Ireland rules out ETF share class changes

Ireland’s financial regulator has ruled out relaxing naming rules for mutual fund ranges that have exchange traded fund share classes, despite the jurisdiction having a competitive disadvantage compared with rival Luxembourg.

The Central Bank of Ireland requires Ucits funds to include “Ucits ETF” in each sub-fund name if it offers any ETF share classes alongside mutual fund classes.

On the other hand, Luxembourg’s Commission de Surveillance du Secteur Financier requires only the listed share class to include Ucits ETF in its name, without having to change the name of the sub-fund.

Ignites Europe analysis shows that Luxembourg’s regulatory approach has enabled mutual funds to steal a march on rivals in other jurisdictions.

Amundi and BNP Paribas Asset Management each have the majority of their passive fund assets in ETF share classes for those Luxembourg mutual funds where both listed and unlisted share classes are available, according to Morningstar data.

Two-thirds of assets in applicable products within the Amundi Index Solutions fund range are in ETF share classes, totalling more than €34bn in ETF assets under management.

BNP Paribas’s Easy fund range has almost 60 per cent of applicable fund assets in ETFs, totalling about €13bn assets, Ignites Europe analysis of Morningstar data shows.

However, a spokesperson for the CBI said: “The central bank considers that a change would be required to the [European Securities and Markets Authority] guidelines before a different approach to the naming convention could be implemented.”

The issue has come to the fore after HSBC Asset Management unveiled plans to launch ETF share classes within a range of existing Ireland-based index funds.

Renaming four of the HSBC Fixed Income index funds to Ucits ETFs on May 18, in line with local rules, was trumpeted as a first for Ireland.

Andrew Craswell, European head of ETF services at Brown Brothers Harriman, said the Luxembourg regulator’s interpretation of Esma’s rules on ETF naming conventions “certainly seem to offer a higher degree of flexibility.

“Hence why we have seen several issuers launch this structure in Luxembourg.”

Markus Schwamborn, director at Deloitte Luxembourg, said that in addition to different naming rules, the CBI “requires specific disclosures” in the prospectus of a Ucits umbrella fund that has sub-funds with both listed and unlisted share classes.

“We are not aware that similar disclosure requirements exist in Luxembourg.”

Manooj Mistry, chief operating officer at HanETF, said: “Luxembourg does appear to be more helpful.”

The CBI’s stricter approach on the issue “makes no sense whatsoever”, added Michael O’Riordan, founding partner of Blackwater Search and Advisory.

There is growing demand for ETF classes within mutual funds, according to experts, opening up opportunities for more Luxembourg funds to offer ETF share classes without having to set up ETFs in Ireland.

Ireland is the largest domicile for ETFs in Europe, with assets of just under €950bn, but Luxembourg is the largest European centre for mutual funds, with assets of €3.4tn, Morningstar data at the end of March 2023 shows.

Craswell said Brown Brothers Harriman was seeing “a great deal of interest in ETF share class structures from asset managers across different jurisdictions.

“There are the obvious benefits of scale and efficiency, but I think this ultimately distils down to an ability to offer investors choice and flexibility.”

Marie-Sophie Pastant, head of ETF and index portfolio management at BNP Paribas AM, said different types of share class appeal to different clients.

Multi-asset investors are among clients that favour ETF classes “due to their transparency, low cost and liquidity”, while some providers of unit-linked insurance products “do not have a broker set-up enabling them to trade ETFs”, she said.

BNP Paribas is not yet considering adding ETF classes to any of its actively managed mutual funds, however.

Mistry pointed out that other aspects, for example the ability to offer lower withholding tax on dividends for US equities, may still make setting up funds in Ireland “more advantageous”.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.