Regulation of investment funds under the UCITS directive has seen a flurry of activity in recent months. Industry participants now hope for a new directive before the millennium.
The UCITS directive, is little more than 10 years old. The industry has de-veloped spectacularly, with assets un-der management growing from 1990-97 alone from $630bn to $1.9trn. In-dustry participants agree the directive is outdated. The problems can best be seen in the host of new legislation allowing non-UCITS funds on a nation-al level. Germany most recently allow-ed funds expressly prohibited under the UCITS directive, such as funds of funds. It had already allowed cash funds in 1994. The success of Luxembourg's Chapter II (which regulates non-UCITS funds) is well known. At the same time, the structure of the industry is changing with increasing integration between all areas of asset management, making the directive's mandatory exclusivity for investment fund management look outdated. Lastly, practitioners agree, the directive has not created a true pan-European investment fund market.
Changes are therefore necessary in three key areas: the typology of funds which are eligible for the passport, the structure of the industry and the means to create a true pan-European market.
A number of areas have been mentioned for reform. Key among these are the eligibility for the passport of fund types which are essentially marketing and distribution tools - such as master-feeder funds and funds of funds, of fund types which allow access to new investment areas - such as cash funds and index funds, and lastly a fundamental reform and liberalisation of the area of efficient portfolio management" - the use of derivatives by investment funds.
The UCITS directive still restricts the passport to funds of investment fund managers which exclusively manage investment funds. The industry is however undergoing a rapid structural change where all areas of investment management are being combined un-der one roof to achieve economies of scale. Reflecting this change, a number of national legislations have created single licences and indeed nation-al associations, such as the French AFG-ASFFI have been created combining investment fund management and asset management. This prohibition is outdated and should be removed.
The ability of member states to require prior host state authorisation for marketing activities has stymied the development of a true pan-European market. Already in 1996, EC Director General Mogg launched the idea of a service-provider rather than a product-based regulation for investment fund distribution. If such a regulation were modelled on the successful investment services directive it could indeed re-move major impediments to the pan-European marketing of funds.
The fundamental problems of the UCITS directive are still with us. The industry, however, has undergone ma-jor changes. From a small, essentially local industry it has grown to a large, if not truly pan-European industry. The original aim of the UCITS directive, to provide European investors with choice at a controlled level of risk is now more relevant than ever. The currently proposed amended UCITS directive could allow the industry to fulfill a major part of these aims.
Adam Lessing is executive director of Goldman Sachs AM in London and vice-president of the European Federation of Investment Funds and Companies in Brussels."