Revision of the UCITS Eligible Assets Directive: the regulator’s willingness to be open

In its 2024 edition of the key figures for asset management¹, the Autorité des Marchés Financiers (France’s Financial Markets Authority) stated that the 3,156 UCITS registered in France represented €841bn in assets in 2022. High risk dispersion, high level of protection, diversification of asset classesand high liquidity to cope with redemptions are just some of the advantages that investors understand fully.

The high level of investor protection in UCITS is notably the result of a strict European financial framework, which includes the Eligible Assets Directive (UCITS EAD or EAD). This directive, which dates back to 2007, was the focus of a request issued by the European Commission for technical advice in May 2024 by the European Securities and Markets Authority (ESMA). ESMA in turn sought the views of stakeholders in the European market through a series of questions. This upcoming review of the EAD is an opportunity to highlight some current issues and possible future directions in the responses given by stakeholders.

How does asset eligibility currently work in France for UCITS?

For a simplified understanding of the regulatory requirements, this article will focus solely on EAD for UCITS. The eligibility of assets resulting from the Management Companies’ activity programme (AMF Position Recommendation 2012-19) and additional restrictions included in the instruments of incorporation specific to each UCITS will be deliberately ignored. In practice, it is this regulatory triptych that governs the eligibility of UCITS assets.

Currently governed by the UCITS Directive, which incorporates the EAD and has been transposed into French law in Articles R.214-9 et seq. of the French Monetary and Financial Code, the eligibility of assets is mainly governed by liquidity, reliable valuation and marketability requirements. These strict rules on asset eligibility mean that it is impossible for a fund to invest in cryptoassets (reserved for certain professional clients), real estate (like an SCPI²), non-traded assets (covered by Private Market AIFs³), receivables (covered by securitization vehicles) or funds that track the price of gold.

The regulations in place makes it difficult to take new financial innovations into account and leads to differences in interpretations observed from one country to another in the European Union (undermining the famous requirement of a “same level playing field”). These two elements are used by ESMA to address a series of questions to stakeholders.

What possible direction might revising the EAD Directive take?

The ESMA consultation on the revision of the EAD has attracted multiple responses from stakeholders in Europe. We will focus on two points in particular: the future of the UCITS standard and the potential opening up of eligible assets within a UCITS.

The majority of respondents are in favour of keeping the “UCITS” standard, a standard known to general public investors and the success of which is explained in particular by the liquidity of assets, strict rules on eligibility and risk dispersion. However, it should be noted that ESMA mentioned, in a position dated 22 May 2024⁴, a recommendation to the European Commission to separate UCITS into two ranges (“basic” and the rest). France, for its part, has introduced a middle way. Fonds d’Investissement à Vocation Générale (general purpose investment funds), French AIFs intended for the general public, authorise a more open list of eligible assets with the possibility of including, to a limited extent, receivables and UCIs investing in unlisted assets. With the recent arrival of the revised ELTIF 2 standard, will we see the emergence of a new European standard for UCIs similar to this French solution, positioned between ELTIF UCIs and UCITS and possibly a form of “European FIVG”, in order to bring certain asset classes or specific risks to the general public?

Another point also mentioned in the stakeholder responses to the consultation concerns the extension of the possible asset classes to the assets of a UCITS. In its letter from the Observatoire de l’épargne in France (which monitors and analyses the savings behaviour of households)⁵, the AMF cites 40% of French people’s intention to invest in guaranteed investments over the next 12 months and only 7%, for example, in cryptoassets. As mentioned by France Invest, the opening of ELTIF UCIs or, more broadly, Evergreen UCIs could be considered⁶. As for other asset classes, it would be advisable to stick to traditional risks that are easily understood and comprehensible by the general public, as France Post Marché in particular explains.

Lastly, it is all about investor protection: will the European regulator want to introduce more risky or non-traditional products to the general public?

It will therefore be up to financial players to monitor the direction ESMA wants the European Commission to take in its objective of uniting the capital markets. ESMA must produce a technical opinion in 2025 to follow up on the responses to its consultation. To be continued!

Vivien Trocherie, Head of Trustee Services France, Societe Generale Securities Services

Article published in Option Finance in January 2025