"Finance Europe Label": EU States Push Investment Initiative

"Finance Europe Label": A Member State Driven Initiative to Boost European Investment

Some key EU member states are taking steps to encourage investment in European assets through the proposed introduction of the "Finance Europe" label. This initiative, championed by France and supported by several other member states, aims to create a labelling framework for investment wrapper products that are predominantly European-focused. The initiative has the potential to shape the future of retail investment across the EU.

Here, we explore the key aspects of the Finance Europe label, its potential implications, and the challenges it faces.

What is the "Finance Europe" Label ("Label")?

The Label is a proposed designation for investment wrapper products - such as accounts, funds, or insurance-based investments - that meet specific criteria outlined in a Termsheet agreed between France, Spain, Luxembourg, the Netherlands, Estonia, Germany, and Portugal.

It is designed to promote wrapper products that invest predominantly in European assets, with the goal of channelling more retail investment into the EU's capital markets.

The Broader Context

Whilst the Label does not appear to be directly related to the EU's proposals to develop a pan-European savings and investment product (see our article here on those proposals), the concept is clearly, in our view, aligned with that broader vision. However, the Label does not appear to be limited only to a pan-European savings and investment product, it appears to be intended to apply to pre-existing investment wrapper products as well.

Key Features of the Termsheet and Label

The Termsheet sets out the parameters for products eligible to carry the Label. It is a high level document (6 pages including the signature page) so the lack of detail in places raises some questions. Below are the key elements.

1. Eligible Assets

The Label would apply to a range of assets including, for example, equity (both listed and unlisted), ELTIFs, UCITS, AIFs, and bonds. Crypto-assets (undefined) are explicitly excluded.

The list does not appear to be intended to be exhaustive, but it is unclear what other wrapper products could be in scope. Questions remain as to whether structured products, derivatives, or certain types of crypto-assets could be included.

2. Investment Threshold

Eligible assets would need to invest at least 70% of their assets in European assets (which would include the European Economic Area (EEA)). In relation to funds, it would be the underlying assets, not the fund domicile, that would be considered.

Some stakeholders have raised concerns about the high threshold, noting that it could limit profitability and make such products less attractive. Comparisons have also been drawn to other investment wrappers, such as Sweden's ISK or the UK's ISA, which do not impose geographical constraints.

Grey areas also exist on the definition of "European" assets. For example, would a French company generating most of its profits outside the EU qualify?

3. Holding Period

The Termsheet suggests applying tax benefits to these wrapper products, linking such tax benefits to a minimum holding period of five years, with limited liquidity windows tied to retirement or major life events.

Concerns have been raised by stakeholders as to whether retail investors may be hesitant to lock up their investments for such a long period, particularly given the current lack of widespread financial literacy.

Another key consideration is that the EU does not have authority to mandate tax treatment across EU member states (see Tax Treatment section below).

4. Risk Exposure

The Termsheet provides that the Label would not be intended to guarantee returns or mitigate risks. This would be left at the discretion of product providers.

5. Governance

Market operators would not require any specific authorisations to use the Label, provided the criteria 1-4 above are met. However national regulators would have the power to monitor and ensure compliance with that criteria.

6. Distribution and Operational

The Termsheet states that no specific additional distribution rules would apply to the Label, allowing member states to tailor approaches to their markets. However a common name ("Finance Europe") and a common logo would be used.

Market operators would also report to (presumably) their national regulators, who would in turn share the volume of label flows with each other in order to monitor the impact of the Label.

Tax Treatment: A Critical Factor

One of the most contentious aspects of the initiative is tax treatment. Member states are encouraged in the Termsheet to provide favourable tax benefits to products using the Label, but tax policy remains a national competency outside the EU's legislative scope.

Tax competency has long been a source of contention between the EU and member states. Some member states are reluctant to offer tax incentives within their national policy, fearing revenue losses. Others are reluctant to give up control of their tax competency to the EU.

This raises the question whether, without pan-EU tax benefits, the Label may struggle to gain traction at all.

Challenges and Next Steps

Legal Status

The Termsheet currently has no formal legal status. It represents a voluntary agreement of terms among the signatory member states, who aim to implement the framework without EU legislation.

However, the European Commission is expected to review the Termsheet. Its apparent adoption by member states who, together, represent a large proportion of the EU's population, suggests that the Label could gain legislative traction if the European Commission likes it.

Industry Feedback

Trade associations are preparing comments on the Termsheet, even though it is not a formal consultation. Industry input could be critical in shaping the final framework, particularly on contentious issues such as the investment threshold and holding period - and national implementation of the terms by signatory member states.

Our View

The success of the Label may hinge on whether member states are willing to offer tax incentives. Without a unified EU approach to tax treatment, the initiative could face significant hurdles.

We are following this development closely. Watch this space!

For further insights or to discuss how this initiative may impact your business, please contact your usual Simmons & Simmons contact or another member of our team.