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paSSporTinG iSlaMic FunDS: a paTh For GroWTh?

By Bishir shiblaq, Head of duba arendt & Medernach–avocats representative office and Florence stainier, Partner, investment Funds

choosing the domicile of an investment fund is not an easy task. a fund promoter has to consider many aspects, in particular the available vehicles, investment strategies, and the reputation of the domicile. one of the key concerns remains, however, the possibility to distribute the fund in multiple jurisdictions. investment funds in the Middle East, whether conventional or islamic, currently face distribution constraints, since there are no arrangements for mutual recognition in place that permit funds that have been authorized in one country to be distributed in another country without complying with the full range of the host country’s approval requirements.

instead of introducing measures to harmonize the legal frameworks, we have seen more regulation recently, in particular in the gcc countries, making cross-border distribution increasingly difficult. in the case of the uaE, for example, investment funds established in the dubai international Financial center (diFc) are considered to be foreign funds by the uaE securities and commodities authority (sca)–the federal regulator for the uaE.

according to Ernst &Young’s islamic Funds report, a distribution-model access is central to the future growth of the islamic funds industry, pointing out a key structural weakness. according to fund managers in the gcc, the islamic funds industry cannot grow substantially unless the institutional sector, sovereign wealth funds, pension funds, and takaful companies all invest in islamic funds. However, institutional investors require more transparency, and the islamic fund industry lacks a uniform legal framework, with the consequence that disclosure of crucial information such as fund size, types of assets held, investment policy, management objectives, and other matters remains voluntary. While some funds provide detailed information, others provide little more than their contact details and the types of financial products offered. investor protection remains a host-country matter. in order to ensure high investor protection and sustainable growth, it remains crucial to choose a reliable legal framework in a fund domicile that offers optimal distribution possibilities.

biShr Shiblaq

head of Representative office – arendt & medernach

Bishr shiblaq is the head of the dubai office of arendt & Medernach, where he advises MEna based clients on luxembourg regulatory matters.

He advises on the structuring and setting-up of investment structures and also specialises in banking and finance, in particular structured finance and islamic finance.

Florence STainier

partner – arendt & medernach

Florence stainier is a partner in the investment funds practice of arendt & Medernach where she specialises in legal and regulatory aspects of investment fund work, advising clients on the creation, structuring and marketing of investment funds with a particular focus on uciTs.

she has been a member of the Brussels Bar since 2001 and of the luxembourg Bar since 2004.

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aware of these distributional deficiencies, regulators in gcc countries–a substantial region for islamic funds, since it accounts for about 80% of global islamic assets–are at a very early stage of considering a gcc passport for investment funds.

GCC countries, accounting for about 80% of global Islamic assets, are at a very early stage of considering a GCC passport for investment funds.

The european paSSporT experienceThe gcc countries are seeking inspiration from the harmonization efforts of the European union (Eu). The idea of a European passport started with the single market for financial services established in the 1970s with the adoption of the first insurance directives and the Banking directive.

Thanks to their European passport, financial institutions that have been granted authorization to conduct their business by the supervisory authorities of an Eu member state may–following a formalized notification procedure–pursue their business in all other Eu member states without requiring further local authorization.

The concept of the Eu passport for investment funds was initiated over 25 years ago, with the establishment of the undertakings for the collective investment in Transferable securities (uciTs). The original uciTs directive was conceived and launched in 1985 and implemented first by luxembourg in 1988. it aimed to develop a unified regulatory framework for mutual funds across Europe, with the goal to facilitate the

distribution of funds domiciled in one member state across all other Eu member states and to offer investors in uciTs products a consistent level of protection and confidence. The uciTs passport marked the birth of the ”uciTs brand.”

Global SucceSS oF uciTS uciTs has been at the heart of the development of the European funds industry for the last two decades, with more than 35,000 funds representing nearly Eur6 trillion being distributed worldwide. according to statistics reported by the European Fund and asset Management association (EFaMa), luxembourg was able to leverage from the development of the uciTs brand and the introduction of the Eu passport; luxembourg is today the world’s cross-border distribution hub for investment funds with a market share of 75%.

Beyond Europe, recent trends have shown a clear and significant growth in the distribution of uciTs products in the international market. uciTs-managed assets represent 32.3% of worldwide investment fund assets, the second largest market share after u.s.-managed assets (which account for 49.2% of the worldwide total). asia, latin america, and the Middle East are the predominant markets where uciTs have wide distribution. in 2010 approximately 50% of all net sales into uciTs products originated from outside the Eu.

islamic fund managers are familiar with the uciTs framework, since uciTs are also often used to create shariah-compliant investment products, with luxembourg being the leading cross-border domicile for islamic funds. according to lipper 18% of all islamic funds created in 2012 were established in luxembourg.

With over EUR2.3 trillion of AUM, Luxembourg is the largest investment funds hub in Europe.

luxembourg was able to leverage from the development of the uciTs brand and the introduction of the Eu passport; luxembourg is today the world’s cross-border distribution hub for investment funds with a market share of 75%.

Beyond Europe, recent trends have shown a clear and significant growth in the distribution of uciTs products in the international market. uciTs-managed assets represent 32.3% of worldwide investment fund assets, the second largest market share after u.s.-managed assets (which account for 49.2% of the worldwide total). asia, latin america, and the Middle East are the predominant markets where uciTs have wide distribution. in 2010 approximately 50% of all net sales into uciTs products originated from outside the Eu.

islamic fund managers are familiar with the uciTs framework, since uciTs are also often used to create Shariah-compliant investment products, with luxembourg being the leading cross-border domicile for islamic funds. according to lipper 18% of all islamic funds created in 2012 were established in luxembourg.

The concept of the EU passport for investment funds was initiated over 25 years ago with the establishment of UCITS.

Recent trends have shown a clear and significant growth in the distribution of UCITS products in the international market, with UCITS worth EUR6.5 trillion, while non-UCITS net assets amount to EUR2.7 trillion.

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aiFMD paSSporT anD oTher iniTiaTiVeSThe concept of the European passport has been recently extended to cover any Eu and non-Eu fund manager that manages Eu-based alternative-investment funds (aiFs) or wishes to market Eu or non-Eu aiF to professional investors in the Eu. The alternative-investment Fund Managers directive (aiFMd) created a new label, the “aiF brand” comparable to the “uciTs brand.” However, the aiFMd does not regulate the funds’ investment policy and applies in principle to all types of funds that are not uciTs, in particular to hedge funds, private equity funds, real estate funds, and index-tracking funds.

authorized aiFM will be entitled to market Eu or non-Eu aiF in the Eu to professional investors via a single authorisation regime similar to the passport for the marketing of uciTs to retail investors. This new passport regime replaces local private placement regimes, which vary from one European country to another.

in addition to the entry into force of the aiFMd, two new pieces of European regulations become directly applicable throughout Europe and might be of particular interest to islamic fund managers. The first relates to venture capital investment funds, and the other relates to social entrepreneurship investment funds. European social entrepreneurship funds are aimed at creating a label for investment funds dedicated to investing in social enterprises (EusEF). This label permits the marketing of EusEF throughout Europe–on the basis of a passport–to institutional and professional investors as well as to high-net-worth individuals investing at least Eur100,000.

so far for 2013, net assets of uciTs stand at Eur6.488 trillion, while non-uciTs net assets amount to Eur2.744 trillion. With over Eur2.3 trillion of auM luxembourg is the largest investment funds hub in Europe.

The harmonized and regulated framework under the European passport allows the European funds industry to develop truly cross-border products, which offer investors greater choice, portability, and investor protection. investment fund assets in Europe have more than doubled in size over the last decade, establishing the European funds management industry as a strong and vital component of the European financial system.

The European passport may have also helped to accelerate the expansion of the islamic fund industry in Europe. islamic insurance providers registered in an Eu member state are able to offer their services to the whole European market, thus promoting the penetration of new markets.

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