UCITS directive limping home
Since Luxembourg was the first European Union member state to implement the original UCITS directive in 1985, it is appropriate that it should have also been the only EU member state to have fully transposed into its national laws the two directives that make up UCITS III by the first deadline of 13 August.
Luxembourg heads a convoy of countries that are all proceeding at different speeds towards the deadlines the European Commission has set for implementation of the new directives. The convoy has become widely scattered since UCITS III came into force in February last year. By 1 April only two countries within the EU – Luxembourg and the UK – and one country outside the EU (Slovakia) had enacted the Product Directive by the deadline of 13 August. The Product Directive enables UCITS to invest in a broader range of financial instruments than was allowed in UCITS I, such as money market funds, derivatives and funds of funds.
By the same date, only one country – Luxembourg – had enacted the Management Directive (also known as the Profession Directive). The Management Directive widens the scope of activities that may be carried out by UCITS management companies and gives them a passport to operate throughout the EU.
Since April, some of the ships in the UCITS III convoy have gained speed. Germany and Belgium, who made had made no moves to transpose either directive into their national laws by 1 April, have since both issued draft legislation.
However, implementation is likely to be fragmented. In Ireland and the UK laws implementing the Product Directive have been enacted. Yet the Irish Financial Services Regulatory Authority and the UK’s Financial Services Authority are still consulting their respective financial services industries on implementing the Management Directive.
There could also be problems if some countries implement the directives earlier than other countries. For example, it is still not clear whether a UCITS established in a member state that has implemented the UCITS III Directives must be accepted for marketing in a member state that has not yet implemented them.
The likelihood is that it would be accepted, however, since the UCITS III Directives are simply amendments of the existing UCITS I Directive. As Steffen Matthias, the secretary general of FEFSI, has pointed out, “UCITS III is not really a new directive but a modification of a old one. All that is not changed remains unchanged.”
However, problems of definition and clarification remain. In particular, there is the question of how ‘passportable’ UCITS will be in the future. Currently, the question is whether a management company could set up a fund in another member state other than its own member state of authorisation. The directive apparently allows this. Article 5 (i) of the Management Directive states that “authorisation granted under the directive to a management company shall be valid for all member states”.
Thierry Blondeau, European co-ordinator and partner at PricewaterhouseCoopers in Luxembourg, says countries like Germany and Austria, which do not have UCITS investment companies, are unlikely to press for this. However, countries that do have a developed UCITS industry, like Ireland and Luxembourg, may. “ Within these countries, some feel that the passport created by the Profession Directive should fully benefit management companies, hence permitting an investment company authorised in one member state to designate a management company authorised in a second member state, with full management powers and duties provide by the directive,” he says.
“This interpretation would lead to the situation where for example a Belgian SICAV would be managed by a UK management company. The ‘product’ - which is the SICAV – would be regulated and controlled by the CBF [the Belgian financial industry_regulator] and the management company by the FSA,”
Already some regulators, notably in France and Ireland, have said they would not accept such a situation. The issue is now before the UCITS Contact Committee, a body of EU member states representatives chaired by the EC, which advises the Commission.
In spite of these hiccups, there is guarded optimism in the European financial services industry about the marketing potential of UCITS III. And there is a feeling that promoters selling their products into Europe rather than within particular European countries will be able to take greatest advantage of the new directives