Ucits IV Directive, the home straight
In the four corners of Europe, regulators and market operators are making their final preparations, albeit with some fears, to adapt to and grasp the new opportunities.
Par Florent Berthat, Stéphanie Salti, à Londres, Lothar Gries, à Francfort, Dominique Muret, à Milan, et Elodie Cuzin, à Madrid
Cross-border fund mergers, asset management company passports, the new KIID (key investor information document), European master-feeder funds and accelerated notification procedures: even if it already existed, the single European market in UCITS should become more fluid after the implementation of the Ucits IV Directive. The Member States are required to transpose the directive, which was adopted by the European Parliament in June 2009, into their national laws by 1st July 2011 at the latest.
From the United Kingdom to Spain, including France, Germany and Italy among others, the authorities have implemented this transposition with differing degrees of urgency. The configuration of the asset management industry varies from one country to another, with some countries having production, management and distribution markets, while in others the market is focused chiefly on distribution. But most of them continue to count to a large extent on their locally registered funds. Therefore, the implementation of the directive is seen not only as an opportunity for market operators, but also as a potential threat for each financial centre.
FRANCE - Literal transposition
France is the second UCITS European market, behind Luxembourg (French-registered funds represented 1,339 billion euros at the end of 2010), but the leading market in terms of financial management (with a market share of 20 %, ahead of Germany and the United Kingdom). Asset management is therefore strategic for Paris as a financial centre, so much so that the country’s High-Level Committee, chaired by the Minister of the Economy, Christine Lagarde, has examined the question, estimating that the ecosystem of this business line consists of 70,000 professionals. Above all, the Financial Markets Authority (AMF), aware of the need not to curtail the industry’s competitiveness by over-interpreting the European texts, has undertaken to "transpose the OPCVM IV Directive literally" and to "refocus the regulation of asset management on controlling the distribution of UCITS". However, "the implementation of new, simplified notification procedures (marketing authorisation) between European authorities will be tricky", according to one market professional.
The French experience in master-feeder fund structures suggests a new development potential (see page 37), but there is a question mark over the capacity of French-registered UCITs to withstand the rise of Luxembourg-registered funds, given the likelihood of increased product rationalisation as a result of the new cross-border merger opportunities (see page 19).
The transposition of the directive is therefore under way, even if the publication of the French texts is likely to be a last-minute affair, undoubtedly a few days before the deadline. Market professionals were consulted by the French Treasury at the beginning of the year on the proposed recast of the texts governing coordinated UCITS (consistent with the directive) in the Monetary and Financial Code. After it has received the Council of State’s opinion, the government may legislate by ordinance, undoubtedly at the end of June, as it is authorised to do by the law enacted last October on banking and financial regulation. In addition, the AMF general regulation (book III for the operators section and book IV for the products section) will be amended by a decree, after two successive consultations, in May and June. The definitive texts will therefore be published just a few days before their implementation. However, they are unlikely to contain any major surprises. The AMF has already taken the lead by publishing guides on the KIID, first on 17 November 2010, then on 18 February 2011, defining the various headings which this document should contain. But the implementation will remain complex because of the addition of new indicators (see page 27). "It will inevitably require a little time, after 1st July, for asset management companies and European regulators to get over the initial teething troubles, admits one market professional. Especially, as the middle of summer is not the ideal time to implement a new system…"
GREAT-BRITAIN - UK authorities and market operators want to be more competitive
The UK Treasury and the FSA (Financial Services Authority), the market regulator, published in December 2010 a joint consultation paper. However, observers do not expect the final form of the text to differ significantly from that proposed in the consultation paper. "In theory, the implementation of this directive will provide the industry with considerable flexibility and potential economies of scale", according to Imogen Garner, senior associate at the law firm of Norton Rose. "For medium-sized companies such as M&G, this directive will facilitate our geographic expansion and will give us the possibility to sell our funds on other markets", explains Peter Grimmett, head of fund regulatory development at M&G. In particular, the possibility to create a master-feeder UCITS structure in one country, then to launch feeder funds in other States, is seen as a plus by asset management companies. On the other hand, the replacement of the current simplified prospectus by the new KIID is greeted with scepticism: "It is essential that this information is delivered to the investor upstream of the contract, asserts the head of regulatory affairs at M&G. However, if this document has not been received by the investor, the transaction, irrespective of it size, cannot be completed. Asset management companies will therefore have to be careful to minimise the possible reputation impact of this change."
Moreover, the uncertainties regarding the final tax rules are also a cause of concern: "Tax systems need to be harmonised throughout Europe", explains Peter Grimmett. When the Chancellor of the Exchequer, George Osborne, unveiled his budget in March, he announced his intention to introduce a government bill to allow UCITS to be managed from the United Kingdom without having any negative impact on their taxation. A first government bill was published in March and is currently passing through Parliament: "In order to promote the creation of master funds in the United Kingdom, the government is also planning to launch a new system of fiscal transparency for these vehicles, explains Imogen Garner. The government is expected to open a consultation on this subject in June and launch the new structure in 2012."
GERMANY - Operators fear new constraints
Adopted by the German Parliament (Bundestag) on 11 April last, the Ucits IV Directive will enter into force on 1st July, thereby enabling German asset management companies to benefit fully from the new regulation. However, operators in this sector are less enthusiastic than might have been expected about the barriers to cross-border distribution coming down. Major asset managers such as DWS, Deutsche Bank’s fund manager, Union Invest, which is part of the cooperative financial services network, and Deka, the subsidiary of the German savings banks, consider that the directive is unlikely to have a significant effect on their commercial activity. In general, they are already well established in Europe, with offices in Frankfurt and Luxembourg, and via important subsidiaries in Paris, such as Allianz Global Investors (AGI). This point of view is shared by Stefan Seip, Managing Director of BVI, the German Federation of Fund Managers. "The main beneficiaries of this directive will be smaller fund management companies which do not have the means to open branches in different countries", he explains. As regards the benefits for large firms, the BVI Managing Director expects the impact to be felt mainly in terms of synergies "because they will now have the possibility to concentrate on only a small number of asset management centres". Eventually, the major German firms expect a consolidation of supply via cross-border fund mergers. But overall, they are somewhat dubious about the new directive’s impact in concrete terms. According to a recent survey conducted by Ernst & Young, they see it more as a challenge involving numerous uncertainties, in particular from a tax point of view, rather than as an opportunity to improve their product distribution.
It is in particular the case for the introduction of the KIID. Creating a specimen document is a "real logistical challenge", according to Stefan Seip, who recently organised an information day on this subject for his members. "If fund managers are devoting so much attention to the creation of this document, it is because the German press, which is very attentive to questions concerning the protection of retail investors, are following this subject very closely", emphasises Wulf Ley, a partner at Ernst & Young in Frankfurt.
ITALY - Funds taxation is being adjusted
The Ucits IV Directive is perceived positively by operators and regulators alike. As part of the preparations for this imminent change, the Italian Association of Fund and Asset Managers, Assogestioni, put in place a team, six months ago, with responsibility for coordinating the implementation of the directive in close collaboration with the regulators. "We have analysed the impact of the directive and put forward proposals in line with the requirements of our industry, in order to facilitate the implementation of the text, explains Roberta D’Apice, Head of Assogestioni’s Legal Department. In some cases, we have even suggested competitive measures that go beyond Ucits IV."
In fact, the Bank of Italy and the stock exchange watchdog Consob intend to fall in line with Community discipline by applying the regulations imposed by the directive, without adding additional constraints and by amending, consequently their own regulations. The new texts have been open for consultations before being adopted. "The directive will increase foreign competition, but will also make Italian asset management companies more competitive", explains the Consob. "It will not have a major impact on the management of our companies, since we have already integrated the related European provisions, notes Roberta D’Apice. On the other hand, Ucits IV will enable Italy to create ‘Master-Feeder’ structures, allowing feeder funds to invest in master funds, which was not allowed previously."
Another major advantage for the Italian market is the replacement of the current simplified prospectus, which is seen as somewhat complex by Italian asset managers. It will be replaced by a synthesis, harmonised document, namely the KIID. This provision will be applied as scheduled from 1st July for new funds, while a six month transitional period up to February 2012 is planned in Italy for existing funds. "The introduction of the KIID is the major innovation in Italy. Previously, the fund documentations were very heterogeneous and comparisons were difficult. It was one of the most criticised points of our market, notes Sara Silano, from the firm of consultants Morningstar. The other major area of progress concerns the tax aspect. Until recently, our funds were heavily penalised by the Italian tax system. This led to a large number of funds being domiciled in Luxembourg or Ireland, thereby considerably limiting the range of Italian products." The Ucits IV Directive finally encouraged Silvio Berlusconi’s government to adopt, in February, a reform harmonising the taxation of Italian and foreign funds.
SPAIN - A warm welcome despite the urgency
Spain is involved in a "race against the clock" to transpose into its national law the Ucits IV European Directive. This directive is eagerly awaited by Spanish asset management companies since, according to a survey carried out by the Inverco Observatory, more than 70 % of them consider that it will have a positive impact on the national industry.
At the end of April, the Cabinet of Prime Minister José Luis Rodriguez Zapatero finally adopted a government bill intended not only to transpose the European directive concerning asset management companies but also to adapt the country’s law to the new competences of the European Securities and Markets Authority (Esma). According to Angel Martinez Aldama, the Director-General of the Inverco Observatory, the provisions will not be in place by 1st July 2011 deadline fixed by the European Commission. "The ministry is aware of the urgency and is working accordingly, but the European Presidency in the first half of 2010 created a very heavy workload and paralysed certain projects", he explains. The situation is particularly pressing because Spain is due to hold a general election in March 2012, which means that the Spanish legislative term will end in December this year.
The government bill to transpose the Ucits Directive will facilitate in particular the implementation of the European funds "passport". "Spanish asset management companies will be able to manage funds domiciled in other Member States and the asset management companies of other Member States will be able to manage Spanish funds", notes the Spanish Minister of the Economy. He also intends to facilitate access to other markets, by reducing considerably the "time limits available to the competent authorities to finalise approvals" and by abolishing "the need for an asset management company to communicate with the competent authority of the host Member State". In addition, the government hopes to "fully harmonise" investor reporting.
But, according to the ministry, "the most important innovation will be the ability to use global accounts for the distribution in Spain of funds domiciled in our country". A welcome initiative for the Spaniards. "Foreign asset managers were already able to distribute in our country via these mechanisms", underlines Angel Martinez Aldama, who thinks that the former Spanish body of laws includes "a number of limiting rules that do not exist elsewhere and pushed funds to register in foreign countries prior to operating in Spain.