Incomplete Domestic Market for Investment Funds Means Unnecessary Costs for Investors

The European investment fund market is still far from being a real domestic market. Obstacles in law and taxation mean that investors in the European market face much higher costs than they do, for example, in the US market.

This is the finding of a study conducted by the Mannheim Centre for European Economic Research (ZEW) on behalf of the Investment Management Association (IMA), a British trade association.

There is no doubt that integration within the European investment market has increased in the last few years. Nevertheless, in no European country does the proportion of investment from foreign investors exceed 20 per cent. This means that European funds have a far lower average volume than American funds. Investors are subsequently burdened with higher average costs. According to the ZEW study, the unnecessary additional costs for investors in European funds amount to approximately 5 billions euros per year. This is a considerable sum, which investors rightly resent losing.

A primary obstacle to greater integration within the European investment market is taxation. Many EU states discriminate against foreign financial services by taxation. Mutual funds of foreign providers are often more highly taxed than those of domestic providers. Other legal provisions also contradict the principles of a domestic market. It is barely possible, for example, for fund providers to merge fund products across borders. It is exactly this which would be beneficial for investors, as it would allow them to cut management costs.

A further anachronism which continues to exist ten years following the so-called "completion" of the European domestic market is the obligation to register funds. Even if an investment fund has already been acknowledged within an EU Member State, it must nonetheless first be registered in other EU member States before it can be sold there. This registration process is associated with costs and time losses and is not compatible with the principle of mutual recognition within the domestic market.

According to the findings of the ZEW study, the European Commission, Member States and actors in the financial services sector must take action. The Commission must fulfil its role as a "protector of contracts" and bring discriminatory contractual content before the European Courts. The Member States are also obliged to ensure that their legal frameworks for investment funds are compatible with the principles of the European domestic market. The financial sector must ensure greater transparency by introducing consistent standards of performance and cost statistics. Progress towards greater integration, competition and efficiency within fund markets might also make an important contribution to solving the European pensions issue.

Contact                                                      

Dr. Friedrich Heinemann, Phone: 0621/1235-149, E-Mail: heinemann@zew.de

Download the study here