Cicero Policy Briefer

Issue 24, May 2008

Industry made to sweat on shape and timing of UCITS reform

By Laura Chisholm

Last month, the European Commission announced that the deadline for a decision on the revision of the UCITS IV Directive would be missed. A delay beyond the date in the Commission’s internal medium-term plan (30 April) will not surprise those familiar with lengthy European Commission consultation processes. The fact that this particular debate has been in train since 2006 makes the delay more predictable, though less justifiable.

It seems, though, that in this case the entire project is in danger of being scrapped. UCITS (Undertakings for Collective Investment in Transferable Securities) form a key part of the master plan to create a single market for European financial services. The original directive dates back to 1985 and was introduced to allow for open-ended funds investing in transferable securities to have a single regulatory regime across Europe .

The sticking point in the current discussion is the concept of the Management Company Passport. Currently, management groups need to establish a fully functional management company in each fund domicile—adding cost and fragmenting management expertise. This was meant to have been simplified in 2001. However, ambiguities in the directive and complications around marketing rules in different jurisdictions mean that it has not been put into practice.

Management Company Passports would allow asset managers to sell funds across the European Union without establishing a fully fledged function in each market.

The UK , France and Germany are behind this measure. They have enthusiastically voiced the benefits which include reduced costs and increased choice for consumers. Luxembourg and Ireland oppose the concept on the grounds that they do not wish to see the roles of national regulators diminished. Of course, both Luxembourg and Ireland host a large number of funds and will face increased competition if full passporting is introduced.

So an impasse is the most logical reason for the delay. It is possible that the Commission is looking at some sort of compromise regime, a ‘partial passport’, as recommended by the Forum of European Asset Managers. The Investment Management Association, among others, is concerned that this is on the table: the trade body has doubts that such a compromise would reduce the current administrative burdens, and fears that there is a chance it could actually increase them.

It has also been suggested that EU Internal Market Commissioner Charlie McCreevy is wary of making any significant changes to the regime while the economic climate remains so uncertain, not to mention undoubted pressures from his homeland. According to his spokesman the “outcome is very open” and the Commissioner “has not made up his mind”. He plans to consult further before making any public announcement.

Laura Chisholm can be contacted on +44 (0)20 7665 9536 or click here to email.