It is now almost four years since the first round of Oeics legislation was approved by Parliament. A...
It is now almost four years since the first round of Oeics legislation was approved by Parliament. At that time, the plan was for a second round to follow almost immediately to allow the full range of Oeics. Round two was delayed and there was some scepticism among commentators about whether a more limited range of Oeics would take off. The figures speak for themselves: Oeic funds now account for almost one quarter of the industry total and have doubled in the last 12 months. And with the second stage of legislation now back on track, these numbers are likely to keep growing.
The Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations were approved in November 1996, although they did not come into force until January 1997. As the regulations were made under the European Communities Act 1972, they are usually known for short as the "ECA Regulations".
They allowed the establishment in the UK of a limited range of authorised Oeics, the limitation being that Oeics have to comply with the EU's single market provisions for collective investment schemes set out in the 1985 Ucits directive which only allows investment in transferable securities (essentially equities, bonds and warrants). The main constitutional document is the instrument of incorporation and many Oeics use a model prepared by Autif to simplify the authorisation process. As a company the Oeic has a legal personality, unlike a unit trust.
The UK Oeic thus became the corporate equivalent of the more familiar unit trust and the domestic equivalent of the sociŽtŽ d'investissement capital variable or "Sicav" widely used in Europe. As a Ucits collective investment product, the UK Oeic qualifies for the single market passport although cross-border marketing has so far met with limited success.
This initial legislative package was completed by the Financial Services (Open-Ended Investment Companies) Regulations 1997, issued by the SIB in January 1997 and now continuing under the FSA. These set out detailed product rules which resemble those for authorised unit trusts. The main difference is the requirement for Oeics to be single priced, on a mid-market basis
Also involved were a group of tax and stamp duty regulations from the Inland Revenue. These provide a tax regime for Oeics which is broadly equivalent to that for unit trusts.
They also provide exemptions from stamp duty and stamp duty reserve tax (SDRT) for unit trusts converting to Oeics on a one-to-one basis, and for conversions which involve an amalgamation of one or more unit trusts (the latter exemption was initially due to expire in July 1999 but the deadline now has been extended).
The first Oeic was launched in May 1997, with others following from August onwards. Most Oeics take an umbrella form, with a number of sub-funds contained within a single umbrella. Providers liked the economies of scale of the umbrella structure, and the ability to have different share classes.
The rate of conversion from unit trusts was slow to get going. Conversion programmes can take anything from six to 18 months and existing unitholders must give their approval. And a number of providers chose to delay conversion until they could convert their whole range.
However, once the ball started rolling numbers grew steadily (see Table). Notwithstanding the limited range permitted, the value of Oeic funds under management doubled between September 1999 and September 2000 and now represents 23% of the industry total.
Just under one third of Autif member companies are actively offering Oeic products. A number of other firms have received FSA authorisation and are in the process of converting, or have announced their intention to do so. These numbers are likely to increase substantially once a wider range of Oeics is permitted.
There were plans as far back as 1997 for a second round of legislation, usually referred to as "Oeics 2", to extend the investment range of Oeics to match that of authorised unit trusts. The Treasury consulted in January 1997 but proposals were put on ice following the general election in May that year.
The announcement of a major review of financial services, leading to the introduction of the Financial Services and Markets (FSM) Bill, meant that legislation for a wider range of Oeics and the conversion plans for those who wanted to convert their entire range of unit trusts - remained frozen for nearly three years. Inevitably this led to some frustration. But there are signs that the thaw is coming.
The new FSM Act contains a new and more flexible definition of Oeics, together with some forward-looking provisions which will allow both the Treasury and the FSA to make further regulations for Oeics. There are two important differences within the new legislation.
Firstly, Oeics will no longer be restricted to Ucits qualifying funds and so authorised money market funds, funds of funds, futures and options funds (including geared funds) and property funds should all be permitted in Oeic form. The jury is still out on feeder fund Oeics pending final details of the reform of personal pensions and the introduction of individual pension accounts. Secondly, the FSM Act also raises the possibility of legislation for unauthorised Oeics.
The Treasury consulted in January this year on draft regulations for the incorporation and authorisation of Oeics to be made under these new powers. Under these proposals, the basic structure of oeics remains largely unchanged, but the authorisation process is simplified with the FSA taking on some functions previously carried out by the registrar of companies.
The FSA has also recently consulted on the Collec
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