Eurosceptics usually have an easy task pouring scorn on a European bureaucratic process that makes life harder for industry without necessarily adding anything for consumers. One area where their carping sounds hollow is financial services, specifically asset management.
The Undertakings in Collective Investments and Securities directive (UCITS) has achieved global recognition as product regulation that is workable and reliable. Consultation with the industry and co-operation between national regulators has led to a framework for a massive industry, with €5,974bn assets under management in UCITS globally at the end of 2006.
The current consultation process as to how best to improve the directive is cognisant of the fact that not just the 27 EU member states have an interest in the outcome.
"Everyone's aware that they need to preserve and protect the brand," says Richard Pettifer of KPMG.
Although the directive was intended to protect retail investors in Europe, many funds are owned by institutional investors for reasons of cost, logistics, transparency or governance.
The most recent version of the directive, UCITS III, (UCITS II was so long in the making that it became obsolete before it appeared), allows much more complex and innovative structures than the vanilla equity and bond funds that were originally envisioned, and asset management companies are jumping enthusiastically on the band wagon.
For example, so-called 130/30 funds, where traditional fund managers are allowed to include a certain proportion of shorting, are often placed within a UCITS structure.
"This helps investors concerned about new strategies," says Rick Lacaille, European CIO of State Street Global Advisors. "It accelerates the process of acceptance of these strategies because it gives reassurance that it is regulated to the highest level. This is not a retail product, but in theory you could go out and sell it in the retail market."
Despite general agreement that UCITS is a good thing, nobody is ready to write ‘finished' under the legislation. In 2006, the European Commission issued first a Green Paper and then a White Paper on asset management, looking at the obstacles still in the way of an integrated pan-European market working to the highest possible standard of efficiency consonant with robust consumer protection.
The White Paper identified five areas that need further work to promote efficiency - by implication, the Commission is satisfied that the consumer protection in place is sufficient.
The five topics that were discussed at the open hearing in Brussels at the end of April were: the fund passport and notification; fund mergers; asset pooling; the management company passport; and the simplified prospectus.
A fund passport is an integral part of UCITS, and is intended to allow funds to be marketed easily across borders. It needs further attention because individual regulators have taken to requiring more onerous documentation than originally agreed and to shillyshallying over the processing of the passport.
It is now envisioned that the cross-border communications should happen regulator to regulator instead of individual UCITS managers to contact the host authorities directly.
Fund mergers and asset pooling are both ways that asset managers would like rationalise their often cumbersome fund ranges, and that are difficult or in the latter case, impossible under the current UCITS legislation.
The strategic objective of the management company passport is "to allow fund managers to manage funds domiciled in another member state, without generating fiscal or supervisory uncertainty which might undermine the effective oversight or tax efficiency of the management company/fund chain".
There is some disagreement about whether this can be achieved in a single step or whether the value chain should be broken up, with some core administrative functions having to be carried out in the fund domicile under the purview of the local supervisor.
t the recent open hearing, opponents of this view pointed out that this would be less efficient alternative, but it was suggested that tactical calculations might be necessary.
It might be better to settle for a second-best management company passport if could be achieved in shorter political time-scale, than aim for a full-blown passport
if the price to be paid was considerable delay in securing political agreement.
The final topic needing to be addressed in legislative terms is the simplified prospectus. This lucus a non lucendo, bitterly described as neither simplified nor a prospectus in its current form, has been the subject of much rending of garments both by the industry and the Commission.
However, proposals to replace the simplified prospectus with a set of ‘key investor information' have not been unanimously welcomed by the industry.
At the open hearing, EFAMA president Stefan Bichsel cautioned that "in the rush to rectify the Simplified Prospectus, we should not throw the baby out with the bath-water. The idea of a standardised document should not be abandoned - because of implementation failures."
He added: "The proposed efficiency adjustments will improve industry plumbing. But it is a limited and insufficiently ambitious agenda. Facilitating industry rationalisation is the bare minimum."
Bichsel also drew attention to what he described as the "pressing need for a single market framework for non-harmonised retail funds such as real estate and fund of hedge funds", as well as a common private placement regime.
But the real source of unhappiness with the current regime is the alleged lack of a ‘level playing field' between UCITS and competing products such as structured products at the level of distribution.
According to KPMG's Pettifer, this "just goes in the too-hard box", although this does not deter Bichsel from issuing a call to action. "In some markets, this is a life and death issue for the fund industry," he said.
"To date, the European Commission has signally failed to do anything to address this problem."
Hope may come from another EC directive, he suggests: "MiFID provides the possibility for imposing common point of sale disciplines across a broad universe of financial instruments."
As it stands however, the EFAMA party line is that MiFID is going to cause more problems in relation to UCITS than it solves. In fact, they think it will be so problematic that a whole new directive will become necessary.
"Although we are in favour of the efficiency provisions suggested, the current status quo is not tenable for the industry," says Graziella Marras, a senior policy adviser at EFAMA. "It's not flexible enough and there are overlaps with MiFID where problems will come up."
Not everyone agrees. In fact, most people feel that the current position is quite good, and that all that is necessary is tinkering, according to Pettifer. "It has been a big success and I don't sense that there is much of a desire to start again."
If further work is needed beyond that already identified by the Commission, he sees it as being focused entirely on the ancillary functions that support funds, but even this is not urgent. "You need to let MiFID settle down first, before revisiting UCITS."