plan for Europe , which aims to strengthen Europe’s economy and encourage investment in all 28 Member States. The CMU is intended to mobilise capital in Europe and channel it to companies in order to facilitate stronger economic growth and job creation. Deeper and integrated capital markets will improve the access to capital for companies while aiding in the development of new investment opportunities for savers. Investment funds have an important role to play in achieving the aim of CMU. Investment funds are investment products created with the sole purpose of pooling investors' capital, and investing that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities. As such, investment funds are first an important instrument to foster investment and increase funding possibilities for companies. Secondly, investment funds that are distributed cross-border will help to allocate capital efficiently across the EU, and contribute to deep and more integrated capital markets. Increased competition across national markets will in turn help to deliver greater choice and better value for investors. The CMU Action Plan envisages that the Commission would gather evidence on the barriers to the cross-border distribution of investment funds. Following an open consultation that was conducted for this purpose from July until October 2016, the Commission announced in its Communication on the CMU Mid-Term Review that it would launch an impact assessment with a view to considering a possible legislative proposal to better facilitate the cross-border distribution of investment funds. In the EU, investment funds can be broadly categorised as UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds). EU investment funds have seen rapid growth, resulting in a total of €14,310 billion asset under management (AuM) in June 2017, of which 60.8% is invested in UCITS and 39.2% in AIFs. The creation of a single market for investment funds – which started with the introduction of the UCITS Directive in 1985 – has resulted in a strong and quickly expanding EU investment fund industry. Although the market is increasingly organised on a pan-European basis, it has not exploited its full potential in terms of cross-border distribution: only 37% of UCITS are registered for sale to more than 3 Member States. For AIFs, available data suggests that only about 3% of AIFs are registered for sale in more than 3 Member States. Industry feedback indicates that regulatory barriers represent a significant disincentive to cross-border distribution. These barriers have been identified in response to the Capital Markets Union5 green paper, the Call for Evidence on the EU Regulatory Framework for Financial Services6 and the public consultation on barriers to cross-border distribution of investment funds as including (national) marketing requirements, regulatory fees, administrative requirements and notification requirements. Eliminating unjustified (regulatory) barriers would support fund managers to engage more in cross-border distribution of their funds, increase competition and choice, and potentially reduce costs for investors. In addition to this initiative – that focuses solely on cross-border distribution of funds – the Commission has just started an overall review of the Alternative Investment Fund Managers Directive (AIFMD). The review started with a tender for an external study on the functioning of the Directive, which was awarded to a contractor in September 2017. An overall review of the UCITS Directive may take place once enough experience is gained with the practical application of elements introduced with the most recent amendments to the Directive. For both reviews, therefore, there is not enough evidence to be able to decide at this point whether any legislative changes would be merited. This is the reason why this initiative on cross-border distribution of funds is clearly delineated and will be pursued now on a stand-alone basis. The potential to make significant progress in reducing barriers and bolstering the single market for investment funds – thus providing a tangible contribution to CMU in the short term – justifies taking action now instead of waiting for the broader reviews. Feedback to the consultations indicates that, besides regulatory barriers, other factors also provide significant disincentives to cross-border distribution of investment funds. These include the impact of vertical distribution channels, cultural preferences for domestic products (home and familiarity bias), and national tax rules. Results from the randomized follow-up survey which focuses on differences between large and small funds shows that fund managers agree on the importance of regulatory barriers and taxation as important barriers, while there is less consensus regarding the importance of local demand and vertical distribution channels. Given that factors related to vertical distribution channels, cultural preferences for domestic products and national tax rules are out of the scope of this initiative, there are inherent limitations to the impact of this initiative. However, other actions under the CMU Action Plan aimed at facilitating cross-border investment and fostering retail investment will seek to (partially) address these factors. Ongoing work streams in this area include a study on distribution systems of retail investment products across the EU; work by the European Supervisory Authorities (ESAs) on increasing the transparency and comparability of costs and performance of retail investment and pension products; and the work with national tax experts on best practice and a code of conduct for withholding tax relief principles. The impact assessment aims at providing an unbiased, comprehensive and evidence-based assessment of cross-border distribution of funds and possible barriers, in spite of some inherent limitations. We rely on 3 methodological approaches (desk research, qualitative analysis and quantitative analysis) to provide a comprehensive impact assessment. Details are presented in Annex 4. The stakeholder consultation strategy relies on 3 types of stakeholder consultation, being (i) an open public consultation, (ii) a randomized sampling-based survey and (iii) targeted individual consultations to ensure that the impact assessment is open to stakeholders' views. Each of the methodological approaches has its merits but we are also confronted with some limitations. A detailed discussion of the methodological approach, its limitations, and the steps undertaken to mitigate its effect is presented in Annex 4. In general terms, limitations are related to the representativeness of data inputs and lack of (historical) data coverage, especially for alternative investment funds (AIFs), unavailability of total cost data and granular data on cost components for individual Member States. Significant efforts have been undertaken to support the analysis of cross-border distribution of funds in the EU and the evaluation of policy options based on 3 methodological approaches. Each of them has its merits but also its limitations and we discussed our approach to mitigate the effect and its effect on the analysis. Overall, the collective evidence stemming from the various methodological approaches can be considered to be sufficiently sound as a basis for the impact assessment. 1.2.The EU investment fund market and its legal framework The fund market in the EU can be divided into UCITS funds and all other funds that are labelled Alterntative Investment Funds (AIFs) Since its origin in 1985, the UCITS Directive has been the basis on which the success of the European investment fund market has been built. The UCITS Directive introduced – for the first time - a genuine European retail investment fund 'product', providing a strong investor protection framework which ensures that funds are suitable for retail investors. UCITS are open-ended funds with strict transparency requirements toward their investors. They need to invest in a diversified manner in transferrable securities or in other liquid assets. Ever since the introduction of the UCITS framework, eligible funds benefit from a cross-border marketing passport with the aim of allowing them to market without barriers to all investors across the EU while using the UCITS label. Since 1985 the UCITS Directive has been revised several times. With the introduction of UCITS IV managers also benefit from a fully-fledged management passport, allowing them to be domiciled anywhere in the EU. In 2013, the AIFM Directive introduced a framework for the authorisation, supervision and oversight of managers of non-UCITS funds (AIFs). Managers whose aggregate assets under management are above a certain threshold are subject to authorisation and compliance with reporting and operational requirements set out in the AIFMD. In exchange, EU managers benefit from an EU-wide passport to manage and market AIFs to professional investors on a cross-border basis. Managers below the thresholds are subject to a set of minimum rules and consequently do not benefit from the passport, unless they opt in and fully apply the AIFMD. Unlike UCITS, marketing to retail investors is only possible at Member State discretion. Figure 1 provides an overview of the complete EU legislative framework for investment funds. More details on the Regulations for European Venture Capital funds (EuVECA), European Social Entrepreneurship Funds (EuSEF), European Long Term Investment Funds (ELTIF) and Money Market Funds (MMF) can be found in Annex 6. Figure 1 – EU legislative framework for investment funds in June 2017 Source: European Commission and EFAMA Quarterly Statistical Release Q2 2017 for the figures In total, in June 2017, the European investment fund industry (AIFs and UCITS) represented €14,310 billion AuM – of which 60.8% was invested in UCITS and 39.2% in AIFs .

In particular UCITS has developed into a strong brand over the years and is nowadays recognised globally. This success is evidenced by the rapid growth of assets that are managed in UCITS compliant funds. Total assets under management (AuM) in the EU grew from €3,403 billion at the end of 2001 to €8,704 billion by June 2017. AIFs have not yet reached the same take-up as UCITS but there is evidence that the market for AIFs is growing steadily. Total assets under management grew from €4,075 billion at the end of 2014 to €5,606 billion by June 2017. Before 2014, the asset under management of non-UCITS funds were less than €3,000 billion. This may be due at least in part to the fact that the AIFMD framework does not have a long history compared to the UCITS framework as it came into application only on 22 July 2013. A breakdown of the EU investment fund market shows that equity and bonds are asset managers’ preferred holdings for UCITS, while AIFs are a more heterogenous class of investment funds, investing in a wider variety of asset types (see figure 2) and employing different investment strategies. These include, hedge funds, private equity funds, infrastructure funds, commodity funds and real estate funds. Figure 2 – Breakdown of UCITS and AIF by investment type (based on net assets)Source: EFAMA Quarterly Statistical Release Q2 2017 To understand the importance and potential of investment funds as an investment opportunity for savers across the EU, it is useful to provide some insight on investment fund ownership. By end of 2016, institutional investors (insurance companies, pension funds, and monetary financial institutions, and other financial institutions) together held most (66%) of the investments in investment funds. Households accounted for a quarter of all investments in funds, making them the second largest holder of investment funds after other financial institutions (see figure 3). Figure 3– Investment Fund Ownership end 2016 Source: EFAMA Fact Book 2017 Nevertheless, a closer look at households' financial assets shows that banking deposits and insurance and pension fund reserves still dominate household savings in the EU (see figure 4 and 5), representing about 70% of households' total financial assets. In the US, households hold only half of their total financial assets in the form of currency and deposits and insurance and pension fund reserves. While investment funds also play an important role in households' financial assets in the EU, most of the investment in investment funds currently goes through insurance and pension products, compared to the US, where households have more direct holdings of equity and investment funds units (see figure 4). Figure 4 – Comparison EU versus US for households' financial assets (share in total, end 2015) Source: ECB, EFAMA About 71% of UCITS are domiciled in five Member States, with Luxembourg being the largest domicile (33%), followed by Ireland (14%), France (11%), the United Kingdom (7%) and Germany (6%). These represent 84% of the UCITS assets under management. For AIFs this picture is slightly different, with 75% of AIFs domiciled in the following five Member States: France (28%), Luxembourg (17%), Germany (15%), Ireland (9%), and the Netherlands (6%). These represent 77% of the AIFs assets under management. Investment fund domiciles It is common for both UCITS and AIFs to be administered and domiciled in a different Member State than the one from where they are managed. For example, a German UCITS manager may choose to domicile a fund range in Luxembourg and to market them in France and Spain. In that case the home domicile of the fund is Luxembourg and the host domiciles of the funds are France and Spain. There are a number of reasons why the manager may choose such a structure, including legal and regulatory factors (regulatory approach of the domicile, expertise and responsiveness of the supervisor, range of fund vehicles), financial and business factors (favourable tax environment, costs of doing business, concentration of fund administration expertise and services) and market and distribution factors (speed to market, investors' perceptions, reputation and longevity as funds centre). Although the EU investment fund market is the worlds' second largest market behind the US in terms of AuM, there are considerably fewer funds in the US (15,415) than in the EU (58,125), implying a significantly smaller average fund size. This has an impact on the economies of scale that can be realised by asset managers in the EU. Furthermore, EU investors pay higher fees than their counterparts in the US; the average asset-weighted expense ratio of US domiciled mutual equity funds was 0.63% versus 1.27% for European domiciled equity funds in 2016. As mentioned in section 1.1, cross-border distribution is an important area where the single market has not exploited its full potential. This has been confirmed in the lost potential analysis (see annex 5, i.e. evaluation annex). Figure 5 (below) shows that cross border distribution of EU investment funds has grown gradually over the last ten years. However, it also shows that the EU investment fund market is still predominantly organised along national lines, with 70% of the total AuM held by investment funds registered for sale only in its domestic market – which includes so-called 'round-trip' funds (see box below). Round-trip funds Where a manager domiciles a fund in another Member State and then distributes it only back into the market where they are based, this is known as an 'round-trip' fund. This impact assessment distinguishes between round-trip funds and more widely distributed cross-border funds. Round-trip arrangements are legitimate arrangements from which managers and investors can both benefit. EU legislation allows for such arrangements; and they rely on availability of the managing and marketing passports. However, round-trip funds don't represent a re al deepening of the single market or an increase in investor choice; a manager is still only marketing a fund in one Member State (plus the fund domicile). A better indication of cross-border activity for the purpose of this exercise is where a fund markets to at least one Member State outside the home market of its manager and domicile. Therefore, for the purpose of this Impact Assessment we consider round-trip funds as domestic funds - even if round-trip funds are only possible because of the existence of the marketing passport.

For the purpose of this impact assessment, only investment funds that are marketed in two or more Member States other than the fund domicile are considered cross-border funds. This is to exclude round-trip funds (see box above). Although round-trip funds are legitimate arrangements from which managers and investors can both benefit, they do not represent a true deepening of the single market. Figure 5 – Assets under management of cross-border investment funds Data on the numbers of funds marketed cross-border across the EU supports the observation that the European investment fund market is still fragmented. In July 2008, the Commission noted in its impact assessment on UCITS IV that only 20% of UCITS were notified for sale in at least two countries other than their fund domicile. By June 2017 this number reached 37% according to data from Morningstar (see figure 6). The proportion of AIFs that are registered for sale in two or more Member States other than the fund domicile was only 3% by June 2017. Figure 6 - Percentage of UCITS and AIFs registered for sale across the EU Country registered for sale Number of UCITS registered for sale Number of AIF registered for sale Domestic only 11,650 46% 9,455 91% 2 countries only 4,326 17% 586 6% 3 to 5 countries 3,440 14% 246 2% More than 5 countries 5,897 23% 112 1% TOTAL 25,313 100% 10,399 100% Source: Morningstar database, June 2017 Figure 7 (below) provides an indication of the growth rate of the number of cross-border funds and registrations over the last twelve years. If Jersey is excluded, the number of cross-border funds in the EU (excluding round-trip funds) was 11,380 by end of 2016. Setting this number off against the total number of funds in the EU by end of 2016 (58,125), indicates that cross-border funds accounted for less than 20% of the total number of funds – confirming that the single market for investment funds is still fragmented. Figure 7 – Evolution of cross-border distribution (numbers of funds and registrations) A more detailed overview and assessment of cross-border distribution of investment funds can be found in section 2.3 of this impact assessment. 2.PROBLEM DEFINITION European legislation allows asset managers to passport their investment funds across the EU, with the objective of creating a single market for investment funds. However, as demonstrated in the evaluation (annex 5), there are still binding barriers for asset managers to distribute their investment funds cross-border across the EU. As a case in point, in the randomized survey at least 69% of the fund managers indicated that a positive change in each of the barriers separately (regulatory barriers, taxation, local demand or the distibution network) would increase their level of cross-border activity. Relatively speaking, large funds found local demand factors more important than small funds. This initiative aims to reduce the regulatory barriers to cross-border distribution of funds within the EU. This section describes the underlying drivers of this problem, assesses the magnitude of the problem and explains the consequences that necessitate action at EU level. A fund manager's decision to distribute a fund cross-border will be influenced by discretionary strategic considerations on the one hand and the attractiveness of the local market on the other hand. The latter include the (i) marginal costs of going cross-border to a specific national market; (ii) structural factors of the local market; and (iii) expected demand. In this initiative we focus on regulatory cost, while factors related to (ii) and (iii) are considered out of scope. A problem tree that summarizes the problem drivers, problems and consequences under consideration in this impact assessment can be found at the end of this section. 2.1.In-scope problem drivers Feedback to the consultations indicate that there are a range of national requirements and regulatory practices regarding the use of the EU marketing passports for investment funds that diverge and can be hard to find and interpret for fund managers. Furthermore, responses from industry suggest that certain (national) requirements regarding the use of the EU marketing passports are burdensome, but have little added value. The areas which were identified by respondents to the consultations and consequently qualify as the problem drivers within the scope of this initiative are: (D1) ·Marketing requirements; ·Regulatory fees;

·Administrative requirements; ·Notification requirements. Relatively speaking, results from the randomized survey show that national marketing rules were considered the most important barrier, closely followed by the existence of a local agent. Regulatory fees and notification requirements were deemed relatively less important. A brief description of the problem drivers is presented below; a more detailed description can be found in the evaluation annex (see annex 5). 2.1.1.Marketing requirements National marketing requirements and supervisory practices differ and are sometimes unnecessarily burdensome - When EU funds are marketed cross border to investors in another EU Member State, they are required to comply with the host Member State's national marketing requirements, including national implementation of the requirements in the UCITS and AIFM Directives. Respondents to the open consultation indicated that in practice, there is a wide divergence in the activities Member States considered to be marketing for both Directives. Activities which may or may not be considered to be marketing depending on the Member State practices include, for example, pre-marketing and reverse solicitation. A considerable majority of industry respondents considered this to have a material impact upon the cross-border distribution of investment funds. Using the marketing passports, asset managers can start marketing funds without any marketing material and just rely on the documents which meet their legal obligations concerning information to be provided to investors. However, in practice asset managers generally also use marketing material, such as flyers, websites, e-mails and radio/TV spots. In at least six Member States national competent authorities check or approve marketing material to retail investors for some or all funds on an ex-ante basis. The ex-ante checks or approval can, according to some industry respondents, be significantly more time-consuming in some Member States than others and can take up to four months, delaying marketing activities and rendering the material outdated when informing clients on evolving market conditions. However, this is not supported by feedback from competent authorities, which indicate that pre-checks or pre-approval of marketing material usually only take a few days, and exceptionally up to 15 days. Lack of transparency over national marketing requirements – As outlined in the evaluation annex, fund managers and industry associations responding to the open consultation indicated that it is often not clear at first glance which (national) marketing requirements apply exactly unless a manager or distributor has very detailed knowledge of the applicable local law. National regulators and supervisors often give additional guidance on how to interpret local law which is not always in a single rule book. There are also Member States that refer to non-financial legislation (such as regulation on advertising and marketing practices). In practice this means that external counsel needs to be engaged to determine how to comply with national rules. Regular changes to marketing requirements introduce additional cost, meaning such costs are incurred on an ongoing and recurring basis. 2.1.2.Regulatory fees Regulatory fees differ and can be complex – When asset managers make use of the marketing passport, 21 Member States require paying regulatory fees to competent authorities of the host Member State when funds are marketed to investors on a cross-border basis. Respondents to the Call for Evidence and the CMU Green Paper have referred to the range of regulatory fees charged by host Member States as hindering the development of the cross-border marketing of funds across the EU. A preliminary assessment by the Commission services showed that the level of fees levied by host Member State on asset managers varies considerably, both in absolute amount and how they are calculated (see Annex 8). This implies that the process to determine the level of fees that have to be paid by an asset manager when marketing his fund cross-border can be very complex. Lack of transparency over regulatory fees – As outlined in the evaluation annex, the majority of industry respondents to the open consultation did not consider the requirement to pay regulatory fees as such as a significant barrier, but rather the lack of transparency over how these fees are calculated and levied. Respondents indicated that it is difficult to find out and understand what the regulatory fees in a certain host Member State are, as this information is often not available on the website of the national supervisor or only in the local language. As a result, asset managers need the services of external counsel to determine the exact level and structure of regulatory fees. Furthermore, some asset managers responding to the open consultation indicated that they did not receive invoices for regulatory fees. This can create accounting difficulties and even delay the passporting process as a proof of payment is required by some host competent authorities to be sent to them before marketing commences. 2.1.3.Administrative requirements National requirements to have local facilities are costly, but have limited added value given use of digital technology - Where UCITS are marketed across borders to retail investors, at least 17 Member States require – as part of the transposition of Article 92 of the UCITS Directive – that facilities are present in their territory for making payments to unit-holders, repurchasing or redeeming units and making available the information which funds are required to provide. A few Member States also require these local facilities to perform additional tasks, like handling complaints or serving as local distributor (e.g. GR) or being the legal representative (including vis-à-vis the national competent authority, e.g. DK). As outlined in the evaluation annex, responses by industry to the consultations suggest that the costs to comply with the requirement to have local facilities present in each Member State are significant. Feedback from industry also suggests that the appointment of local facilities is time-consuming and can lead to significant delays in marketing funds, as negotiating the agreement involves the management company's legal and business teams as well as the fund's depository and operational oversight teams. While the costs of local facilities are significant, asset managers and one investor association indicated that in practice facilities nowadays mostly play a passive role and are rarely used by the investors, as the preferred method of contact has shifted to direct contacts with the manager and payments and redemptions are done through other channels, either online or by telephone. Besides questioning the need to have local facilities nowadays, many industry respondents also considered the diverging requirements between Member States regarding the appointment and role of local facilities a barrier. 2.1.4. Notification requirements Requirements for updating notifications are either not standardised or applied differently across the EU and types of funds – Before a fund manager can use the marketing passport under the UCITS and AIFM Directives, it is required to notify the competent authority of the home Member State of its intention to market the fund(s) cross-border in another Member State. As outlined in the evaluation annex, whereas feedback through the consultations on the initial notification process was rather positive, industry respondents found the process for updating/ modifying documentation burdensome. A majority of these responses reported difficulties with the UCITS process for updating notifications, as this process is managed by the host Member State and is not harmonised or standardised. As for AIFs, several industry respondents noted that the requirement under AIMFD to update notifications when there are material changes can create difficulties as it is unclear which timeframe is applicable to the notification; what constitutes a material change; and whether marketing activities are allowed during that period. No harmonised de-notification process – Another issue highlighted by industry stakeholders in the open consultation was the absence of a de-notification process in some Member States, as well as differences between existing national de-notification procedures. More precisely, when a fund wishes to stop its marketing activity and exit the market of one or several Member States, different procedures can apply across Member States depending on whether there are still local investors in the fund and on whether the number of investors drops below a specific threshold. In addition, five Member States allow de-notification only after certain publication requirements are fulfilled. According to responses from industry, difficulties with de-notification result in a lack of an exit strategy, which considerably influences the decision of a fund manager to access a market in the first place. 2.1.5.Out-of-scope problem drivers There are other significant problem drivers that impact the problem under consideration. As indicated in the introduction of this section, the decision to go cross-border is determined by cost considerations and factors related to the attractiveness of the market. This is supported by the regression analysis in annex 6 which demonstrates that both cost considerations and factors related to the attractiveness of the local market affect the cross-border distribution of funds.

The out-of-scope drivers are summarised briefly below, together with an explanation why they are considered to be out of scope. Taxation (D2) – Many industry representatives and asset managers responding to the CMU Green Paper and open consultation on cross-border distribution of funds pointed to taxation as an important barrier. Respondents reported that investment funds often lack or have difficulties with obtaining access to double tax treaties, due to their tax status in the territory where they are domiciled or because they cannot demonstrate that their investors meet particular residence or nationality requirements. When they did have access to double tax treaties, respondents reported several difficulties due to inconsistent and burdensome withholding tax recovery processes, which are defined and applied at a national level. Other tax issues highlighted by industry respondents and investors were diverging national tax reporting requirements – in particular reporting on investor income tax – and tax discrimination of non-domestic investment funds, which discourages (retail) investors from investing cross-border. Taxation barriers are out of scope as these would need to be addressed on a different treaty base and are already the subject of other Commission work streams. This includes the work with national tax experts, which has led in December 2017 to the publication of a code of conduct on more efficient WHT relief and refund principles as part of the CMU Action Plan. Market structure (D3) - The closed architecture of distribution and intermediation channels has also been cited by industry representatives, investor associations and national competent authorities as a significant barrier for cross-border distribution. In many Member States banks and insurance companies are the biggest distributors of retail investment funds, offering in some cases predominantly in-house funds. Economic research indicates that financial advice might be biased when financial advisors also act as sellers of financial products, thereby not improving investors' portfolio allocations. In Europe, such dependent advisors are also unlikely to consider cross-border funds from other distributors (on an equal footing). Market structure is out of scope of this initiative for two reasons: ·Recent legislative initiatives: MiFID II and PRIIPs are intended to alter inducement incentives and provide greater clarity over costs. The impact of these measures will need to be evaluated before further steps are considered. ·As part of the CMU Action Plan, a follow-up to study on distribution systems of retail investment products across the EU is currently underway and further steps will be considered following this. Investors' behaviour (D4) – Economic research has demonstrated that fund investors are subject to several behavioural biases, including home and familiarity bias. It is argued - and indirect evidence is provided - that investors might be willing to buy high fee funds with which they have become familiar, possibly through localized marketing efforts. As such, home and familiarity bias have a negative impact on the demand from investors for cross-border funds, as they are more likely to invest in domestic funds. These behavioural biases also act as a disincentive for managers to engage in the cross-border distribution of funds: fee competition could not be as effective as these investors are willing to pay higher fees for funds they are familiar with and may therefore not switch funds solely because of lower fees. In addition, it will require more (marketing) efforts for non-domestic funds to be as noticeable in a market as local funds, making it difficult to sufficiently increase investors' familiarity with their fund. The broader issue of (retail) investors' behaviour is out of scope as this cannot be addressed through this targeted initiative. Recent legislative initiatives, like PRIIPs, already aim to address investors' behaviour more broadly by providing simpler and comparable information on investment products, which is expected to significantly improve investors’ decisions. Online and direct distribution (D5) – Divergent, paper-based requirements, such as Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks in many Member States were reported by a significant number of asset managers as a costly complication where managers are seeking to market directly online across borders. The current process is regarded as costly and labour-intensive, requiring renewing and maintaining Know Your Customer processes, monitoring, maintenance of sanctions lists, on-site visits etc. An additional factor is the need for managers of existing funds to maintain relationships with their existing distributors when launching online or other direct distribution channels. A number of managers have reported that this can act as a disincentive either to launch these channels or severely limits the possibility to compete by offering lower prices. See also the section on market structure. KYC and AML requirements are out of scope of this initiative as this is a horizontal issue, which applies to all financial services. Work in this area is already ongoing on a broader basis, for example by addressing the interoperability of identity authentication through the eIDAS initiative. In this initiative Member States cooperate in order to reach interoperability and security of electronic identification schemes. A shift to more online distribution in general may also have the potential to overcome some of the investor behavioural biases towards buying funds offered across borders. 2.2.Problems As discussed in section 2.1 and described in more detail in the evaluation annex, there are several areas (corresponding to the problem drivers) where national requirements and regulatory practices regarding the use of the EU marketing passports for investment funds diverge and can be hard to find and interpret for fund managers. As a result, they add unnecessary complexity and legal uncertainty to distributing cross-border, resulting in higher costs for asset managers who want to market their funds cross-border across the EU. Feedback from the consultations indicates that asset managers need to seek legal advice to understand and comply with different national regulatory frameworks. Costs for legal advice are incurred on a one-off basis when first accessing the market, but also on an ongoing basis to keep up with changing requirements. Furthermore, requirements like the mandatory appointment of local facilities can be burdensome according to industry respondents, given the direct fees that have to be paid to these facilities and the time needed to negotiate appropriate arrangements. In practice, this means that there are (regulatory) barriers for asset managers to distribute their investment funds cross-border. In order to get a sense of the magnitude of this problem, it is first useful to look at feedback to the open consultation, where respondents – in particular asset managers – were asked to indicate what the reasons were for any limitiation on the cross-border distribution of their funds for each Member State. Figure 8 indicates that for asset managers, the (most important) reasons for not distributing to a certain country differ between Member States. Nevertheless, for 23 Member States regulatory barriers were mentioned as a reason not to distribute in that country. This seems to indicate that regulatory barriers are binding for asset managers in the sense that they negatively influence their decision to market cross-border in the EU for almost all Member States. This is confirmed by the results of the randomized survey in which 77% of the respondents agree that a positive change with regard to regulatory barriers would increase their level of cross-border activity, even without any change in the other barriers. Relatively speaking, large funds found local demand factors more important than small funds. Targeted follow-up consultations of asset managers and industry representatives that were conducted after the public consultation, have confirmed that regulatory barriers are an important factor – and sometimes even a deciding factor – when determining their distribution strategy across the EU.

Figure 8- Feedback from stakeholders Source: Open consultation, European Commission, 2016 The chart below (figure 9) provides an indication of the importance respondents to the open consultation attributed to each of the problem drivers identified in section 2.1. It suggests that marketing requirements and tax issues (out of scope) are the most important barriers to cross-border distribution according to respondents, followed by administrative requirements, regulatory fees and notification. However, these results should also be considered in light of strong feedback from these respondents that rather than any individual one of these problem drivers being the major difficulty, it is their cumulative effect that increases complexity and in doing so acts as a major barrier. Figure 9 – Feedback from stakeholders * Respondents could vote twice on marketing requirements; the average score was 1.9. ** Respondents could vote four times on tax issues; the average score was 2.7. Source: Open consultation, European Commission, 2016 In order to confirm the feedback from the open and targeted consultations that regulatory barriers act as an important disincentive for asset managers to distribute their funds cross-border, a random stratified sampling was conducted among a sample of 60 funds (see annex 4 for details on the methodology). The asset managers of the selected funds were asked to answer a questionnaire with six questions on the importance of the various barriers to cross-border distribution of funds, including out of scope drivers. The responses received in the context of the stratified sampling indicate that a large majority of asset managers feel that regulatory barriers hinder cross-border distribution. These responses also indicate that a large majority of managers would increase cross-border activity if regulatory barriers are reduced. The statistical analysis of the impact of costs on cross-border distribution set out in Annex 11 also supports the hypothesis that costs have a negative effect on cross border distribution of funds. As there is only anecdotal evidence available on the overall compliance costs of cross-border entrance, the statistical analysis only considers direct regulatory fees. The results show that there is a limited but distinct negative effect on cross border distribution. The analysis furthermore shows that ongoing costs have a considerably stronger impact than one-off fees. Based on the results of the analysis of regulatory fees it can be deduced that other costs arising on cross border entrance (search costs, legal fees etc.) will also have a significant effect. Given that stakeholders have indicated that regulatory fees are only a minor barrier to cross border distribution, this effect is likely to be larger than that of regulatory fees. Direct and indirect costs are therefore shown to hinder the growth rate of cross border distribution of funds thus lowering the potential increase in competition throughout the Member States. Besides feedback from stakeholders and the statistical analysis confirming the bindingness of regulatory barriers as a disincentive for cross-border distribution, a quantification of the costs asset managers incur for marketing cross-border also provides an indication of the magnitude of the problem. Figure 10 (below) shows the average costs for two types of asset managers: Scenario A describes an asset mangement company relying on in-house legal advice and in-house fund administration, whereas Scenario B shows an asset management company outsourcing legal advice and fund administration to third parties. More details on the costs and the methodology used for calculating them can be found in Annex 12. Figure10 Type of cost One-off (per fund and host jurisdiction) Ongoing (per fund and host jurisdiction) Compliance costs: external (legal) services for determining: ·marketing requirements ·administrative requirements ·notification requirements ·regulatory fees Scenario A : €4,297 Scenario B: €8,150 Scenario A: €1,146 Scenario B: €6,983 Compliance costs: external services for local facilities € 4,930 € 4,930 Charges: regulatory fees € 1819 € 2194 TOTAL per fund Scenario A: €11,046 Scenario B: €14,899 Scenario A: €8,270 Scenario B: €14,107 TOTAL for all cross-border funds Scenario A: € 679 million Scenario B: €916 million Scenario A: € 508 million Scenario B: €867 million Estimated Costs as % of overall fund expenses (*) 1-4 % in total (*) According to estimates provided by a number of industry associations in response to the open consultation, the different regulatory barriers sum up to total costs between 1 and 4% of the overall fund expenses. Anecdotal evidence provided in response to the open consultation, also indicated that for a single asset manager total costs linked to national requirements can correspond to 2 basis points (0.02%) of its reported AuM.A recent study by Morningstar of the fees charged by investment funds found that the average asset-weighted expense ratio for the full European fund universe was 1% (of AuM) in 2016. Applying these industry estimations to the €4.19 trillion AuM held by cross-border investment funds implies fund expenses of circa €41.9 billion, with regulatory barriers costing somewhere between €419 million to €1.67 billion. This corresponds with the range estimated in the cost calculations in figure 10, which is based on detailed anecdotal evidence provided by asset managers and private companies through targeted consultations. 2.3.Consequences The problems described in the section above lead to disincentives for asset managers to distribute funds on a cross-border basis. As a consequence, and despite a trend towards further integration, the European market for investment funds is still a fragmented market with less competition than one would expect in a fully functioning single market. Ultimately, this leads to less investment opportunities for investors in the EU. This section provides a description of these consequences, first by exploring more in-depth the current cross-border distribution of funds (building on section 1.2), and second by estimating the lost potential for the single market and ultimately investors. To get a better indication of current cross-border distribution of investment funds, it is necessary to consider cross-border distribution from two perspectives: ·Assets under management held by cross-border funds provide the magnitude of investments in these funds compared to domestic funds.

·The number of funds marketed cross-border gives an indication of choice available to investors. Assets under management – As illustrated in figure 5 in section 1.2, by the end of 2016, the proportion of AuM held in funds registered for sale in at least two other Member States other than their fund domicile was 30% of the total AuM of investment funds in the EU. This had grown from 20% by the end of 2006. These figures indicate that – although the AuM in cross-border funds has grown – the EU investment fund market is still predominantly domestic. Although a complete overview of the proportion of AuM held by cross-border funds in each (domestic) market is not available, data from EFAMA provides some indication of this. Available data shows that in most Member States the market share of cross-border funds in terms of AuM seems to lie somewhere between 5 and 25%, with some outliers – like Italy – where the market share of cross-border funds is 67%. It should be noted that this data included round-trip funds; hence the market share of true cross-border funds will be overrepresented in most Member States. Number of funds – Various sources provide indications of the number of funds distributed cross-border. As already included in section 1.2 (see figure 6), Morningstar data indicated that the proportion of UCITS funds that are registered for sale in at least three Member States is 37% (which excludes round trip funds). The proportion of AIFs that are registered for sale in at least three Member States is 3%. Recent statistical data collected by ESMA from national competent authorities (see Annex 8), indicates that on average, only 22% of UCITS domiciled in a Member State are marketed in other Member States (median 16%). However, large differences can be observed between Member States. While in Luxembourg (85%) of the UCITS domiciled there were marketed in other Member States, this percentage is significantly lower for all other Member States. For example, in Germany this was only 5%. In terms of numbers of UCITS, in only six Member States more than 100 of the funds domiciled there were marketed cross-border. Five Member States reported that none of the UCITS domiciled in their territory were marketed on a cross-border basis. Differences between the data from ESMA and Morningstar can be explained by the fact that not all competent authorities contributed statistical data to ESMA, including Ireland – which is the second largest domicile for UCITS. Furthermore, data reported by national competent authorities to ESMA seems to confirm data from Morningstar that uptake of the AIFMD marketing passport is significantly lower as compared to UCITS, with only three Member States reporting numbers of more than 100 AIFs marketed on a cross-border basis and 11 Member States stating that less than 10 AIFs domiciled in their jurisdiction were marketed across the border. The distribution of cross-border funds into individual Member States can also be considered as an indication that the single market is not functioning optimally, with some Member States receiving relatively few cross-border funds. Figure 11, which collates data from two different sources, illustrates that while in several Member States a high number of cross-border fund are registered for sale, in most Member States that number is (relatively) low. Figure 11– Number of cross-border registrations, funds sold into a Member State (per Member State) Source: PwC, Benchmark your Global Fund Distribution – March 2017, Morningstar database – July 2017 Estimates made from EFAMA data (Annex 7) suggest that the proportion of cross-border funds registered for sale in Member States compared to domestic funds (market penetration rate), strongly vary, e.g. 12% in Spain, 19% in Belgium and 76% in Hungary. However, in practice, these figures are likely to over-represent the proportion of non-domestic funds, due to the inclusion of round-trip funds. The open consultation also provides an indication of distribution across the EU – albeit anecdotal given the sample size, showing that managers choose not to market their funds in all Member States, with only 3 managers (15% of those responding) choosing to market in 27 or 28 Member States, and with the majority of managers marketing in half or fewer Member States (see figure 12). Figure 12 – Feedback from stakeholders Source: Open consultation, European Commission, 2016 Results from the open consultation also suggest that the Member States where fund managers do not market at all tend to be smaller; and these markets are possibly characterised by a lack of demand. There is a marked difference in distribution; while 19 of the managers responding market to Germany, only 2 market to Latvia and Lithuania, for example (see figure 13). Figure 13 – Feedback from stakeholders Source: Open consultation, European Commission, 2016 In a fully functioning single market, it could be expected that a large majority of managers would distribute their funds without unnecessary cost across the EU. Current arrangements clearly fall short of this. Increased distribution of cross-border funds has the potential to decrease the fragmentation of the market for EU funds, to increase competition in the national markets through new entries and to improve investment opportunities for investors in the EU. For a market to be competitive, new entry should take place and the entry should affect the behavior of incumbents and the economic setting in which they compete. Economic research shows that new entry impacts incumbents through price and quantity competition, with the effect of new funds entering depending on competition intensity in the market. Incumbents facing high competitive intensity engage in price competition by reducing management fees.

It should be noted that this research also concludes that investors did not benefit from the price competition in terms of lower fees as the lower management fees were offset by an increase in distribution fees. However, where funds enter the market and face low levels of competition for incumbents, investors still profit from increased diversification opportunities. This is particularly the case for the smaller markets that currently benefit less from the cross-border distribution of funds. Evidence provided in a recent analysis by Deloitte in the context of a study on the retail distribution channels in the EU, indeed suggests that fees are higher in markets that are underserved by asset managers. For example, in Estonia, where only 1,918 investment funds are available, the average fee is 2.72%, while in France - where 39,822 investment funds are available – the average fee is 1.59. It is possible that the differences in fees may be partly due to a lack of competitive pressure where markets are underserved by cross-border funds, though there are of course other significant differences between jurisdictions that could explain some of the divergence in fees. In order to estimate the lost potential for the single market due to regulatory barriers to cross-border distribution, an economic analysis was conducted. Even small increases in the growth rate of cross-border funds potentially have a significant effect on the total number of funds marketed over the course of several years. This will increase the choice for investors and will have positive effects on the level of competition, which will in turn put pressure on the fees charged by investment funds. Figure 14 shows the impact of increased growth rates of cross-border UCITS funds in terms of total number of UCITS funds marketed across the EU for 4 different scenarios (for a 1%, 3%, 5% and 10% increased growth rate). The baseline in the graph depicts the development under the assumption that the current 5-year average growth rate in each Member State is maintained. Meanwhile, the box plots indicate the strong dispersion across Member States given that average 5-year growth rates vary considerably (from 1.55% in Slovakia to 11.75% in the United Kingdom). Figure 14 – Different scenarios of increased cross-border growth rates Source: Morningstar data (Oct. 2017), EC calculations A comparison between the baseline and the different scenarios demonstrates that even a 1% increase in the growth rate of cross-border funds will lead to a 0.5% increase in the total number of UCITS funds marketed across MS over the course of 5 years (this implies that 487 additional funds would be offered). This effect becomes increasingly more pronounced as the increase in the growth rate rises. A 10% increase, for example, would lead to 4,944 additional UCITS funds marketed over the same time period. This demonstrates that there is a significant lost potential in terms of competition associated with a lower growth of cross-border funds. The sooner the growth rate is boosted the sooner investors would benefit from the effects of increased competition. CONSEQUENCES PROBLEMS DRIVERS Barriers for asset managers to distribute their investment funds cross-border across the EU Diverging, sometimes difficult to determine national requirements and practices regarding use of EU marketing passport for funds

2.4.Groups affected by the problem Both providers of and investors in investment funds are affected by the remaining difficulties managers face in distributing funds cross-border: Investors across the EU might not be offered attractive investment opportunities that would be available to them in a fully functioning single market. While the data on cross-border distribution provides evidence that cross-border funds are available across the EU, the relatively low level of investment in these funds suggests that retail investors are not able or willing to fully exploit this opportunity. This could be due to a number of factors, including both in- and out-of-scope drivers such as a preference for domestic products (home/familiarity bias) or to the funds that are marketed cross-border being insufficiently competitive or attractive. Retail investors are particularly affected, as the choice available to them is more limited, and it is likely that they will respond by either investing in the funds easily available to them through distributor networks, or choose to invest in other types of assets, for example bank deposits. Professional investors are better able to access a wide range of investment opportunities: rules regarding marketing to them are less strict, and they generally have the resources to seek out suitable investments or even request the creation of tailor-made products. However, it is likely that they will also be disadvantaged by the barriers, which imply that the offer is lower than it would be in a fully functioning single market. Asset managers facing a significant incremental cost in marketing to more Member States have reported that they instead choose to limit distribution of their funds where they can be confident there is sufficient demand. In doing so, they lose the opportunity to test new markets and further grow their funds. Responses to the consultation show relatively few managers marketing to 27 or 28 Member States (3 out of 19 managers), with many choosing to market to roughly half this number or even fewer. National Competent Authorities and ESMA are also affected by the problem as the rules applicable in each Member State differ and this could create difficulties to ensure a level playing field across the EU. 2.5.Baseline scenario

The baseline scenario is that no policy action would be taken with regard to regulatory barriers to cross-border distribution. Not addressing these regulatory requirements would mean that there will continue to be notable regulatory barriers to the cross-border distribution of funds, lagging behind the development of a fully competitive single market for investment funds. In the absence of any policy action in this area, national requirements would remain unaligned and at times difficult to determine, with associated costs borne by managers or (investors in) the funds. In detail this would mean that: ·marketing requirements would remain unaligned, and in some case difficult to find, requiring expensive legal advice to interpret. There are no indications that this legal advice would become cheaper; ·administrative requirements, including the mandatory use of local facilities, would remain in place in many Member States; ·regulatory fees would remain divergent and difficult to determine. ·notification procedures and requirements would remain unaligned and a procedure for de-registering funds is likely to be absent in some Member States. In a static version of the baseline scenario, costs for cross-border distribution are unlikely to diminish. These would continue to act as a disincentive to distribution. Although in this scenario no policy action with respect to regulatory barriers would be taken, a slow increase in the development of cross-border distribution could still be expected. This is due to the fact that both the AuM and the number of cross-border investment funds has shown a steady increase over the years – as illustrated in figures 5 and 6 – despite the barriers to cross-border distribution. However, fund managers and investors would not to be able to benefit from a fully functioning single market. Fund managers would not compete as efficiently as they would in case of a fully integrated market for investment funds. Evidence in economic research suggests that selling a fund in 7 countries instead of only one country increases the total expense ratio by almost 30 basis points. Other research suggests that funds that do not engage in the optimal level of cross-border distribution are losing out on the possibility of attracting net flows and related fees from other national markets. This in turn would affect a fund's growth and its ability to reach its optimal scale in order to maximise benefits stemming from economies of scale. From an investor perspective, this research also shows that incumbent funds faced with competition from new funds that hold similar portfolios, decrease their management fees, suggesting that pre-entrance fees were possibly too high. In addition, incumbent funds lose inflow from investors, indicating that these new funds are attractive to investors. When taking a dynamic perspective regarding the baseline scenario, other factors need to be taken into account. These other factors, which correspond to the out-of-scope drivers described in section 2.1.5., are independent from regulatory barriers and limit the cross-border distribution of investment funds. Although these factors are not expected to change substantially in the short-term, there are several initiatives and developments, which can have an impact on these factors. In turn, this is expected to have an indirect, but moderately positive impact on cross-border distribution of funds. However, a definite assessment of the impact of these initiatives is not possible, as they are linked to ongoing developments or legislation which has not yet entered into force or has not yet been implemented. These initiatives are described below. The growth of FinTech may lead to some greater opportunities for cross-border distribution, including through direct distribution. Development of online platforms, together with other reforms such as eIDAS, will allow funds to be marketed more easily online or directly to retail investors, including on a cross-border basis. Growing cultural acceptance of online purchases – currently patchy – could well support this. Since increasing amounts of retail services and products are offered and marketed online, the physical location of providers and distributors should become somewhat less prominent. Furthermore, online and direct distribution are less affected by home bias and consequently put national and EU funds on a more equal footing than the traditional market structure and long established distribution channels do. However, the European financial services market still remains clearly fragmented by national borders, especially in retail services. The sale of financial services differs from other products given that trust in the financial service provider is an important determinant: providers with low trust have difficulties selling products with certain levels of risk. The success of online financial services will thus depend partly on how trust can be established in online relationships relative to face-to-face sales. Customer surveys have shown, for example, that factors such as branch proximity still play a key role in customers' decision of bank providers . While there is certainly a trend towards an increasing use of online distribution channels, especially for transaction activities , branches and other forms of face-to-face and voice-to-voice channels are likely to maintain an important role for sales-and-advice interactions . These sales and advice interactions are crucial for the effective marketing of funds. How quickly and to what extent this will change will crucially depend on the quality and costs of internet based services and especially consumer trust. Other measures addressing the incentives to market cross-border may have a positive impact in supporting wider distribution, for example: ·The limited ban on inducements being introduced through MiFID II could contribute to opening up vertical distribution structures, allowing for a wider distribution of investment funds and supporting investors' in exercising greater choice. ·Along the same lines, national legislative changes, for example the UK's and Netherlands' ban on inducements, could also support this aim. ·Key Information Documents (KID) for packaged retail and insurance based investment products (PRIIPs) will improve transparency and comparability in particular regarding costs linked with different investment products, including transaction costs. This should have a positive impact on investor's confidence in packaged investment products, including investment funds and help them to take better informed investment decisions. The KID should also help cost-efficient products to better compete in the markets. ESAs review: The Commission proposal for the ESAs review foresees a more integrated EU supervisory framework to foster the Capital Markets Union and financial integration. If financial activities are regulated and supervised more consistently across all Member States, it can be expected that cross-border activities can be conducted more easily. Providers of financial products will benefit from a level playing field across the single market and service providers may expand their product offerings and benefit from economies of scale. Users of financial products and services – consumers as well as business – may benefit from a wider choice without concerns about consumer protection or market integrity. Additionally, direct supervision powers for ESMA with respect to EuVECA, EuSEF and ELTIF funds are foreseen. A more integrated EU supervisory framework has the potential to reduce regulatory differences between Member and increase cross-border activities, including the cross-border distribution of investment funds,. WHT relief principles: The European Commission, helped by national tax experts, has recently developed a code of conduct on more efficient WHT relief and refund principles as part of the CMU Action Plan. Once implemented, the code of conduct will address the longstanding problems of long delays and high costs faced by investors seeking to claim withholding tax refunds. This would help avoiding double taxation, making it easier and more attractive for investors to make cross-border investments, including in investment funds. The UK's withdrawal from the EU will have an impact on the EU investment fund market; many managers are located in the UK and it also has a large investor base. If the UK leaves the single market, then the single market for investment funds will become smaller, even allowing for some restructuring and relocation of fund managers to remain within the EU. These changes accentuate the need to ensure that the single market for funds operates as effectively and efficiently as possible. To sum up, given experience to-date and work to address the broader market for investment products, it is likely that in the baseline scenario cross-border distribution of funds will continue to increase, but only moderately within a European Union of 27 Member States. 2.6.Evaluation A back-to-back evaluation of the provisions affected by the initiative was conducted for the purpose of this impact assessment and can be found in Annex 5. The evaluation focuses on the rules on cross-border distribution of investment funds and provides an assessment of the UCITS and AIFMD Directives, focusing on the potential factors that may have prevented the wider distribution of the funds as compared to the level one could expect in a fully functioning single market. The evaluation does not constitute a full review of the two Directives, as both the UCITS and AIFM Directive will be subject to an overall review in the near future.

3.THE EU'S RIGHT TO ACT AND JUSTIFICATION Article 114 of the Treaty on the Functioning of the European Union (TFEU) confers to the European institutions the competence to lay down appropriate provisions that have as their objective the establishment and functioning of the single market. The problem that the initiative under consideration aims to address is directly related to the use of the marketing passport for investment funds as provided for in existing EU rules, and as such, concerns the functioning of the single market. Without solving the problem, the objectives of the UCITS and AIFM Directives cannot be achieved efficiently. Action at EU level is appropriate to address the identified problem, as feedback from the consultations clearly indicates that national implementation of UCITS and AIFM Directives resulted in differing interpretations of the rules applicable to the use of the marketing passports under these two Directives. In addition, the randomized survey revealed that on average 96% of the respondent were in favor of increased transparancy or increased harmonizaiton at the EU-level. As the problem relates directly to the application of European and national legislation and (supervisory) practices by Member States, other approaches that focus on (voluntarily) changing behaviour or practices of market participants would not solve the problem. Although Member States have the ability to address the problem by (voluntarily) amending national legislation or practices, uniformity and legal certainty regarding the use of the passport can be better ensured by taking action on EU level. Furthermore, previous efforts to converge national (supervisory) practices in this area through ESMA have not succeeded to address the identified problem. Therefore, addressing the remaining barriers to cross-border distribution of investment funds across the EU can be most efficiently achieved at EU level in accordance with the principle of subsidiarity as set out in Article 5 of the TFEU. Finally, to address (parts of) the problem it might be necessary to amend existing EU legislation, which requires action at EU level. This is being pursued now on a stand-alone basis, prior to the overall reviewos of the AIFM and UCITS Directives, because for both reviews there is not enough evidence to be able to decide at this point whether any further legislative changes would be merited. The Commission has just started the overall review of the AIFMD. The review started with a tender for an external study on the functioning of the Directive, which was awarded to a contractor in September 2017. An overall review of the UCITS Directive may take place once enough experience is gained with the practical application of elements introduced with the most recent amendments to the Directive. 4.OBJECTIVES The general policy objective of the initiative under consideration is to increase investment opportunities for investors in the EU by removing inefficiencies in the functioning of the single market for investment funds. This general objective translates into the following specific policy objectives: ·removing unnecessary complexity and burdensome requirements regarding cross-border distribution of investment funds across the EU (S1); ·improving transparency of national requirements and practices regarding cross-border distribution of investment funds across the EU (S2); and ·safeguarding investor protection (S3). Problem Problem drivers S1 S2 S3 Barriers for asset managers to distribute their funds cross-border across the EU Marketing requirements Yes Yes Yes Regulatory fees Yes Yes No Administrative requirements Yes No Yes Notification requirements Yes Yes Yes The objectives of the initiative are consistent with other EU policies and initiatives – most notably CMU – that aim to strengthen Europe’s economy and encourage investment in all 28 Member States. The objective also reflects the EU's commitment to complete the single market (Articles 4(2)(a), 26, 27, 114 and 115 of the Treaty on the Functioning of the European Union (TFEU). The EU is committed to high standards of protection of fundamental rights as laid down in the Charter of Fundamental Rights of the EU. The objectives of this initiative are not likely to have an impact on fundamental rights of EU and non-EU citizens, and as such are consistent with EU policy. 5.POLICY OPTIONS AND ANALYSIS OF IMPACT 5.1.Methodology This chapter describes and assesses the policy options identified to address the following areas: ·Differing national marketing requirements

·Lack of transparency regarding national requirements (concerning national marketing requirements and regulatory fees) ·Complexity of regulatory fees ·Administrative requirements (local facilities) ·Notification requirements These areas correspond to the problem drivers identified in section 2, with the exception of the area on the lack transparency. This area has been created to provide more clarity and ease the comparison of options and groups together the lack of transparency regarding national marketing requirements and the lack of transparency regarding regulatory fees. The problem drivers that have been identified are separately related to different requirements imposed by the UCITS and AIFM Directives and can therefore be addressed independently from each other. There is also no interdependence between the various options presented below, as each can have an effect on its own. For this reason, policy options are presented in each area in a detailed manner in order to provide a clear picture of which solutions have been considered and why certain solutions have been discarded. Nonetheless, the presented policy options correspond with three possible approaches to address the problems identified in this Impact Assessment: (1) transparency on national level, (2) transparency on EU level, and (3) harmonisation of national rules. In each area, options are described, their impact on stakeholders analysed, and compared for their effectiveness and efficiency with the 'do nothing' option in meeting the specific objectives. The coherence with existing measures is analysed, and an explanation on whether the options conforms to the principles of subsidiarity and proportionality is provided. Finally, preferred options are identified. The preferred options specifically respond to the problem drivers. It is important to note that there is no one size fits all approach: for some problem drivers the solution might be to increase transparency at national level, for others to increase transparency at European level, and finally for others more harmonisation might be identified as the best way forward. The set of preferred policy options is presented in chapter 6. 5.2.Options addressing differences regarding national marketing requirements 5.2.1.Description and assessment of the options The following options were considered: Policy option Description 1. No policy action Baseline scenario applies. In specific, leave MS flexibility to interpret the definition of marketing and maintain detailed differing requirements regarding the marketing materials and their approval process. 2. Define pre-marketing Introduce the concept of pre-marketing for AIFs. 3. Define reverse solicitation Introduce a definition of reverse solicitation for AIFs. 4. Harmonise requirements and supervision process for marketing materials Complement high-level principles and ask ESMA to develop common detailed marketing requirements. Frame the supervision process of marketing material. Options 2, 3 and 4 can exist on their own, but can also be combined. Option 1: No policy action Under this option, the baseline scenario, the definition of marketing in the AIFMD would remain and not be complemented by a negative definition (i.e. of what does not constitute marketing). Option 1 means that uncertainty would remain for asset managers and practices among Member States would still diverge. In addition, no improvement would be achieved in terms of harmonisation of the requirements for marketing materials and their checking/examination by competent authorities. Option 2: Define pre-marketing under the AIFMD Option 2 would define the concept of pre-marketing for AIFs, relating to professional investors. Such a negative definition of what does not constitute marketing would complement the positive definition of marketing already provided in the AIFMD. This option would provide for legal certainty under which circumstances contacts with potential investors are not treated as marketing. It would harmonise the practises across the EU on pre-marketing of AIFs, including EuVECA and EuSEF, which would reduce complexity. Pre-marketing is already used by asset managers in some Member States in order to test the appetite of the market (i.e. potential investors) regarding a specific strategy. A harmonised definition would allow asset managers to develop products where a demand exists, and save costs for complying with regulatory requirements as long as the decision whether to market a product has not yet been taken. The concept should be limited to professional investors in order not to endanger retail investor protection. It should be made clear that pre-marketing can only be followed by marketing (or no offering of the product), i.e. any future subscription on the basis of final documents by the potential investor contacted in the framework of a pre-marketing activity will be considered as marketing.

As compared to Option 1, Option 2 would remove burdensome requirements as long as the decision whether to market a product has not yet been taken. Option 2 would benefit asset managers as it increases transparency as to situations covered by pre-marketing and lowers burden for asset managers in the pre-marketing phase. This option would not undermine investor protection, especially for retail investors, as the pre-marketing is limited to AIFs and to professional investors. In addition, pre-marketing could be beneficial for the investors as they would benefit from better targeted products that might be more appropriate to their needs. Option 3: Define reverse solicitation under the AIFMD Option 3 would introduce the concept of reverse solicitation in the AIFMD. Reverse solicitation covers situations where passive marketing takes place, in other words where a professional investor contacts the manager regarding a specific product on his own initiative. Recital 70 of AIFMD recognizes that professional investors may invest in AIFs on their own initiative, but given no further guidance. Accordingly, the current frameworks do not prohibit investors to buy or to invest in a product on their own initiative. In the absence of a harmonised definition, the practice differs from one Member State to another.A harmonised definition of reverse solicitation would clarify this concept and specify that reverse solicitation falls outside the scope of marketing. Contrary to Option 1, Option 3 would potentially allow professional investors access to funds which are currently not being marketed to them, if they are in a Member State which does not currently recognise the practice. However, there is also risk of a loss of investor protection as funds sold in this way would be considered outside of AIFMD, with the non-application of EU marketing rules. This could constitute a way to circumvent the AIFM Directives and this might put at risk the efficiency of EU legislation. Option 4: Further harmonise requirements and supervisory practices for marketing materials Under this option the process of checking UCITS marketing material and the requirements on marketing materials would be further harmonised. As to the requirements on marketing material, the principle of a clear, fair and non-misleading presentation would be further strengthened. According to Recital 64 to the UCITS Directive, control of compliance of marketing arrangements with applicable rules of host Member State can be performed after the UCITS has accessed the market of that Member State. The Recital explains the host Member State can verify whether the marketing communications are fair, clear and not misleading before the UCITS use them, provided such control is non-discriminatory and not preventing that UCITS from accessing the market: the verification of marketing communications may not constitute a precondition for the offer of UCITS. Competent authorities which verify marketing communications, prior to them being used, undertake this activity as part of their investor protection, and in particular retail investor protection, mission. Investors' associations are also in favour of such checks. Against this background, option 4 foresee that any Member State can require automatic notifications of marketing communications by domestic UCITS as well as UCITS from other Member States intending to be marketed in their territory to the competent authority. Competent authorities that choose to use such option would need to ensure, in their policies or internal rules and procedures, a transparent and non-discriminatory treatment of all UCITS regardless of their origin, i.e. in particular not preventing non-domestic UCITS from accessing the market. This option would also introduce a reasonable timeframe for assessing notified marketing communications. This option would apply to UCITS, but also to AIFs marketed to retail investors (if a Member State allows this) in order to ensure equal protection of all retail investors. the principle, laid down in Article 77 of the UCITS Directive, would be complemented by an additional requirement: a balanced presentation of the rewards and risks of the fund. Further details regarding the requirements on the marketing communications should be developed through ESMA guidelines, which should also take into account the specificities of digital marketing communications in the context of online distribution. Although these principles are primarily addressed to UCITS, they shall also apply to AIFs. As compared to Option 1, Option 4 would improve transparency and reduce complexity, as requirements regarding the process of checking marketing material and requirements on these materials would be more harmonised. This option would ensure investor protection, as the general principles regarding the content of marketing material will be strengthened in order to ensure the quality of the marketing materials. Feedback from stakeholders Many stakeholders (in particular asset managers) asked for recognition of pre-marketing and a harmonised approach to pre-marketing, while in comparison only some stakeholders asked for the introduction of the concept of reverse solicitation. The Member State expert group on free movement of capital has explored possible definitions for pre-marketing and reverse solicitation. The requests regarding pre-marketing were mainly made in the context of AIFMD but some respondents also requested it for UCITS. Arguments presented by asset managers were that they need to be able to determine investor appetite prior to refining and marketing their products – and cannot justify registering in all jurisdictions with the associated regulatory and administrative costs without knowing if there is demand from investors. Pre-marketing is common practice in certain asset management segments that target professional investors or high net worth individuals, such as private equity or venture capital. Unlike UCITS, which are offered on a continuous basis to retail investors, many AIFs which are closed-ended or which only offer periodic opportunities to invest may need significant prelaunch commitments from professional investors. It was argued by many stakeholders that Member States which do not permit pre-marketing are denying their investors the opportunity to participate (and benefit from) initial capital rounds on advantageous terms, meaning they could only participate in later rounds or the secondary market. Respondents (industry representatives) to the consultation reported that several Member States have an ex-ante pre-approval or checking process of marketing materials and the uncertainty about how long this process takes is often a problem. Investors associations highlight the importance of marketing material in investment decision and firmly request ex-ante checking of marketing materials by Competent Authorities. NCAs who perform an ex-ante checking argue that the practice is beneficial for both investors and asset managers. They consider that ex-ante checks are in line with their mission to ensure investor protection and highlight the benefit for asset managers to receive specific information on the rules and practices in the target market, which allows them to be more confident on the use of their marketing materials. 5.2.2.Comparison of options Options 2, 3 and 4 are complementary options. Options 2 to 4 are envisaging new elements, which would be added to existing legislation without replacing any existing provisions and they are against this background coherent with existing legal frameworks for investment funds: the UCITS and AIFM Directives as well as the ELTIF, EuVECA and EuSEF Regulations. Option 2 would provide less flexibility for Member States to interpret the definition of marketing. The introduction of a definition of pre-marketing would benefit both professional investors and asset managers, allowing the latter to explore investors' appetite prior to establishing and marketing a fund, whereas Option 3 could have a negative impact on investor protection and lead to circumvention of EU rules, as it concerns existing funds. Option 4 would introduce more convergence among the Member States regarding requirements and supervisory practices for marketing materials. Investors' associations underline that marketing material needs to be supervised in order to guarantee that it is complete, correct, objective and balanced. The strengthening of the principles applicable for marketing material and the development of a level 2 measure/ guidelines by ESMA is in this context – in addition to option 2 – the most reasonable option as it will improve the protection of investors all over the EU. Preferred options are Options 2 and 4. They constitute necessary elements to achieve the policy objectives satisfactorily and, as such, are proportionate measures. Options 2 and 4 together will have a beneficial impact on compliance costs, as less legal advice will be required thanks to some harmonisation and transparency. As outlined in detail in annex 10, legal counsel costs range on average from € 1,146 to 6,983 (ongoing costs per annum) per fund and host jurisdiction. They could decrease by 25 to 50% if all preferred policy options are pursued, while it seems unrealistic that they decrease more, as legal advice will still be required for other aspects, e.g. national taxation rules, national distribution structures. Enforcement costs for competent authorities will be low. Option Effectiveness Efficiency S 1 S 2 S3 Cost-effectiveness Option 1 + 0 0 0 Option 2 + ++ 0 + Option 3 + ++ - - Option 4 ≈ ++ + + 5.3.Options addressing lack of transparency over national requirements

5.3.1.Description and assessment of the options The following options were considered: Policy option Description 1. No policy action Baseline scenario applies. 2. Publish and translate requirements on national websites Require Member States and national competent authorities to publish their legislation/guidelines in one place on national websites and to translate it in the language used in the financial sector. Require national competent authorities to publish regulatory fees on their national websites. 3. ESMA website as single information portal on marketing requirements Introduce a single point on ESMA website containing full up to date marketing requirements applicable in each Member State. 4. ESMA interactive database on regulatory fees Require ESMA to maintain a central database with the regulatory framework of each NCA Options 2, 3 and 4 can exist on their own, but can also be combined. Option 1: No policy action In the absence of any policy action, the baseline scenario applies. Managers wishing to distribute cross-border would be required to seek out relevant national legislation and guidelines concerning marketing requirements on individual websites where possible, and in some cases also translate them into their working language. Under option 1 asset managers would still have some difficulties to know in advance how much it will cost them to market a fund in another MS. They would need the services of local law firms and/or consultancy firms in order to obtain all the information, which can be expensive (based on anecdotal evidence provided in response to the consultations). Option 2: Publish and translate requirements on national websites This option requires Member States and National Competent Authorities to place all their laws, rules and guidance relating to marketing requirements for funds making using of the marketing passport in one place on a website. This includes, where applicable, the (national) definition of marketing as well as the methodology and an indication of the level of regulatory fees charged. If specific requirements apply for online distribution, these shall also be disclosed. It would also involve requiring them to translate their requirements into a language commonly used in financial services. This option recognises that managers find it difficult to determine the range of requirements for marketing into a Member State and the level of regulatory fees to be paid, and it can be costly and take time for them to do so. When this information is published and translated on national websites, asset managers can easily obtain the information for each country in which they market or intend to do so, which would reduce the search costs and complexity of national requirements and improve legal certainty. As compared to option 1, option 2 would improve transparency which is likely to reduce the time and costs for managers in determining how to market into a Member State, reducing the disincentive to do so. This is particularly relevant for small asset managers, given that they cannot spread costs across many funds, or where a manager is considering marketing into an additional Member State. This option would have no impacts on investors. It would cause minor costs for competent authorities to consolidate their information and ensure all appropriate rules are captured and, if needed, updated. If competent authorities are also required to translate requirements into a language commonly used in financial services, this would add further costs, which will ultimately be borne by whoever funds the competent authorities, in many cases the financial services firms themselves. Option 3: ESMA website as single information portal on marketing requirements This option requires ESMA to introduce a single point on its website on which all of Member States’ marketing requirements for cross-border marketing are put in one place, and translated into a language commonly used in financial services and are made available in the form of a summary table providing a concise, accurate and up-to date overview. This overview could be used by asset managers to quickly understand the various national requirements, although the asset manager would not