The European Commission's White Paper on enhancing the common market in investment funds says new rules are needed because the existing UCITS regime cannot deal with structural changes.
The White Paper on enhancing the single market framework for investment funds suggest although passporting using UCITS (Undertakings for Collective Investments in Transferable Securities) rules means cross-border fund sales represented 66% of total net industry inflows in 2005, this success is by no means guaranteed.
“The UCITS Directive is no longer sufficient to support the European fund industry as it restructures to meet new competitive challenges and the changing needs of European investors,” the paper states.
“Core elements of the Directive are not functioning properly. The freedoms conferred by the Directive come at the price of unnecessarily high compliance costs. It does not allow fund mangers with funds or activities in different member states sufficient flexibility to organise or restructure businesses. These inefficiencies and constraints are reflected in higher costs and lower returns that are borne by the fund investors.”
Research cited by the document suggests if EU fund costs were reduced to US market levels, then nominal investment returns could increase by up to 3%.
Key challenges requiring action include:
- the existence of prescriptive rules in the existing UCITS directive, which mean funds cannot operate within the rules and at the same time operate across borders;
- recognising investor demand is changing from accumulating capital wealth to ensuring those savings are turned into secure and predictable retirement income;
- ensuring follow-up on research scheduled to be published in mid-2007, which is looking into how UCITS funds can compete with other products such as life insurance or structured notes or certificates, although the Commission does not believe the answer lies in extending the scope of types of products covered by the UCITS regime;
- ensuring any changes to UCITS rules are done in mind of competition from non-European fund industries. The paper proposes it may be rules have to allow more cross-border trading in non-UCITS funds or financial instruments, especially in cases involving institutional and so-called “sophisticated investors”.
Boosting efficiencies in the industry will somewhat have to be driven by consolidation. Current treatment at the national level means the number and value of cross-border consolidation of funds is minimal because of legal and fiscal differences.
The Commission says it will work to make it easier for funds to consolidate to create economies of scale, which will ultimately cut costs to the benefit of investors. This development may require relying on European case-law rather than trying to attempt to introduce tax harmonisation across all member states.
Passporting as a concept requires broadening to include asset management houses and not just their funds. Allowing investment management companies to operate from a single member state but offer services in many without necessarily setting up shop locally – as is often required by national legislation - should be a goal.
Introducing such changes will require greater co-operation between supervisory or regulatory bodies, which is also what the White Paper is proposing. This would be done by beefing up provisions of co-operation already outlined in current UCITS rules.
Previous regulatory failings, such as those seen seen following implementation of the Prospectus Directive, which was supposed to give retail investors access to more easily understood prospectus documentation, need to be recognised, the paper notes. Hence it proposes steps need to be put in place immediately, without waiting for a new agreed directive, to ensure properly simplified prospectuses are available to consumers by mid-2008.
Distribution costs remain high across the EU, the paper notes, which is why the EC will monitor implementation of MiFID to ensure intermediaries provide the expected quality of advice to clients and any inducements from provider to distributor are disclosed to the end client.
Consultation on all the proposed changes will take place through the spring of 2007, with final proposals set for publication toward the autumn. Reviews and publications on non-UCITS funds will be undertaken during the second half of 2007, including one expected following the creation of a new “expert group” looking at open-ended real estate funds.
Reaction from the IMA has been marginally positive. It says the proposals generally mirror its own 2003 Heinemann Report.
Fidelity International says the timings outlined in the paper are not acceptable. The fact final proposals will not appear for another year – autumn 2007 – after which they will have to be considered by both the Council of Ministers and the full European Parliament, mean the process is going to take too long, considering some of the issues raised by the paper itself.
“If the Commission is serious about its intention to reduce inefficiencies, then it must bring forward amending legislation without delay.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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