The 1985 Ucits Directive was crucial in removing some of the barriers to cross-border activity for mutual funds. The updated directive, Ucits III, hopes to create a true single market in European collective investment management
Over the past decade, the European mutual fund industry has developed significantly, not just in overall size, but also in terms of how funds are distributed both within national borders and across Europe. In particular, Ireland has seen an increasing amount of cross-border activity since the introduction of the 1985 Ucits Directive which sought to harmonise the structure of certain collective investment schemes (Ucits) and to remove barriers to the free movement of capital among them. The 1985 Ucits Directive has since been radically updated by the 2001 Ucits Directives (Ucits III), which will facilitate increased cross-border activity and the pursuit of a single European market. The 1985 Ucits Directive has been a major factor in the rapid development of countries, such as Ireland, as centres for collective investment funds.
Looking at Ireland, it has several advantages. Due to the large volume of funds established in Ireland, in particular Ucits, home regulators in the European Union (EU) are very familiar with the Irish regulator's (IFSRA) documentation and procedures. In addition, Ireland has always had a well established non-Ucits regime and therefore is adapting with ease to the new products introduced under Ucits III, such as index tracker funds, fund of funds and funds investing in derivatives. Ireland offers a deep pool of skilled professionals expert in the establishment and operations of funds.
1985 Ucits directive
On 20 December 1985, the Council of the European Communities adopted Directive No. 85/611/EEC, the European Directive for Undertakings for Collective Investment in Transferable Securities (the 1985 Ucits Directive). Its aim was the creation of a truly pan-European mutual fund product, a collective investment scheme, the units or shares of which are capable of being marketed and sold freely throughout the EU. Once a Ucits is registered or authorised by IFSRA or the competent authority in any other EU member state as having complied with all of the requirements of the 1985 Ucits Directive, its units or shares may be sold or marketed freely throughout the EU without the requirement to re-register such Ucits or obtain authorisation over and over. The 1985 Ucits Directive applies only to undertakings whose principal place of establishment is in the EU.
Although the 1985 Ucits Directive can be said to have opened up the mutual fund industry in Ireland and Europe as a whole and to have achieved its objective of reinforcing the overriding aim of freedom of movement of services across EU borders, certain obstacles to marketing Ucits in Ireland and throughout the EU remained. The 1985 Ucits Directive enabled 'harmonised' products to be marketed in Ireland and other EU member states as a result of mutual recognition among supervisory authorities but is generally seen as having failed to create a truly pan-European mutual fund product. The product created was too restrictive, prohibiting certain types of investments and activities such as the use of futures, warrants and options.
Indications were that while an increasing number of funds were registering with IFSRA and national authorities for marketing into different countries, effectively marketing Ucits in another European country was still an uphill struggle. Among the main constraints quoted were cultural differences, tax disparities, impenetrable distribution systems, administrative red-tape (costs and registration delays etc), differences in interpretation by supervisory authorities and disparities in national legislation on consumer protection. Furthermore, new, modern and inventive types of investment funds that had been created since the 1985 Ucits Directive, such as fund of funds and funds making broad use of derivatives, were not covered by that directive and so could not take advantage of the European passport.
To market the same Ucits in more than one country required different approaches to registration and investor information. National supervisory authorities very often went beyond the information requirements of the 1985 Ucits Directive and took different interpretations of the requirements of the 1985 Ucits Directive. Once a Ucits had been authorised, there were numerous snags in maintaining the authorisation and there was a disparity of regulations concerning the marketing, distribution, delegation, taxation of savings or furthermore still fairly widespread discriminatory provisions to the detriment of foreign funds in certain jurisdictions. Although the 1985 Ucits Directive enabled a reliable and reputable product to be created at European level, it has only been the first stage in building a true single market for Ucits.
The desire of fund managers to market investment funds cross-border and the initiative of many EU member states to extend a true European passport to a range of funds coincided with the wishes of the European Community authorities, who officially backed speeding up the completion of a real single market in collective investment management. After much industry discussion and consultation at European level, the long awaited updating of the 1985 Ucits Directive became effective on February 13, 2002. On that date, European Directives 2001/107/EC (Management Company Directive) and 2001/108/EC (Product Directive), collectively known as Ucits III, came into force. The deadline for the EU member states to implement Ucits III was February 13, 2004. Under the Product Directive, the number of asset classes in which a Ucits can invest has been significantly increased to include money market funds, funds of funds, cash deposits and financial derivative instruments. Provisions have also been introduced to facilitate the operation of index tracker funds. The Management Company Directive authorises companies managing Ucits to carry out additional activities such as discretionary portfolio management, investment advice and safekeeping and administration services relating to units of collective investment schemes.
The advent of Ucits III has been hailed with great enthusiasm in Ireland and across the EU and it is hoped its implementation will be a success. However, remaining uncertainties have yet to be addressed. Ucits III provides for transitional provisions whose application has given rise to uncertainty among EU member states in relation to key operating elements such as the simplified prospectus or the management company passport.
The Committee of European Securities Regulators (CESR) issued a consultation document in October 2004 to seek comments on the practical arrangements for supervisors that CESR proposes to issue on a number of items relating to the transitional provisions and the management companies' and the Ucits' passport introduced by Ucits III. CESR proposes to draft guidelines that will facilitate the consistency of practices regarding the transitional treatment of Ucits funds established under the 1985 Ucits Directive and their management companies. They will also aim at developing a convergent approach to some issues regarding the management companies' and the Ucits' passport among the EU securities regulators. The elaboration of guidelines will not only facilitate a consistent approach to these supervisory issues across the EU but also ensure, by way of this prior public consultation, that the views from market participants and end-users will be fully considered.
A truly single market
The IFSRA and the other relevant regulatory authorities are making some headway in the pursuit of a single European market for the cross-border sales and distribution of investment funds, particularly with the implementation of Ucits III. The term 'Ucits' has become a worldwide label for a high level of investor protection. Globally, the European collective investment management industry ranks second in size after the US. Although certain obstacles to European cross-border trade in investment funds are still hindering Europe's progress towards a truly single market for mutual funds, many of these obstacles are currently under review. CESR's guidelines are expected to issue early this year. With continued cross-border collaboration, ongoing substantial regulatory change appears inevitable which will hopefully move us over to the final goal - a single European market for the cross-border distribution of investment funds.
The 1985 Ucits Directive is generally seen has having failed to create a pan-European mutual fund arena.
The advent of Ucits III has been hailed with great enthusiasm in Ireland and across the EU and it is hoped its implementation will be a success.
Cross-border collaboration will hopefully move the investment community over to a genuine single European market.
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