For a long time, investment in anything other than a bank account or basic pension was predominantly viewed as a preserve of the rich and famous. Increasingly, however, attitudes are changing and there has been a trend towards more people investing in property and company shares. Even so, the stigma attached to the term ‘funds’ has largely remained that of being risky investments, only for people who can afford to gamble with their money.
This is why the White Paper issued by the European Commission on 16 November 2006 entitled ‘White Paper on Enhancing the Single Market Framework for Investment Funds’ has been so warmly received by both investors and the various associations dealing with fund management, as it has recognised the importance of the investment management industry that such popularity can only grow in the face of growing life expectancy and the consequent need to save and invest for later life. In order to see what has been outlined in the Paper, it is necessary to briefly mention the legislation currently dealing with funds in the EC to establish what needs to change.
The current situation is governed by Directive 85/611/EEC as amended by 2001/107/EC and 2001/108/EC which makes certain requirements relating to areas such as the management of a fund and its allowable diversification of investment. Undertakings for Collective Investment in Transferable Securities (“UCITS”) is the term given to funds that comply with the legislation and are hence allowed to be offered to the public throughout the EC, whilst noncompliant funds can, as a general rule, only be offered within one member state. Current statistics show that fully 26% of funds currently set up are non-UCITS and this shows that, despite the offering restrictions on those funds, there are still enough drawbacks to the Directive to make such funds viable.
Problems associated with such a diversity of funds include higher costs for consumers (suggested to be as much as 3% higher than for equivalent US funds) and this is one of the areas the White Paper suggests could be addressed by, for example, creating legislation enabling the merging of funds in order to utilise economies of scale or removing obstacles to functional and geographical specialisation which currently cause funds to invest in only one member state with only the fund itself being allowed to be pass-ported to other member states. Such investment in different areas could be far more efficient and create greater returns for investors.
The White Paper suggests the introduction of a framework enabling such fund merging and tax harmonisation so that mergers will not penalise investors, while also giving advance disclosure of mergers to investors and possibly allowing them to redeem free of charge. Additionally, the diversification restrictions will be relaxed to allow ‘entity pooling’ (allowing a fund to aggregate assets through one legal entity).
Cross-border marketing itself has been identified as a problem with the process for obtaining a product passport often taking far too long. It is suggested that the current 2 month waiting period before being allowed to market crossborder be scaled back and that documentary exchange take place on a regulator-to-regulator basis, with the focus being on local compliance.
Additionally, the Commission suggests domestic approval for funds be expedited to enhance the efficiency of fund establishment. One problem created by the Directive itself was that of insufficient disclosure to investors. The plan for a simplified prospectus contained in the Directive was supposed to help investors make decisions without having to trawl through reams of technical data. In fact the use of a simplified prospectus has been abused to the extent that often investors do not have necessary information from which to make informed investment decisions. This section of the Directive will be clarified to ensure that the objective of providing a simple but informative set of facts on which to base an investment decision is met.
The 2001 amendments to the Directive were supposed to enable effective passporting of funds’ management so that, unlike originally required, management companies could act out of any member state thus reducing costs for the consumer. Although the 2001 amendments failed to effectively introduce this change, further legislation will be introduced to enable management of corporate and contractual funds to occur in another member state, separating this function from that of supervision which should remain in the host member state of the fund itself. Additionally, greater powers will be introduced to enable supervision of funds and punishment of reckless fund managers. The Commission further proposes strengthening the Directive’s provisions relating to regulators and supervisory co-operation, with such amendments to be modelled on recent legislation (including the Markets in Financial Instruments Directive (MiFID)).
Following further evaluation, the Commission will decide whether a single market framework should be set up for non-UCITS retail products, based on whether they are suitable for offering to cross border investors. A report should be made to the Council and Parliament on this subject some time in 2008. The Alternative Investment Management Association and The European Fund Asset Management Association reacted positively to the paper although were cautious as to relevance outside the retail sector and required clarifications respectively.
So whilst the ideas of harmonising funds, simplifying procedure and expediting the fund offering process were welcomed, it is still to be seen whether the measures set forth in the White Paper do indeed bring about such change and make the EC investment management forum a world competitor.