Investors suffering from inconsistency of interpretation

Different interpretations of Ucits III legislation – which was supposed to provide a common standard for collective investment funds – by European regulators is proving to be a hurdle to the sale and distribution of cross-border funds. Increased cost and time to market are the main problems distributors have to overcome. Practical difficulties experienced by industry players and opportunities to make amendments to the legislation were some of the areas discussed at the spring conference organised in Luxembourg by Association Luxembourgeoise des Fonds d'Investissement (Alfi), the Grand Duchy’s fund industry association. Although the current directive was much criticised, with some speakers even suggesting that the European Commission should start the legislation from scratch, the problem of inconsistency of approach from the various regulatory bodies was the central cause of concerns. Unveiling results David Reed, secretary of the expert group on alternative investments of the European Commission Asset Management Unit, presented the results of the feedback statement to the consultation launched by the Commission to evaluate the impact of European legislation in the industry. In theory, if a product is authorised and approved as a Ucits-compliant product by a member state, that should be sufficient for other member states, if notified, for allowing distribution of that product in their own jurisdictions. In practice, notification often turns out to be a very lengthy process. “There are various reasons why the notification process is slow. One reason could be due to the number of notifications that a country receives from the member states. “That affects the time it takes to process it,” says Mr Reed. “Another issue is the actual specificity of the fund itself, in terms of assets in which the fund is investing. There are different interpretations of what a Ucits fund is in different member states and that could slow down the process.” Mr Reed says that the Committee of European Securities Regulators (CESR) is currently looking at the issue of notification and improvements are taking place. At the same time, there are also other parallel organisations addressing this issue of registration, such as the Federation of European Investment Managers (Feam), which was founded in 2005 by chief executives of large management houses, including Joachim Faber, CEO of Allianz Global Investors. The single purpose of Feam, says Dr Faber, is to make the European market more efficient. Efficiency is not achievable in a market which currently comprises 29,000 mutual funds, he says, an enormous number if compared to the US market, with only 8,000 funds. As a consequence, the average fund size in Europe is small, at around ?140m, compared to ?740m in the US, according to the Efama factbook. “Our strong recommendation is that notification will streamline the market to create economies of scale, which are going to benefit the consumers and improve customer choice,” says Elizabeth Corley, chief executive officer at AGI Europe, recently appointed chairman of Feam. “At the moment, that is not the way it works.” “You can get your product scrutinised and regulated in one country and when you take it to the market, you have to go through a lot of notification and registration procedures. That local regulator might require some additional information. It is time and cost,” says Ms Corley. Time to market Opportunity costs are the main disadvantages in taking such a long time to register, says Gordon Thomson, head of institutional fund services at HSBC securities services in Luxembourg. “If a fund manager or promoter misses the right opportunity, they are not able to launch their product and sell it in the right jurisdiction quickly.” Problems also lie in the variety of reporting that needs to be produced and in the different interpretations of what at first glance may seem to be a standard Ucits structure. If fund companies did not file the information, their licence to market and sell that product in that particular jurisdiction could be revoked, or the tax position of their product could be adversely affected, says Mr Thomson. “There are significant financial penalties if financial reporting is not done in exactly the right format in that particular jurisdiction,” he concludes.

Faber: notification will streamline market