Aware that I am even more Euro-sceptical than most, it is really quite rare for me to suggest that an EU action might genuinely provide a benefit, either to the industry or to consumers. But so it is this time. However, as no silver lining comes without its cloud, we will get the good news quickly out of the way so that we can then focus on the inevitable drawbacks.
For really quite a long time, like ten years, the European Commission has been trying to introduce a ‘management company passport’ for UCITS. After a number of ham-fisted attempts, they may have finally pulled this off in UCITS IV. The purpose of the management company passport is to make it possible for a UCITS operator (NB we are not talking about the investment manager) to run a UCITS fund that is domiciled in another EEA country. However modest that may sound, it is quite a significant step and tackles head on the protectionism that is particularly noticeable in Dublin and Luxemburg. It is not difficult to see why this passport might be unpopular in countries that have developed financial services on an entirely export basis with no significant domestic sales. The regulators in those nations have little interest in investor protection and much in attracting the regulatory arbitragers and the business that clings to the coat-tails of investment funds, so well evidenced by the branches and subsidiaries established in those jurisdictions.
But for the UK it is a different story. We have the expertise, we have no shortage of manpower and we still have the reputation of a major financial centre. We also have rigorous regulation, of which we may as well make a virtue in our marketing. If tax dictates that funds should be based elsewhere, that will no longer drag the operator with it. London must be the natural home for scheme operation and has the scope to dominate the market for UCITS. That is what UCITS IV facilitates. The battle for supremacy begins on 1st July. There will be price competition for the operation of new funds; we may even see a tendering war break out to take over the operation of existing funds. And operators will at last be able to provide disinterested advice on the selection of the best domicile for the fund.
Hand in hand with the new management company passport goes the improved availability of the marketing passport for UCITS funds. No longer will protectionist national regulators be able to stall over providing access to promote UCITS within their territory. The home state regulator will merely notify the host state and, as soon as that is done, marketing can begin, all within the space of a fortnight. The combination of this restructured procedure and the introduction of arbitration for dealing with inter-regulator disputes should assure reasonable access to the whole EEA.
And at last we have the UCITS Directive properly facilitating the master-feeder structure by lifting the spread requirement from UCITS funds designated as feeder funds.
So what’s the snag? The joint HM Treasury and FSA consultation was launched just in time for Christmas fairs to enjoy that old game of Guess the Weight of the Rules Appendix. A two hundred page tome of new rules is seldom the present that the industry hopes to find lurking at the bottom of its Christmas stocking. And to those who wish simply to opt out of all that passport stuff to save the hassle of implementation, the news should be broken gently that the new rules apply whether you use the facilities or not.
Chief among the new obligations is the key investor information document. Compulsory for all UCITS from 1st July 2011, with transitional relief of 12 months from then, KIIDs are the replacement for the failed ‘simplified prospectus’. More like the key facts document in concept, KIIDs will be short and to the point, but must leave none of the essentials uncovered.
Somehow it has become difficult to continue to express surprise when EU regulations are introduced with too little time for the industry to implement them. Inherent in the structure of directives, with their two-year implementation cycle, is inadequate time for the industry. On this occasion, consultation will close in Month 21; the rules may be confidently expected in Month 23. In Month 24, let the competition begin.
Oliver Lodge
February 2011