S&P report concludes rules hinder cross-border distribution of funds
Multiple tax regimes and a plethora of small portfolios are holding back the development of a single European mutual fund market, concludes a report from Standard & Poor's.
Françoise Nichols, a director at S&P, added: "European funds are on average five times smaller than their US counterparts and approximately four times greater in number."
The ratings agency consulted several industry practitioners on the EU legislative framework for Ucits funds and its influence on the marketing of these products across borders in Europe.
Nichols said that while some indicated Ucits III Directives lacked precision, others, such as members of European Fund and Asset Management Association, cautioned too much precision may hinder financial innovation.
"While the 1985 Ucits I Directive has been amended to allow for funds to invest in instruments that do not qualify as transferable securities, such as money market, funds of funds and index funds, alternative products such as hedge funds do not fit within the guidelines," she added.
"One fund promoter indicated the list of eligible instruments for a Ucits fund should be further extended to include commodities through derivative contracts or property investments."
Nichols concluded, despite the amended directives, barriers still exist that hinder the cross-border distribution of funds in Europe.
"In particular, the notification procedure for registering Ucits in other member states needs to be streamlined," she said.
"Currently it 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.
"Fund promoters have said the documentation required by various European regulators to authorise a 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 scheme also varies greatly from one jurisdiction to another, between 15 days and three months or even six months in some instances."
As for other issues identified, one group said the barriers to trade entry in an EU country can also lie outside the approval process, in the form of additional local language quarterly reporting obligations for funds in countries such as Germany.
"In effect, this makes market penetration uneconomical for smaller funds," added Nichols.
However, she concluded that with the publication of the EU Commission's Green Paper in 2005, the debate on the subject has at least been widened..
Time and cost of translating documents a negative.
European funds on average 20% of size of US mutual fund.
Europe has four times as many funds as the US.
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