The UCITS IV impasse
The reform of UCITS legislation regulating the EU investment fund market has reached an impasse. The April deadline for a proposed text from the European Commission was missed and no firm future deadline in sight. Investment managers and associations are looking for a revision of the UCITS directive to enable implementation legislation as soon as possible.
The Commission proposal for the new UCITS is on the desk of internal market Commissioner, Charlie McCreevy. McCreevy's spokesperson, Oliver Drewes, confirms that the upgrade "is not on the agenda at the moment and Mr McCreevy has indicated that he might need further information before deciding what to do. … He might want to do nothing". Wolf Klinz, the European Parliamentary rapporteur on the subject, comments: "Everything is on hold."
One obstacle blocking the progress of UCITS IV is how to deal with pressures from countries like Luxembourg and Ireland, which want to keep in place restrictions that keep administrative services, such as accountancy, in the fund's national domicile.
UCITS IV would bundle the services via a single management company passport and supervision would occur in the country of the company managing the fund. The question is whether this would erode supervisory oversight, and the fear is that the fund domicile will become a mere regulatory empty shell.
So far, the flow of the EU's UCITS legislation has been notably successful. It goes back to the earliest days of financial services directives, to 1985, with the present UCITS III version enacted in 2001. The Commission proudly describes it as a "gold standard", both inside and outside the EU. The legislation has become a globally recognised because of its high level of investor protection, based on integrity and including comprehensive information for investors. Today there are over 32,000 UCITS funds spread across Europe, Asia and Latin America. About €6trn are managed by European firms, equivalent to half the EU's 2008-estimated GDP.
The case for an upgrade to UCITS IV is overwhelming. A paper by the European Capital Markets Institute, ‘Pouring Old Wine into New Skins', points to signs of weakness. "Today, [as much as] around half of new cash raised is not channelled into UCITS funds, but rather into alternative funds - hedge funds/funds of hedge funds; real estate funds; private equity funds: and structured product wrappers - all of which are unregulated at EU level so far."
Karel Lannoo, secretary general of the Brussels-based institute, says the present directive is struggling to keep pace with the rapid rate of marketplace innovation. Regulatory barriers mean that the full-scale cross-border management of funds has not really taken off. As a result cross-border sales account for only 17% of UCITS funds under management.
Klinz points to another drawback to retaining the status quo. The German MEP comments that the "market efficiency package" is badly needed to ensure that UCITS does not become a museum piece. Klinz points out that the average fund size in Europe, at €236m, is less than one-fifth of its US equivalent, of €1.28trn. European investors are charged an estimated €2-6bn more in annual fees than they would if economies of scale were fully exploited. He adds that national taxation rules form a major obstacle to cross-border fund mergers.
Peter De Proft, director general European Fund & Asset Management Association (EFAMA) in Brussels, lists the substantial benefits of a legislative upgrade. These would include reducing the time delay for notification to sales target country regulators from up to two month down to only three days. Other advances could be the introduction of a simplified prospective, the possibility of funds to merge across EU national borders, and the pooling of different funds into to one entity, which would reduced management costs.
De Proft concludes: "The worst that could happen would be no UCITS IV package." EFAMA is keen to support any kind of practical solution to bring UCITS IV into the light of day, even if a current sticking point might mean adding to the package later, he says.
Similarly, the UK Investment Management Association hopes that the delay to the draft directive will not be too long. Its chief executive, Richard Saunders says: "We and are ready to work with regulators and the Commission to ensure the obstacles to the directive are removed so that we can move towards a truly single market in asset management."