Source: Daniela Vogel¸ PKF Malta¸ 30 April 2012

First off all¸ what is the passporting process?  Typically we see how the  German Federal Financial Supervisory Authority (BaFin) describes the passporting process as a routine needed before banks¸ financial institutions¸ investment companies¸ insurance companies or pension funds can take on third party business¸ they need a written permission from the BaFin.  An exception exists for companies that originate from another Member State of the European Economic Area. These companies only have to be registered at the BaFin in Germany¸ if they exercise under the freedom to provide cross border services¸ or with a subsidiary. This is called the notification procedure or the “European passport”.[1] This article discusses the position of  Switzerland which opted not to join the European Economic Area in 1992¸ as it argued that the membership to the common internal market for mutual funds – UCITS (Undertakings for Collective Investment in Transferable Securities) was unnecessary. The background to this decision can be better apreciated when recalling how Switzerland¸ was and is still considered ‘the fund center’. In practise this move has resulted in lost market share which migrated  increasingly to EU financial centers such as Luxembourg¸ Dublin and recently also to Liechtenstein¸ because of the chosen bilateral approach and because of the lack of free movement. The damage to lost business was exacerbated with the recent introduction of the UCITS IV Directive an  EU-harmonization scheme which as one of its targets is the creation of an EU passport for management companies (fund management)¸ facilitating cross-border mergers¸ the introduction of a UCITS master-feeder fund and the replacement of the simplified prospectus with the new one page “Key Investor Document”.[2] The Key Investor Document is a formal simplified prospectus which shows the customers transparent product information and gives each to compare key efficiency indicators on a two year comparison which is easy to comprehend.[ 3]

The changes in the new EU UCITS Directive lead to an acceleration of the notification procedures and the improvement of the cooperation between supervisory authorities. These measures would be attractive to EU full member states ¸ because they make the UCITS market more efficient and give understandable information to investors. By comparison one notices how due to a global slowdown and other measures the funds market in Switzerland is stagnant¸ because the admission of foreign UCITS is very much facilitated by UCITS 1V directive ¸ whereas the exportability of Swiss products is isolated. In addition¸ this latest directive has resulted in Switzerland being forced to expand only in tight niches such as funds for qualified investors and other funds for traditional and alternative investments.[4]

The situation could be further aggravated by the Directive on Alternative Investment Fund Managers (AIFM)¸ because the directive  does not regulate the individual situations¸ but rather the managers and all investment strategies¸ which are not covered by the UCITS Directive yet. If these non-UCITS should be distributed to professional investors – even if this happens within national borders – the managers need to apply for an “EU passport”.[5]

Again¸Switzerland fund managers will find this a hurdle. In response to the financial