Further improvements to UCITS III are necessary to remove barriers to cross-border distribution of funds within Europe, according to a report by Standard & Poor's.
In its report, From UCITS III Toward A Single European Mutual Fund Market, Standard & Poor’s says the EU Commission Green Paper on the enhancement of UCITS III – the EU legislative framework for UCITS which was issued in July 2005 – addresses some of the issues and challenges that face the industry but that further improvements are necessary.
The report surveys key players from the European fund management arena who raise concerns over the current legislative framework for UCITS funds and its influence on the cross-border marketing of these funds in Europe.
Particular concerns include:
- The notification procedure for registering UCITS funds in other member states needs to be streamlined. Current registration of UCITS is seen as cumbersome and can be costly since translation into the local language of all information pertaining to the fund is often a requirement;
- Documentation required by various European regulators to authorise UCITS for local distribution is not homogenous, as EU member states are reluctant to give up local practices. The time required for approval of a UCITS varies greatly between 15 days and three months, or even six months in some instances;
- Barriers to trade entry in an EU country sometimes lie outside the approval process, in the form of additional language quarterly financial reporting obligations for funds that exist in some countries, such as Germany. This effectively makes market penetration uneconomical for smaller funds; and
- Although some indicate that UCITS III Directives lack precision, which may lead to differences in interpretation in member states, others, such as members of EFAMA, caution on too much precision, which may hinder financial innovation.
However, fund managers also give some positive feedback:
- Some practitioners welcome the eligibility of funds of funds under the new UCITS III regime, as well as the relaxation of the concentration limits within such vehicles;
- One fund manager reports, from the investor’s perspective, the UCITS status enhances a fund’s credibility, given the directive’s emphasis on the role and responsibilities of the board of directors of UCITS, which must have a fairly “hands-on” approach and be increasingly involved in operational issues;
- Others indicate the process for registration of UCITS in other EU member states has improved. This was facilitated by the clarification work carried out by the Committee of European Securities Regulators (CESR) over the past 18 months in outlining the documents required by local regulators when reviewing UCITS authorisation requests;
- One fund sponsor comments that UCITS directives brought opportunities in terms of market reach and it currently provides a safer investor environment, which has so far been immune from scandals; and
- The CESR’s current work on clarifying the definition of “eligible assets” for UCITS, which is expected to be finalised by the EU Commission in early 2006, has been welcomed by market participants.
Standard & Poor’s fund credit analyst, Francois Nichols, says the Green Paper “is expected to lead to further improvements in the legislative framework for UCITS rather than to a complete overhaul”.
Nichols adds: “Barriers still exit to cross-border distribution of funds but further improvements of the kind outlined in the Green Paper would be welcomed by the industry.”
The report also examines the essential points of the two directives that constitute UCITS III – the Product Directive and the Management Company Directive – which pave the way to issuing a single “European passport” for management companies and broaden the range of financial instruments authorised.
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 Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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