Brussels, 16/11/2006 (Agence Europe) - On Thursday 16 November, the European Commission published a 'White Paper on enhancing the single market framework for investment funds', describing ways of gradually adapting the UCITS Directive (Directive 85/611/EEC on Undertakings for Collective Investment in Transferable Securities) to rapidly changing market needs.
Representing 74% of the EU investment fund market, UCITS is a young, very dynamic market and a driving force in the EU's financial markets, explained Niall Bohan, Head of Unit of the third party asset management unit at the European Commission. UCITS have mushroomed recently, with four-fold growth over the last decade, and are currently estimated at being worth some EUR 5000 billion a year (half of EU GDP). Bohan explains that UCITS are experiencing annual growth rates of 10%. But the European Commission feels the current regulatory framework is not keeping up with the challenges facing UCITS, described in the White Paper, namely getting out of sync with the market, being hugely important tools for pension funds, competing with other long-term investment products (like life insurance) and growing international competition.
The Commission is planning targetted changes to EU legislation. While acknowledging shortcomings in the scope of the UCITS Directive, it does not yet see the need for a fundamental overhaul of the directive. Bohan explained the legislative timeline being considered - unveiling a draft directive in the first few months of 2007, a public consultation process with a public hearing in May 2007 and publication of draft legislation after the summer break.
UCITS. The White Paper proposes to eliminate red tape standing in the way of cross-border marketing of UCITS (scaling back ex-ante verification of fund documentation by the host authority, cutting the current 2 month maximum waiting period, and greater cooperation among regulators). The complex, slow and costly procedures governing cross-border mergers of UCITS will be relaxed. Bohan explains that the funds managed by half of UCITS are too small. New measures will ensure effective advance disclosure on mergers and the possibility for the unit-holder to redeem free of charge. As far as the taxation of cross-border UCITS mergers is concerned, the Commission will publish a Communication based on European Court of Justice case law to clarify that national tax-neutral arrangements should be extended to mergers involving funds domiciled in another Member State.
The Commission will propose amendments to the diversification and other provisions of the UCITS Directive to encourage asset pooling (simultaneous management of assets gathered by different funds while maintaining a local fund presence in different target markets). The Commission will propose amendments to the Directive to allow authorised management companies to manage corporate and contractual funds in other Member States. Amendments to strengthen the provisions of the UCITS Directive relating to competent authorities and supervisory cooperation will be modelled on the relevant provisions of more recent securities legislation, like the MiFID Directive (Markets in Financial Instruments Directive, 2004/39/EC) and the Prospectus Directive (2003/71/EC). Non-legislative measures will help expedite fund approvals, speed up fund-order processing and settlement times, and introduce greater flexibility for the appointment of depositaries (in other Member States, for example).
End-investors. The White Paper recommends simplified prospectuses to provide investors and intermediaries with basic information. The UCITS Directive will be amended to clarify the fundamental objectives and guiding principles of the simplified prospectus. Basic information should be provided 'about the possible risks, associated charges and expected outcomes' of the product, explains the White Paper. Distribution systems account for most UCITS costs (46% of total costs in France and 75% in Italy, for example). The Commission explains that it will carefully monitor the implementation of MiFID rules on 'conduct of business' and inducements in respect of intermediated fund sales.
Non-harmonised funds. There are categories of investment fund that are not UCITS compatible because of aspects of their investment policy or fund structuring. Such funds are mushrooming and account for a quarter of all investment funds - like open-ended real estate funds, funds investing in raw materials, private equity funds and hedge funds (see EUROPE 9242). In 2008, the European Commission will publish a report on the likely costs, benefits and risks of providing an enabling single market framework for non-harmonised retail products and whether such products are actually suitable for cross-border marketing, establishing an expert group to this effect. Rejecting the 'myth' that hedge funds are not regulated at either the EU or the national level, the Commission says it is no need at present for the EU to regulate hedge funds but it will be closely monitoring the extent to which hedge fund growth is impacting on the financial markets. (mb)