The ucits 3 regulation remains unclear and taxation and marketing have not been properly addressed
Ucits 3 regulation has sparked much debate and there are still concerns over its implementation in 2005. Regulations concerning management companies in the second part of the directive are still unclear and there are fears an unfair playing field could be created. On the positive side, the introduction of new products under the first part of the directive has received strong support from the investment community as has the establishment of a simplified prospectus.
The main concerns regarding Ucits 3 have been the stringent requirements that management companies have to meet in order to be able to passport products under the regulation.
Antony John, executive director and head of institutional clients of mutual funds at Lombard Odier, warns this could create problems for management companies. They may be forced to cut costs in order to create a subsidiary in Luxembourg. According to Julie Patterson, director of regulation and taxation at IMA, there are a lot of companies that would need to create a subsidiary in Luxembourg in order to passport funds. She says there are a lot of questions surrounding the implementation of this for management companies.
However, Mary Blair, product development director at Threadneedle, does not think it will be a costly exercise for management companies. It is up to each individual company to decide whether or not it is worth doing.
Another concern for management companies under Ucits 3 is the capital requirement. Patterson warns the capital requirement for Ucits 3 could prove disastrous for smaller stand-alone management operations as they could be below the minimum requirement outlined in the legislation. The present capital requirements in the various countries are different to what is outlined in Ucits 3. This could result in smaller companies closing down or merging together in order to survive.
There is also fear over the timescale of the implementation of Ucits 3. Patterson says the implementation deadline is not until next year.
There are a number of member states that do not have any draft legislation.
The UK has been the only member state that has implemented legislation for Ucits 3. A management company will not be able to start to passport products until every country has adapted the rules.
Mike Ryder Richardson, marketing director of Investec, warns the implementation of Ucits 3 could be staggered in a way that could make it impossible for companies to market cross border.
According to Ryder Richardson, there are two areas left outside the scope of Ucits 3 that need to be addressed. One of these areas is taxation and the other is marketing. While companies will be able to passport their products between countries, investors will be faced with different taxation levels in each country.
This may create an unlevel playing field, warns Ryder Richardson. Not all foreign funds are treated the same as domestic for tax purposes. Although the European courts have become more vigilant in penalising countries that do have unfair tax treatments, the process still needs to be addressed.
In addition, each country has differences in the way they market funds, says Ryder Richardson. Although it will be easier for fund management groups to passport products between countries, each jurisdiction has different rules concerning the way funds are marketed.
This may create extra administration burdens for companies. They will need to ensure the marketing complies with the legislation in the various jurisdictions.
However, not all regulations outlined under Ucits 3 have received bad responses. Most management groups have been positive regarding the implementation of the product directives and the simplified prospectus.
The product directive pertains to the introduction of money markets, cash, funds of funds and derivatives products under Ucits 3. John says this directive has been well anticipated and the criteria have been well set out.
According to Mary Blair, product development director at Threadneedle, the interesting thing for Ucits 3 is the relaxation of the requirement for funds such as funds of funds and cash funds. She expects to see a number of new types of funds being launched under the new directives. She predicts an increase in defensive products. This is because the cash portion of assets has increased. In Luxembourg, the cash position is 49% compared with 15% in the UK.
It will also open up the opportunities for protected type products as derivatives will be able to be used under the regulation, says Blair.
Nathalie Dogniez, partner at KPMG, says the product directives are very good and it is high time money markets and funds of funds got some distribution.
But, Dogniez is concerned that the directives do not take into account alternative investment products. She says there is a market for alternative products in Europe that Ucits 3 has not addressed.
Another positive move for Ucits 3 is the introduction of the simplified prospectus.
Blair says the prospectus is difficult to work through and the simplification will reduce the volume of paperwork for clients and the ease of distribution throughout Europe.
Ryder Richardson is positive on a simplified prospectus as it makes products more understandable for investors, as well as easier and more efficient to distribute.
An added tier of asset management can of course deliver additional benefits for certain investors, writes Graham Bentley - just be sure you can justify it to the regulator and, especially, the client
The government is "in daily contact" with industry figures over the pensions dashboard as it prepares for the roll-out and its feasibility report, Guy Opperman has said.
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From 1 April 2019
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