The European directives on Ucits 2 will be adopted in 2003
Key features documents (KFDs) for mutual fund sales are to disappear once the European directive on Ucits 2 is adopted.
Ucits will override local bodies, who will have to amend regulations so investment firms comply with the directive.
Under the current proposals, on course for implementation by mid-2003 at the latest, KFDs will be replaced by a simplified prospectus.
The Ucits directive contains a list of attributes the prospectus must have, which includes past performance and charging information, but there is no requirement to provide forward projections, such as the reduction in yields which are currently included in KFDs.
This means that in the UK the Financial Service Authority (FSA) will have to back off its negative stance on the provision of past performance information. Julie Patterson, director of regulation and taxation at Autif, said while the authority has not banned the use of past performance information, over the past year, through several initiatives including its comparative information tables, the regulators have been discouraging its use.
The prospectus must also include the warning that past performance is no guide to future returns. The directive's aim is to standardise investment fund literature across Europe, no matter which country the fund is domiciled in, according to Patterson.
Once adopted, European member states will not be able to require fund groups or intermediaries to provide any additional information to consumers beyond the prospectus.
FEFSI, the federation of European fund trade associations, has created a model prospectus following the information provided in the Ucits directive. If accepted, it would see the inclusion of annualised past performance figures in addition to charges presented as total expense ratios, rather than as a mix of annual management fees, initial charges, commission and exit penalties.
Patterson said: 'While the directive does not say specifically how charges should be shown, the obvious way would be to use TERs.'
The Ucits directive also notes that the simplified prospectus may be incorporated in a written document or in any durable medium having an equivalent legal status. Under UK regulations this may lead to intermediaries being able to use an electronic form of the prospectus.
However, a parallel European directive, entitled distance marketing, creates some conflict. Under this directive, which addresses non-face-to-face advice, using an electronic form could mean product providers would have to send the information direct to intermediary clients.
The UK Treasury will begin consultation on the changes during 2002 and introduce the alterations once Ucits 2 is approved. Draft proposals for Ucits 2 have been released to EU members before going to the European parliament later this year. These are on course to be implemented by 2003, following a compromise on the directive's more controversial proposals, in particular, capital adequacy requirements for fund manager businesses.
Originally, there were concerns that controversial portions of Ucits 2 would lead to the entire directive being held up.
Despite proposals to allow groups five years before having to comply with capital adequacy rules, there are fears they would be detrimental to small fund management firms.
Under today's Ucits rules, a manager of a fund must have at least six weeks' expenses in order to meet capital adequacy rules. These expenses include everything needed to run the fund, including marketing costs and payroll. The new directive will see this move to 13-weeks fixed assets, or two basis points of funds under management whichever is the higher. So far there has been no definition of the term fixed assets and, as such, there is still confusion as to whether it will include more than what expenses covered.
The report also recommends that Ucits 2 be reviewed within three years of implementation to ensure that all aspects covered under the directive are working.
Patterson added that the report means the non-contentious parts of Ucits, such as the simplified prospectus and the passporting of products, may now pass without further debate.
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