Commission wants to allow more cross-border activity in order to increase the efficiency of the European asset management industry
Ucits rules should allow more cross-border activity to let the fund management industry in Europe evolve, the European Commission said in a recent document.
In order to increase the efficiency of the European asset management industry the Commission believes clearer rules need to be set out regarding fund mergers while asset pooling from feeder vehicles into master funds should be allowed. It also feels management company passports need to be allowed so firms do not have to set up companies in states where it wants to market a fund. In addition, firms need to have clearer simplified prospectuses prepared so there is a smoother cooperation framework with authorities.
The IMA welcomed the draft as a step forward in addressing the required amendments to Ucits but feels more work should be done on company passports.
The Ucits directive allows passports so management companies can run a fund on a cross-border basis but ambiguities in the text mean this has not happened. The latest EC document estimated that a company would save between E381m to E762m per year if it was allowed to run a fund in individual member states without having to establish a company there.
Mona Patel, head of communications at the IMA, said: "A UK fund management company should be simply allowed to operate its funds in other member states. The draft legislation does not quite go that far.
"A true passport would allow all administrative activities to be carried out in the same location as the fund management group. The proposal for a partial passport does not go that far."
Specifically, the paper said a company should be allowed to manage a fund domiciled in another EU country or appoint a management company to run it for them. It added that clear tests should be carried out to determine the domicile of the fund and company to work out which regulatory regime it would come under as well as to avoid any tax uncertainties.
Peter Grimett, head of distribution compliance at Threadneedle, said although the paper is positive as a whole, there are some areas of disappointment, including company passports.
"I think France, Germany and the UK want the management passport but suspect that two particular other countries that have large administration centres would not be in favour of this," he said. "I do not think they realise the opportunities that will open up and believe they will lose business as a result.
Further on in the document, the European Commission suggests that fund management companies should be able to pool assets of smaller funds into a master vehicle to achieve economies of scale without actually merging the vehicles.
The paper states: "Proliferation of funds of a small size creates a heavy burden on the fund industry and ultimately investors. Economies of scale are not realised and inefficiencies are passed on to investors."
As a solution, it suggests a feeder fund, be it retail or institutional, could invest at least 85% of its assets in to a master vehicle. The management of the feeder fund would be allowed to use derivatives or hedge currency risk as an overlay to differentiate it.
Grimett said: "The proposal regarding asset pooling is a simple one but we would like to see this go further with the allowance of feeder funds being able to invest in more than one master vehicle."
Disclosures made by fund managers to potential investors and simplified prospectuses, are also addressed in the paper.
"The simplified prospectus was meant to provide investors with concise and understandable information about the investment policy, risks and associated charges of a fund, it said. "However, it has suffered from national gold-plating and divergent implementation. The result is a lengthy user-unfriendly document that is a source of costs to the industry and of limited use to investors."
Proposals are for the documentation to be known as key investor information, which will define product information, in particular relating to costs and risks. It would not be responsible for disclosure of advisory or sales related fees that are charged separately from the fund, which is up to the intermediaries to explain.
The EC also suggested fund managers and intermediaries need to join up so the information is used in a timely and effective way by potential investors on a complementary basis at the point of sale.