The EU directive on retail investment funds is being revised – yet again – but the proposals are flawed.

What is it?

The European Commission is planning to update the Ucits Directive, which sets out the single market framework for retail investments funds known as undertakings for collective investment in transferable securities. The directive, adopted in 1985, was last amended in 2001 (Ucits III), but some of the amendments were only implemented a few months ago.

Who dreamed it up?

The Internal Market and Services Directorate General of the European Commission. Industry consultation on the draft ended in June and formal proposals will be published by the end of this year.

What are its main provisions?

•    To facilitate cross-border marketing of funds by removing costly administrative interference.

•    To build scale and liquidity by supporting fund mergers and asset pooling.

•    To allow fund managers to manage funds domiciled in another member state.

•    To simplify and improve product disclosures, thus providing investors with meaningful and concise information about costs, risks and rewards.

•    To strengthen supervisory co-operation mechanisms.

What’s in the small print?

The establishment of a “private placement regime”, which would repeal certain sales and marketing restrictions applying to financial institutions offering investments to professional investors.

What does the industry say?

Steffen Matthias, secretary general of the European Fund and Asset Management Association (EFAMA), says: “We support this initiative, but are concerned about investor information, the taxation of mergers and the management company passport.”

The commission proposes to replace the current method of a single document containing a defined set of product information disclosed to investors (the Simplified Prospectus) with “key investor information” not necessarily included in a specific document. Mr Matthias warns that “each distributor could request a modification of the key investor disclosure according to its own set of requirements”. This would raise costs for the industry and reduce comparability at the point of sale.

Second, Mr Matthias doubts whether the proposals will be sufficient to guarantee the tax neutrality of possible mergers.

Third, the proposal to offer only a “partial passport” to Ucits management companies operating cross-border is flawed. In this criticism, EFAMA is supported by the UK’s Investment Management Association (IMA). With a partial passport, a fund manager would have to carry out certain administrative functions in the member state in which the fund is domiciled (the “host state”). The IMA believes fund managers should be offered a full passport, enabling them to carry out these functions in their “home state”.

How much will it cost?

The commission says the benefits outweigh the costs.

What do the regulators say?

Charlie McCreevy, internal market and services commissioner, says “the Ucits Directive has served the European fund industry well” but it provides no answer to the “massive structural challenges” facing the industry.

The law of unintended consequences

The replacement of the Simplified Prospectus with “key investor information” will, according to the commission, “remove unnecessary legal or regulatory information” that creates “information overload and excess compliance costs”. However, the European Association of Cooperative

Banks says it will have the unintended consequence of increasing the regulatory burden in other areas.

Could we live without it?

No, but the current proposals are imperfect.

Rating: 3

Rating scale: 5 = Essential;

           4 = Useful;

           3 = Neutral;

           2 = Unnecessary;

          

           1 = Waste of time.

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