In 2003 there was quite a lot of frustration around managers of UCITS funds. The UCITS directive had been around for many years, and had been subject to some considerable (and sometimes painful) negotiation to produce UCITS III. It held out some great promises about the creation of a single market for funds in Europe and managers were increasingly looking to use it to develop their pan-European business.
Yet the reality was far from the promise. Managers discovered that they had a passport but a multitude of visa requirements were imposed on them as they sought to enter new markets.
At the IMA we all decided that we needed to vent that frustration in a constructive, coherent way and so we commissioned Dr Friedrich Heinemann of the Zentrum für Europäische Wirtschaftsforschung to produce a report outlining where the real barriers to cross border business lay and what might be done about them.
He helped us draw up a very clear agenda of areas where change was required to achieve the efficiencies and economies of scale which we believed could and should be achieved if we had a more efficient single market for funds in Europe.
Four years on it is now no longer just an industry agenda, but all the main issues which he identified have now been picked up by the European Commission. By the end of 2007, they will make formal proposals for focused, targeted changes to the UCITS directive after analysing comments they have received on an exposure draft of possible legislative measures which contains almost everything that the industry has been asking for.
The Commission proposes that the process for registering funds for cross-border distribution should be vastly simplified, with communication taking place between regulators. A fund would be capable of being marketed in a host member state three days from the date of receipt of notification from the home member state.
Provisions would be included in EU law to facilitate cross-border mergers of
funds. Here the Commission has responded to complaints from the industry that the size of European funds is sub-optimal and that some jurisdictions put unreasonable constraints on funds moving outside their jurisdiction.
Similarly, master-feeder fund structures would be permitted, with a complementary aim of allowing administration to be centralised but this time allowing local funds to be offered to local investors.
While we may have some disagreement with one or two of the details of the proposals - we believe the Commission has gone into far too much detail on master-feeder fund arrangements, and that it must do something about ensuring fund mergers do not create a tax event for investors - we think that the Commission has done a very good job.
This makes it all the more disappointing that there is one area on which we have significant disagreement. The Commission suggests the new legislation should allow only for a partial passport for the cross-border operation of funds.
The IMA (and the UK Financial Services Authority) believe that the existing UCITS directive allows for a corporate fund in one member state to be operated by a management company in another member state, but most regulators or legislators from elsewhere in Europe have disagreed.
If anything, UCITS III has caused more onerous requirements to be imposed on management companies than existed under UCITS I. This has increased costs for managers who have ranges of funds in more than one member state.
The Commission has recognised that there is a problem. In our view, however, it has been unnecessarily timid in seeking to tackle it. It suggests that certain activities have to take place ‘physically' in the same member state as the fund; indeed, the fund would take on the nationality of the country in which those activities take place. The activities that it has chosen are the calculation of the NAV of the fund and the maintenance of the unitholder register.
We have told Commission officials in no uncertain terms that they have this wrong and, indeed, that it would be a backward step and against the aim of achieving a single market. First, a number of UK funds are already administered outside the UK, notably in Dublin. If the proposals were adopted as drafted, such funds would either have to change their domicile and become domiciled in Dublin, or the administration would have to be brought back to the UK. This would add to costs rather than reduce them.
Second, we think the proposals would militate against the development of centres of excellence and expertise around Europe. The FSA is at the moment consulting on the establishment of amortised accounting for UK-based funds.
The valuation of such funds is complex and at present the main European expertise in this area lies with the administrators in Dublin and, to a lesser extent, Luxemburg.
It would seem perverse not to allow the administration of such funds by the recognised experts. Our third objection is to the suggestion that something like the NAV calculation or maintenance of the register takes place physically somewhere when it is, in fact, done electronically and can both take place and be monitored from anywhere in the world.
There are, of course, counterarguments, which we would acknowledge but to which we think there are robust responses. Regulators have a natural concern about their ability to oversee what is going on in the fund and wonder how they can do this when the manager is not in their jurisdiction. We point out that we fully accept that the depository or trustee must be in the same member state as the fund, and it has a vital supervisory role. We also point out that the Commission is proposing enhanced cooperation between regulators. This is a concept which is well accepted in other financial services sectors, so why not for UCITS?
The Commission has shown a real commitment to understanding how the industry works and to making sure that any EU initiatives are properly thought through. This may seem frustratingly slow, but shows a clear determination to get things right. The Commission's exposure draft is the result of years of careful consideration, resulting in focused, targeted changes to the directive to achieve a more efficient and cost effective European single market for funds.
The Commission is being criticised for not including suggestions to widen the investment and borrowing powers of the directive - but it is not ignoring such suggestions. A working party is considering property funds, and the Commission is in the middle of a study comparing existing harmonised and non-harmonised funds.
It has put out for tender a further study on funds that do not at present fall within the UCITS directive. It must be right to push forward the widely agreed legislative changes on efficiency and, in parallel, look at wider investment and borrowing powers and possible further legislative change at a later date. There is a lot of political concern at the moment about private equity and hedge funds. It would be unfortunate if these concerns were to overshadow and slow progress on the much less controversial and more technical proposals that the Commission is putting forward. We cannot afford to jeopardise the progress of the efficiency package by introducing at the last minute new, largely untested ideas.
That is by no means the end of the story, since it is not only the Commission that has a say. The debate in the Council and the European Parliament which formally decides on EU legislation and negotiations will take place in 2008.
We will all be aiming by 2009 to have in place rules that should really make a difference to reducing costs and increasing efficiencies for firms who are already operating around Europe. Firms that have aspirations to increase their business by moving into other European markets should find it much easier to do so. Investors should benefit from greater competition and lower costs.
Sheila Nicoll, deputy chief executive, the Investment Management Association
Sheila Nicoll leaves the IMA this month to join the UK's Financial Services Authority as director of its retail firms division
Sheila Nicoll leaves the IMA this month to join the UK's Financial Services Authority as director of its retail firms division
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