The fourth stage of the pending UCITS directives, which sought to introduce a complete “passport” allowing fund managers based in one European Union member state to run and trade funds in another in a pan-European format, has been temporarily tabled following outcries from Ireland and Luxembourg.The controversy surrounds Version IV of the “Undertakings for Collective Investment in Transferable Securities,” or UCITS — a set of EU directives that allow collective investment schemes to operate freely throughout the EU on the basis of a single authorization from one member state.
A measure in Version IV centered on the location of administrative services — such as accounting — for an investment fund. Under the present UCITS guidelines, all back-office work has to be located in the nation of the investment fund concerned. As many are based in Ireland and Luxembourg — both nations noted for their benign financial regimes — the proposed “passport system” would have allowed those management services to move away and into the control of the jurisdictions of the traders.
Regulators in Dublin and Luxembourg contended that a full passport would involve the loss of regulatory oversight and jobs.
Meanwhile, others have argued the need for a full passport — allowing services such as accounting and administration to be delivered centrally, as opposed to locally.
Even a compromise or partial passport would require a fund to either operate in a jurisdiction where it had established a fund, or establish administration in two locations.
The passport mandate is among some critical issues being presented for consideration by an EU financial support organization — the Committee of the European Securities Regulators.
Regardless, most experts predict that even if passed, UCITS IV is unlikely to become embedded in EU national codes before 2010 or 2011.
A sigh of relief over the removal of the impasse for UCITS reform came from Wolf Klinz, the parliamentary rapporteur on the subject, who welcomed the development. Klinz’s only reserve was that he hoped “that CESR can produce results sooner, rather than later.”
Meanwhile, on another UCITS matter, the German liberal party MEP had commented that a “market efficiency package” was badly needed to ensure that UCITS did not become outdated and overshadowed in scope by its counterparts in America.
Klinz pointed out that the average fund size in Europe, at $340 million, was less than one fifth of its American equivalent of $1.9 billion. European investors, he said, were charged an estimated $3 billion to $9 billion more in annual fees than they would be if economies of scale were fully exploited.
Karel Lannoo, secretary general of the Brussels-based Centre for European Policy Studies, explained that the present directive is now struggling to keep pace with the rapid rate of innovation in the marketplace.
Roger Turner, a partner with Big Four firm PricewaterhouseCoopers in London, appreciates the UCIT IV advance “towards a functioning single market in Europe.” But he noted that other, serious inefficiencies are being caused by lack of harmonization of EU company tax rules.
Substantial benefits to result from the upgraded legislation were cited by Peter De Proft, director general of the European Funds & Asset Managers Association, noting the reduction of the time delay for notification to sales target-country regulators from up to two months down to only three days. Other advances could include the introduction of a simplified prospectus; the possibility of funds merging across EU national borders; and the pooling of different funds into one entity, which would reduce management costs.
There are over 32,000 UCITS funds spread across Europe, Asia and Latin America. About $9 trillion in assets are under management by European firms, equivalent to half the EU’s estimated 2008 GDP.
