The European Commission’s proposals to address the fragmentation and underperformance of EU capital markets, focusing on market integration and efficient supervision, will introduce changes for UCITS and AIFs with a view to simplifying requirements and reducing unnecessary regulatory and administrative burdens.
Fund managers have spent recent months preparing for the transposition and implementation of AIFMD 2.0, the directive amending the Alternative Investment Funds Mangers Directive (“AIFMD”) and the UCITS Directive, which is due to be transposed by EU member states by 16 April 2026. The revised investment funds framework, introducing new rules relating to the use of liquidity management tools and a new harmonised regime for loan originating alternative investment funds, has not yet been fully implemented, but it is already being targeted for further changes as a result of the European Commission’s (“Commission”) market integration package, published on 4 December 2025.
The market integration package includes a proposed directive (“Proposed Directive”) amending the AIFMD, UCITS Directive and the Markets in Financial Instruments Directive (“MiFID”) and a proposed regulation (“Proposed Regulation”) amending the supervisory powers of the European Securities and Markets Authority (“ESMA”) and amending the regulation on the cross border distribution of funds (“CBDR”). The overall aim of the package, which forms part of the Savings and Investments Union (“SIU”) initiative, is to simplify legislation and reduce the regulatory burden where appropriate, as well as promoting harmonisation and a single market for financial services by minimising the potential for national divergences and “gold-plating”.
No direct supervision of large cross-border asset managers
The Commission’s proposals follow a communication on the SIU published by the Commission in March this year, which mooted the possibility of direct supervision of large cross-border asset management groups, arising from recommendations in the Letta and Draghi reports on EU competitiveness. While group-level authorisation of asset managers and ESMA direct supervision were considered by the Commission as one of the optional policy responses, it was concluded that this approach would entail higher costs for the sector and its supervisors, outweighing the potential benefits. The Proposed Regulation amending the ESMA founding regulation does not propose direct supervision but focuses instead on stronger convergence and coordination of supervision at EU level. The proposed amendments aim to strengthen the use and effectiveness of ESMA’s supervisory convergence tools and to introduce new tools.
Cross border distribution of funds
The Proposed Regulation notes that, under the current framework, the cross border distribution of UCITS and AIFs is mainly governed by directives, allowing for national discretion in many areas. There are therefore diverging rules across member states relating to marketing communications, as well as specific administrative and operational requirements, for example relating to fees, reporting obligations and local physical presence requirements. The Proposed Regulation aims to address these national divergences and to move relevant provisions (with amendments) relating to the cross border marketing of funds from the UCITS Directive and the AIFMD into the CBDR, so that all fund marketing rules are in one place and the potential for transposition differences and national divergence is reduced or eliminated.
The proposed amendments target administrative delays, waiting periods and inefficiencies in the current notification process where funds are marketed in member states other than the home member state. Changes to the passporting regime would require a UCITS or AIF to indicate the member states where it intends to be marketed at the time of authorisation. The home member state will transmit the fund documentation to ESMA through a new data platform upon authorisation and the fund will be permitted to immediately access the listed host markets.
The Proposed Regulation aims to simplify the rules relating to the de-notification of marketing and would also remove the 36 months pre-marketing ban where a fund has issued a marketing de-notification.
ESMA will be empowered to identify and pursue actions to address diverging, duplicative, redundant and deficient supervisory actions hindering the cross-border marketing of funds in the EU. To improve transparency, the CBDR will also be amended to provide that ESMA will centrally publish the fees and charges levied by host member states.
Removing barriers to Distributed Ledger Technology Innovation
The Commission’s package recognises the potential of distributed ledger technology (“DLT”) and tokenisation of financial instruments to improve financial services for people and businesses in the EU. It is therefore proposed to amend existing legislation to remove barriers and complexities hindering DLT uptake in the EU financial sector. Revisions to the DLT Pilot Regime are designed to encourage increased experimentation while providing input for future policy making.
Amendments to AIFMD and UCITS Directive
The Proposed Directive amends the AIFMD and UCITS Directive with the aim of: (a) removing barriers to the cross-border operations of fund managers and their EU groups; (b) eliminating national discretions that can lead to diverging national requirements and supervisory practices; (c) introducing a depositary passport; and (d) strengthening ESMA’s powers to foster supervisory convergence. A summary of the proposed changes is set out in the table below.
Authorisation
UCITS Directive and AIFMD amended to address diverging national requirements and procedures in the authorisation of alternative investment fund managers (“AIFMs”) and management companies. ESMA mandated to develop regulatory technical standards (“RTS”) specifying details of information, procedures, timelines, templates, data standards, formats and instructions for authorisation applications.
Notification of Material Changes
UCITS Directive amended to clarify the scope and timing of the notification of materials changes to the conditions of initial authorisation and to align with AIFMD.
EU Groups of Management Companies and AIFMs
Amendments to recognise asset management group structures:
- groups can share human and technical resources across EU entities; and
- ”) would be required.
Elimination of National Discretions
- National discretions that allow member states to interpret, supplement or derogate from core rules are removed.
- ESMA to develop guidelines to specify the content of national rules of conduct and prudential rules.
Third Party AIFMs / Management Companies
Amendments would allow third party AIFMs / management companies to disclose the relationship at the time of authorisation and be in a position to provide information on request to confirm that they have taken all reasonable steps to identify, prevent, manage, monitor or, where applicable, disclose conflicts of interest. This would reduce the upfront compliance burden as detailed disclosures would not be required at the time of authorisation.
Management Passport
Timelines for the transmission of documents between home member states and host member states are reduced to ensure the efficient operation of the management passport. Member states would be prohibited from imposing any additional requirements on management companies operating within their state.
Depositary Passport
AIFMs and UCITS would be permitted to appoint a depositary located anywhere in the EU.
Investment Limits
- UCITS Directive amended to increase the current 10% limit on debt securities issued by a single entity to 15% for UCITS investing in securitisations issued in accordance with the Securitisation Regulation.
- UCITS Directive amended to extend the 20% issuer limit currently applicable to index-tracking UCITS to UCITS that are managed by reference to an index that is recognised by ESMA. ESMA is to publish and maintain list of recognised indices.
Regulatory Simplification and Burden Reduction
Removal of obligation to draw up key investor information for UCITS – as UCITS marketed to retail investors are already required to prepare a key information document (KID) under the Packaged Retail and Insurance-based Investment Products Regulation.
Cross-border marketing
As mentioned above, the rules in the UCITS Directive and AIFMD governing the marketing of EU AIFs managed by EU AIFMs and of UCITS in the EU are deleted and moved to the CBDR.
ESMA’s Supervisory Powers
- ESMA to identify and maintain a list of largest asset management groups (based on AUM in excess of €300bn and cross-border operations and activities).
- ESMA to conduct annual reviews of each large group identified, assessing supervisory approaches of NCAs to effectively identify and address divergent, duplicative, redundant, or deficient supervisory practices in specific cases, ultimately removing barriers to the operations of large asset management groups. The review would assess: (a) organisational structure and governance arrangements; (b) resources and their allocation; and (c) risk management systems. Where issues are identified during the review requiring supervisory action, ESMA will issue recommendations for corrective actions within reasonable time (maximum one year).
- ESMA granted the power to intervene where NCAs do not effectively apply EU rules or to directly suspend the cross-border activities of a fund manager or depositary.
Timeline
The Commission’s proposals will now be debated and negotiated in the European Parliament and the Council of the EU. Member states would have to transpose the Proposed Directive within 18 months of its entry into force. The provisions of the Proposed Regulation would apply from various dates between 12 and 24 months after its entry into force.
Comment
The market integration package proposes further change at a time when fund managers are still adapting to the AIFMD 2.0 amendments, requiring further compliance reviews and operational change, although efforts to simplify the legislative requirements, reduce operational and administrative burdens and prevent gold-plating will be welcome. Industry will also be receptive to the Commission’s aim to remove regulatory obstacles to DLT based innovation, which should facilitate wider experimentation with DLT in financial services.
Previous attempts to expand the supervisory powers of ESMA have been hotly debated by the EU law-making institutions, which have in the past diluted the ambitions of the Commission in the course of the legislative process. While on this occasion, the Commission has not gone so far as to propose direct supervision of asset managers by ESMA, the EU regulator’s enhanced role with regard to the supervision of large asset managers and the relationship between ESMA and NCAs in that process will no doubt attract intense scrutiny during the negotiations.
