Cicero Policy Briefer

Issue 27, August 2008

UCITS next steps: an ambitious timescale

By Mark Twigg

The EU Commission has finally published its proposals for reform following months of delay. The delay was, of course, unwelcome, though the fact that we have got here at all should be a major cause for relief. UCITS had been likened by current Commissioner Charlie McCreevy to an “old banger” in which previous attempts at reform had failed to take hold, either because of legal ambiguities in the UCITS directives (as was the case with the management company passport) or poor execution during the national transposition phase (as happened with attempts to harmonise information requirements in the Simplified Prospectus). The content of the Commission proposals have been largely welcomed. The notification process—currently a bureaucratic drain which produces €45 million in deadweight regulatory costs—will be streamlined. The proposals for enabling mergers between UCITS funds, as well as allowing the use of master-feeder structures should drive further efficiencies.

In addition to these changes, issues such as private placement have fallen by the wayside for now. Expect this to resurface in the next Commission. For now, more pressing issues will arise, which will result in a period of frantic negotiations. Chief amongst these concerns is where to go next on the management company passport (MCP). The Irish and Luxembourgeois have been successful to date in fighting their rearguard action aimed at slowing progress in this area. But it is clear that they have failed to stop the company passport in its tracks. The French Presidency is already committed to pressing ahead with proposals for inclusion within the draft text. As with so many things at the EU level, success will depend on the arithmetic when the votes are cast. The big countries—the UK, Germany, France, Spain and Italy—speak with one voice, but they will still need to cajole others into supporting a change in the text. To this end, the industry needs to be forceful in making its case for change—particularly through representations in those smaller member states which are as yet undecided.

It is not clear at this stage how the Commission will respond to such a demand from the Council. When launching the current proposals the Commission made clear that supervisory and investor protection concerns are still apparent. The issue will remain one of inconsistencies in the role and oversight of the depository function. Not all countries offer similar levels of investor protection. However, in a sign that we can expect some movement on this front, the Commission has left the door open to any proposed change of direction on the MCP by mandating the Committee of European Securities Regulators (CESR) to examine the benefits of it. CESR should report back by 1 November; we can expect the French to have a response worked up by then.

There is also the issue of how to proceed with the Key Information Document (KID). The Commission is currently consumer testing a range of synthetic risk indicators. The Simplified Prospectus was meant to provide comparable information for consumers: only the regulators failed to stick to the harmonisation mantra. The widely varying approaches adopted between member states actually created a fresh obstacle to the single market rather than removing one. The consumer feedback should conclude by early 2009, and one can only hope that it delivers a clear consensus—though the omens aren't too good. Previous attempts to create simple, investor-friendly risk warnings, whether in the form of ‘traffic light’ warnings or 1-5 risk ratings, have floundered on the rocks of over-simplification. The decision to invest over the long term generates rather complex information needs. Clearly, consumers don’t want information overload, but dumbing down consumer risk warnings too much renders the documentation meaningless.

So how much can the KID actually achieve? While having truly comparable product information in a clear and succinct format would be a positive evolution, it is not a panacea. Obstacles to the creation of an internal market for retail investment funds go way deeper than the disclosure regime. As the FSA’s Dan Waters made clear in his comments to the Commission's open hearing on substitute products earlier in July, even if the Commission were to create perfect disclosure requirements, its effectiveness would be hampered by other deep-rooted obstacles. These include legal and fiscal differences, different consumer traditions and preferences, not to mention language barriers. None of these can be addressed by reforming the architecture of UCITS.

Against this backdrop there is still plenty of detailed policy development ahead of us. Which all leaves very little time to make progress ahead of the Parliamentary elections in spring 2009.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.