Euro regulator resists radical clampdown on ETFs

The regulatory body for the European Union has proposed stricter disclosure requirements on providers of exchange traded funds (ETFs), but has backed away from imposing more radical reforms on the sector.

A consultation paper published today by the European Securities and Markets Authority (ESMA) set out draft rules governing the sale and promotion of ETFs.

It proposes ETFs must disclose whether they lend out securities and give greater detail on the collateral they hold.

Investors must be informed via products' prospectus, key facts documents and marketing literature how they will meet their stated investment policies, including any intention to outperform an index, ESMA proposes.

Some stakeholders had expected tougher proposals, including dividing ETFs into 'complex' and 'non-complex' groups and restricting the sale of derivative-based synthetic ETFs to retail investors. But the ESMA paper did not outline draft rules in these areas.

Instead, the guidelines, which follow a discussion paper issued by ESMA in July, aim to increase investor protection by upping providers' disclosure requirements.

The ESMA paper proposes providers must explain their products' risks fully and the mechanism by which they deliver returns.

Elsewhere, the paper said index-tracking UCITS must contain a description of their investment policy and provide sufficient detail in relation to the components of the index or the benchmark to which it refers.

"It is important investors are provided with sufficient detail to understand the index tracking policy used and the types of underlying assets and strategies they are gaining exposure to," it said.

"Investors must always be informed of the principle risks in relation to the investment policy of the UCITS."

The IMA said it agreed with the proposals but said the scope of any new laws should be widened to cover all exchange-traded products.

Julie Patterson, IMA director of Authorised Funds and Tax, said: "The European Commission's Packaged Retail Investment Products initiative seeks to ensure that all retail products are subject to similar rules on disclosure and selling, but we are concerned that this important principle will be eroded if different pieces of legislation apply to different products.

"In particular, the issues highlighted by ESMA are relevant to all exchange-traded products, not just exchange-traded UCITS."

"We recognise that regulators remain concerned that some retail products are overly complex, but complexity does not necessarily equate to risk. Sophisticated investment strategies can maximise returns while minimising risk. Removing so-called complexity could lead to investors not having access to the investment returns they seek within the UICTS framework."

The industry has until 30 March to respond. Rules are expected to be finalised and adopted in Q2 2012.