Smooth progress for UCITs programme
Modernisation of legislation for the EU investment fund market is under way in Brussels with modifications to the undertakings for collective investments in transferable securities directive, (UCITS III), expected to reach draft proposal stage in September or October this year.
When finally implemented, the upgrade will simplify matters for investors working across the EU, providing them with fuller cost and performance disclosures on which to judge funds available on the broader market.
The reworked regulations will allow collective investment schemes to operate across the EU on the basis of a single authorisation from one member nation. The revisions, which are to be subject to the now mandatory impact assessment process, are to take the form of amendments to the current directive.
At present, procedures for cross-border marketing are considered to be cumbersome, costly and subject to unnecessary supervisory interference. Deadlines for completing review of fund notifications have frequently been exceeded. Difficulties have also taken the form of intrusive checks, additional information requirements or requests to modify documentation or certain fund features, such as the name or denomination of funds.
Now the intention is to enable fund managers to better exploit business opportunities across the single market by refocusing and scaling back product disclosures to make them more relevant for investors. UCITS will lay down a set of rules defining eligible assets, that is, transferable securities and other liquid assets.
As a result, fund managers will be able to restructure their fund complexes (via mergers and pooling), and export their funds and services more easily. The idea is to make it easier for the industry to achieve cost savings and specialisation benefits across the single EU market.
The funds concerned involve over €5.5trn of assets, or 75%, of the investment funds market in Europe. These assets are equivalent to more than 50% of the EU's annual gross domestic product. The revision is against a background that these assets have grown four-fold over the last decade.
The importance of investment funds is set to grow further as many European investors are investing more in them to save for retirement. The market is increasingly organised on a pan-European basis. Already cross-border fund sales represented some 66% of the total in 2005.
Specific changes currently on the table in Brussels will:
o Simplify the notification procedure;
o Create a framework for the cross-border merger of funds;
o Create a framework for asset pooling;
o Enable fund managers to manage funds domiciled in other EU member states;
o Improve the quality and relevance of the key disclosure documents to the end investor; and
o Strengthen supervisory co-operation to monitor and reduce risk of cross-border investor abuse.
The white paper, published late last year, that spells out all the proposals from Brussels also includes that the new legislation will:
o Remove delays and administrative obstacles to placing funds on other EU markets;
o Permit fund mergers;
o Allow pooled management of assets gathered by different funds;
o Enable fund managers to manage funds in other member states;
o Simplify and improve product disclosures;
o Strengthen supervisory co-operation mechanisms.
The new procedure would rely heavily on a regulator-to-regulator approach and a defined set of documents will be submitted to the trade's home authority. The latter would be responsible for verifying completeness of this information, certifying that it is duly authorised. It will transmit the specified local market information to relevant member state counterparts in a harmonised manner.
Information that was covered by the previous ‘marketing arrangements' document will in future be included in a ‘letter of notification'. The right to place UCITS on the market of a host member state would become effective three days after transmission of required documents by the authorities of the UCITS home member state to those of the host member state.
The UCITS legislative package plans to lay down clear and common requirements and procedures for funds wishing to merge. The need is to ensure effective protection of the rights of unit-holders in the merging or dissolving funds and remove any regulatory grounds for competent authorities to object to the proposed merger besides the fulfilment of such requirements and procedures.
The reasoning here is that 54% of European funds manage less than €50m of assets. In other words, the average European fund size is under one fifth of that of a typical US fund. The cost of running and selling these micro-funds is significantly higher than for larger funds. Hence, annual scale savings of up to €6bn have identified in this area.
There are also suggestions for a review of options for establishing a European ‘private placement regime'. This would allow financial institutions to offer investment opportunities to qualified investors across the EU. The current discussions include how to deal with harmonised funds, such as hedge funds. Also, the Commission is looking at whether there is a need to make similar changes for other fund products, especially real estate funds that are not covered by the current EU framework.
At present the Commission is not willing to discuss the complex rules on UCITS portfolio construction, a situation due for reassessment in mid-2008.