From Fragmentation to Harmonisation: The EU’s Market Integration Proposal Explained

Ambitious harmonization goals through the Market Integration Legislative proposal: Streamlining rules for asset managers

The European Commission’s Market Integration proposal, published on 4th December 2025, introduces a substantial reworking of the EU framework for the cross-border marketing and supervision of UCITS and AIFs. Rather than incremental amendments, the proposal restructures the regime around a single, reinforced regulation and significantly strengthens the role of ESMA. It is aimed at addressing persistent fragmentation in the EU single market for investment funds. Divergent national implementation and supervisory practices in cross-border marketing and distribution have been identified as structural barriers to scale, efficiency and investor access. The proposal therefore, focuses on harmonisation, supervisory convergence and greater use of EU-level mechanisms.

Structurally, the package comprises three legislative instruments: a “Master Regulation” (amending multiple existing EU Regulations, including Regulation (EU) 2019/1156), a “Master Directive” (amending UCITS, AIFMD and MiFID II), and a Settlement Finality Regulation proposal. This design is essential to eliminate duplication and enable a coherent approach to distribution. It cannot function effectively unless the underlying Directives are amended in parallel to remove overlapping passporting provisions, rebalance home and host state competences, and adjust the foundational UCITS and AIFMD framework.

Consolidation of cross-border marketing rules into a single Regulation

At the core of the changes is the expansion of Regulation (EU) 2019/1156 (the Cross-Border Distribution Regulation). This Regulation becomes the central legal framework governing cross-border marketing, replacing the fragmented approach previously spread across UCITS and AIFMD provisions. In parallel, the UCITS Directive’s cross-border marketing chapter is removed, and equivalent mechanisms are re-established within the Regulation.

Harmonised, authorisation-anchored passporting framework

A key structural change is the move away from nationally implemented notification-based marketing passports towards harmonised, authorisation-anchored regimes. Marketing remains dependent on the underlying UCITS or AIFMD authorisation, but notification and de-notification processes are standardised at the EU level and operate as procedural steps within the authorised UCITS management company or AIFM framework, rather than as standalone national gatekeeping mechanisms. Separate but harmonised passporting regimes are introduced for UCITS and for AIFMs marketing either in their home Member State or cross-border. These regimes are supported by standardised documentation lists, common rules on material changes to marketing arrangements, and harmonised withdrawal and de-notification processes.

Central role for ESMA in cross-border distribution

The proposal also places ESMA at the centre of cross-border fund distribution. ESMA is mandated to develop and operate a data platform through which all passporting notifications, updates and de-notifications must be submitted and exchanged. This platform also underpins a public register of UCITS and AIFs marketed cross-border. In addition, ESMA is given new powers to address supervisory obstacles to cross-border activity, to facilitate dispute resolution between national authorities, and, in defined circumstances, to intervene directly. To support this expanded role, ESMA is authorised to charge fees to UCITS and AIFMs in connection with passporting, de-notification and operation of the data platform.

Clarification of home and host supervisory responsibilities

Another important element of the proposal is the clarification and formalisation of the supervisory split between home and host Member States. The home authority remains responsible for prudential, organisational and product-level supervision of the fund and its manager. Host authorities’ competence is expressly limited to the areas defined in the Regulation, primarily relating to marketing communications and investor-facing conduct. This approach replaces the previous, more diffuse host-state powers and is intended to ensure consistent application of the single market rules.

Marketing communications are fully harmonised at the EU level. The Regulation sets out detailed requirements on content, presentation and consistency with fund disclosure documents, including mandatory references to investor rights and de-notification information. Prior approval of marketing communications by host authorities is explicitly prohibited, and Member States are prevented from imposing additional national requirements on content or format. The proposal also clarifies responsibility for compliance where marketing is delegated or carried out by distributors acting on their own behalf.

Simplification of the AIFM pre-marketing regime and scope of harmonisation

The proposal also materially simplifies the EU pre-marketing regime for AIFMs. In particular, it deletes the AIFMD rule under which any subscription by professional investors within 18 months of the start of pre-marketing is automatically deemed to be the result of marketing and therefore subject to marketing notification requirements. In addition, the restriction preventing an EU AIFM from pre-marketing the same or a similar strategy for a period of 36 months following de-notification is removed. Pre-marketing is thus more clearly treated as a preparatory activity conducted under the responsibility of an authorised AIFM, without automatic re-characterisation or extended lock-out effects. The proposal does not harmonise marketing by non-EU AIFMs or marketing to retail investors; national private placement regimes therefore remain governed by national law.

Harmonised investor disclosure requirements

The proposal further harmonises investor disclosure obligations in a cross-border context. Where UCITS or AIFs are marketed in a host Member State, investors must receive the same information as in the home Member State, subject to harmonised translation rules. Certain operational aspects, such as the frequency of publication of UCITS dealing prices, are explicitly tied to the law of the home Member State.

Other regulatory and supervisory changes

Beyond the fund distribution framework, the Market Integration proposal includes a number of targeted amendments to other EU financial services regimes, reflecting the Commission’s broader objective of strengthening supervisory convergence and reducing market fragmentation.

In particular, the proposal amends EMIR (Regulation (EU) No 648/2012) to further enhance supervisory coordination and information-sharing in relation to central counterparties (CCPs), including greater involvement of ESMA in cross-border supervisory matters and a more consistent approach to supervision of systemically important clearing activities.

The proposal also introduces changes affecting the EU Distributed Ledger Technology (DLT) framework, with the aim of facilitating the cross-border development of DLT-based market infrastructures and improving regulatory clarity and supervisory cooperation in this area. These amendments are intended to support innovation while ensuring that supervisory responsibilities remain clearly allocated and consistently applied across Member States.

In addition, the package contains amendments relating to Central Counterparties (CCPs), reinforcing ESMA’s role in supervisory convergence and crisis coordination and supporting a more integrated EU clearing landscape. While these measures primarily affect market infrastructure providers, they form part of the same policy objective of centralising oversight, improving supervisory consistency and strengthening the resilience and integration of EU financial markets.

Finally, the proposal includes targeted amendments to the SFTR framework, aligning ESMA’s supervisory and fee-charging powers for trade repositories with its broader supervisory mandate. While these changes are primarily directed at trade repositories, they complete the broader objective of centralising EU-level oversight.

Overall direction of travel

Overall, the proposal reflects a shift towards a more centralised and harmonised model for EU financial markets. In the asset management context, it seeks to reduce national divergence in cross-border distribution, clarify supervisory responsibilities and strengthen the practical functioning of the EU single market for investment funds, while complementary changes to market infrastructure regimes reinforce the same integration and supervisory convergence objectives.

Timing and transitional arrangements: key unknowns

The proposals incorporate defined implementation milestones: namely, a 24-month period for the establishment of the platform and a 36-month review of host Member State fees. However, the extracted provisions do not comprehensively address the mechanism by which existing UCITS and AIFMD marketing notifications are to transition to the proposed authorisation-anchored notification letters and the ESMA-managed platform.

In light of the Directive’s deletion of the current marketing chapters and articles, a risk of transitional discontinuity may arise in at least two circumstances: (i) where Member States transpose the deletions prior to the amended Regulation becoming fully operational (for example, before the platform is functional); or (ii) where the amended Regulation becomes applicable before Member States have implemented the corresponding supervisory and structural amendments, thereby creating interim hybrid regimes.

While the final legislative act will likely include detailed transitional provisions to mitigate such risks, the precise commencement dates and transitional mechanics remain to be determined pending formal adoption of the legislation.

If you have any questions on how the Market Integration proposal may affect your UCITS or AIF distribution strategy, or would like to discuss the practical implications for your firm, please contact our team.