EU framework for investment funds proposed

The European Commission has proposed an important revision of the EU framework for investment funds, which provides consumers with access to professionally managed investments on affordable terms.
These funds, known as 'UCITS' (Undertakings for Collective Investment in Transferable Securities) at the end of last year accounted for over EUR6.4 trillion of assets in total which is equivalent to half of the Union's GDP and represents 11.5% of European household financial assets.
The new provisions will increase the efficiency of the current legislative framework in a number of key areas.
First, it will allow UCITS managers to develop their cross-border activities and generate savings consolidation and economies of scale. Currently EU funds are on average 5 times smaller than US funds and the cost of managing them are twice as high as in the US.
Second, investors will benefit from a greater choice of investment funds operating at lower costs.
Third, the proposal also seeks to improve investor protection by making sure that retail investors receive clear, easily understandable and relevant information when investing in UCITS. These improvements will help reinforcing the competitiveness of UCITS on global markets. Currently 40 % of UCITS originating in the EU are sold in third countries, mainly Asia, the Gulf region and Latin America.
As part of the Commission's Better Regulation Strategy and its firm commitment to simplify the regulatory environment, the new Directive will replace 10 existing directives with a single text. The proposal now passes to the European Parliament and Council for consideration.
The proposed changes to the UCITS Directive will:
– Remove administrative barriers to the cross-border distribution of UCITS funds: Current burdensome notification procedures can take several months before completed. They entail unnecessary red-tape and administrative costs estimated to around EUR45 mln. The new notification procedure will be reduced to a simple, electronic, regulator-to-regulator communication. The distribution of units of funds will start immediately after such communication.
– Create a framework for mergers between UCITS funds and allow the use of master-feeder structures: Fund mergers will be allowed, on both a domestic and a cross-border basis, and their authorisation procedure will be harmonised, as will the required level of information to be provided to investors. Subject to approval and the appropriate information of investors, a UCITS fund (feeder) will be allowed to fully invest its assets into another fund (master). It is estimated that these new management opportunities will allow UCITS to make up to €6 billion in savings and economies of scale. These could in turn be shared with investors in the form of lower investment costs.
– Replace the Simplified Prospectus by a new concept of Key Investor Information (KII): KII will be contained in a short document conveying key facts to retail investors in a clear and understandable manner so as to assist them in taking an informed investment decision.
– Improve cooperation mechanisms between national supervisors.
As regards the "management company passport" (i.e. the possibility for funds authorised in one Member State to be managed remotely by a management company established in another Member State), the most recent consultation process has revealed that there are a series of potential supervisory and investor protection concerns. These need to be tackled if the MCP is not to lessen the protection of retail investors or endanger the UCITS brand – traditionally considered to be a European "gold standard" for investor protection. The Commission has therefore decided to consult the Committee of European Securities Regulators (CESR) on these issues. A mandate to CESR will be sent out today.. CESR will be invited to provide advice that will help the Commission to develop provisions permitting the introduction of a management company passport under conditions that are consistent with high level of investor protection. In that regard CESR will be invited to advise the Commission by 1 November 2008 on the structure and principles which could guide potential future amendments to the UCITS directive which may be needed to give effect to the UCITS management company passport.
Following that advice the Commission will come forward with an appropriate proposal in time to allow for its adoption during the current legislature".
The UCITS Directive lays down common requirements for the organisation, management and oversight of UCITS funds. The Directive defines a list of eligible assets in which a UCITS fund can invest. It also imposes rules relating to the diversification and liquidity of the fund's portfolio. Thanks to these strict requirements, UCITS funds enjoy world-wide the reputation of a well supervised financial product. They have also protected UCITS funds against the severe effects of the recent financial turmoil.