Stumbling blocks remain for cross-border mergers of coordinated UCITS
Ucits IV allows funds to be merged irrespective of their original European domiciliation. But all eyes are turning to UCITS V.
Incomplete. While the Ucits IV European Directive will considerably facilitate the commercial development of asset management companies operating in Europe, it needs to be perfected. Indeed, the cross-border merger of funds, at European level, is one of the most "progressive" applications… on paper. "Cross-border funds mergers are already possible, but only between two funds incorporated under the same laws", notes Marc Raynaud, Head of Global Funds Solutions and Chairman of BNP Paribas Investment Partners in Luxembourg. In other words, at the current time, only two UCITS incorporated under French law, or two Italian funds, etc., can be merged, in the case, for example, of management overlaps. There is, however, one exception: "Ireland, which allows such cross-border mergers, irrespective of the place of domiciliation of the other fund." Some asset management companies have already taken advantage of this opportunity, such as BNP Paribas which, when it acquired the transalpine BNL, whose asset management subsidiary promoted a mutual fund domiciled in Ireland, merged it into the sub-funds of the Luxembourg mutual fund Parvest. Invesco followed the same path, in December 2008, when it announced the merger of an Irish fixed income fund with a similar fund domiciled in Luxembourg. The advantage of merging two funds lies "in spreading fixed charges over a large number of investors, which benefits everyone", explains Marc Raynaud.
If the new Ucits IV system held out the promise of large-scale rationalisation between UCITS domiciled in different centres, "not all the practical arrangements have yet been specified by the competent European and local authorities", notes Jean-Baptiste de Franssu, President of Efama (European Fund and Asset Management Association). "We will have to wait therefore for the finalisation of level 2 of the Lamfalussy process before we see transactions of this type."
No tax harmonisation
In addition, the creation of a real, unified UCITS market requires legislative changes. Cross-border UCITS mergers are faced with an obstacle: the total lack of European tax harmonisation, in particular as regards VAT. "While France has already announced that capital gains will not be taxed in the case of a merger of two funds, notes Marc Raynaud, that is not the case in either Belgium or Switzerland." In Switzerland, such mergers are treated as a transaction and are subject to the payment of stamp duty. In Belgium, it works out even more expensive, because "the authorities there consider that there is first of all a sale of units then a purchase of units in the new fund, he explains, resulting de facto in a tax on the capital gain generated". Spain and Germany have not yet announced their position on this topic. Before any merger, it is necessary therefore to carry out a strict analysis of the liabilities of the UCITS. "If the investors are largely Belgian, we will not implement any fund mergers whatsoever", states Marc Raynaud, while adding that, in any event, the number of cross-border mergers is likely to be limited because of the lack of legal consistency. Moreover, it is not really in the interests of regulators to be overly cooperative. "As long as it is sufficient to have all funds domiciled in one centre to pursue a growth policy throughout Europe, it is obvious that certain centres will be neglected while the winners will be Luxembourg or Ireland", notes Jean-Baptiste de Franssu.
Should Paris, which continues to struggle to export French registered funds outside its borders, be worried about a loss of interest on the part of international investors? "History has not yet been written", asserts Christine Lacoste, Director of Marketing of Natixis Asset Management, which has no immediate plans to merge its funds, because of the complementarities between its two Luxembourg and Irish mutual funds and its range of French funds. "In the case of the merger/absorption of two UCITS domiciled in different countries, the quality of the management often dictates the jurisdiction of the absorbing master fund, she explains. However, according to the Lipper data, on average, French registered funds are more present in the first decile than Luxembourg registered funds (over five years for the 18 basic investment strategies, 11 % of French registered UCITS are in the first decile versus 9 % for Luxembourg registered funds, Editor’s Note). Despite the strong presence of international asset managers on the Luxembourg market, French asset management continues to be of a high quality." There are grounds therefore for optimism.
Nevertheless, observers have pointed out that the Ucits IV Directive, drawn up before the Madoff affair, is already obsolete. "It is urgent to finalise Ucits V, which is more focused on protecting investors, emphasises Jean-Baptiste de Franssu. This will include essential points such as a single definition of the role and responsibilities of UCITS custodian banks, irrespective of their domiciliation, and determining the principles of the remuneration of managers. » Although Ucits IV is still in its infancy, attention is already on a fifth version.