Preparing for UCITS IV

European Parliament approval for the Undertakings for Collective Investment in Transferable Securities (UCITS) IV has been greeted with enthusiasm by trade bodies and the asset management industry as a whole. Now everyone is asking how it’s going to work. This article gathers views on what industry professionals think the UCITS IV future may hold. 

by Richard Willsher, financial journalist

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If UCITS IV fulfils its promise then the package of measures it ushers in could make a very real difference to scope, scale and organisation of fund management in Europe. The European funds and asset management association has described it as ‘a new milestone in the creation of an effective single market for investment funds’. And its president, Mathias Bauer commented, “efficiency and confidence are crucial if the investment fund industry is to remain competitive, in particular under the current difficult market circumstances. UCITS IV will enable asset managers to deliver these efficiency gains, increase confidence in the existing UCITS framework and help promote the UCITS brand even more…”

Jarkko Syyrilä, of the London-based investment management association is similarly upbeat. “The new directive,” he says, “will simplify the regulatory environment; create cost savings through economies of scale; give greater choice of investment funds to investors; and increase investor protection by making sure that retail investors receive clear, easily understandable and relevant information when investing in UCITS funds.”

Market practitioners agree that it will have significant effect on the market. “I think it will,” comments Adam Fairhead, Global Head of Product Development at HSBC Global Asset Management. “The master feeder arrangement could encourage a lot of consolidation of funds thereby cutting costs. The management company passport could lead firms to domicile all their resources in a single location instead of having them spread about. Fund mergers cross border should certainly be easier though there is no solution on the tax side, which is important.”

He adds that the structural change that UCITS IV will bring about will mean that businesses may alter the way they set up and organise their fund management operations though not what products they sell to investors or the way the sell them. Jamie Macleod CEO of Skandia Investment Group says that his firm “very much welcomes the variety of new initiatives being pursued with the development of the UCITS IV regime. However,” he continues, “while we have noted [a number of ] benefits… and the desire of regulators to work more closely together, there remains a lack of detail… The result is that we cannot make business decisions until these proposals have been fully worked through…”

Indeed many firms have a number of wide ranging business decisions to make regarding how they are structured, locally, cross border in Europe and globally. Aegon Investment Management among a number of others, is in the process of reorganising its business into a global asset management structure and helen webster Aegon’s Head of Products says that UCITS IV provides her firm with some of the tools to do so. At Standard Life Investments Phil Barker who is Head of European Business Development adds that it will help reduce costs and help increase efficiency.

Richard Pettifer KPMG’s Director of Investment Management identifies three key areas that firms will now be focusing on. The first is where to locate their principal management company. The second is where to put their master-feeder agreements and thirdly, where will fund administration be carried out?

Pettifer queries whether Luxembourg and Dublin will continue to grow as centres for all or some of these activities. Or will, for example, firms with head offices in say Frankfurt, London or Paris, place their management operations, and master-feeders in those centres and transfer fund administration to low cost centres elsewhere, such as, he suggests, Poland or India? The counter to such suggestions lies in the deep pools of expertise and excellent regulatory environments that Dublin and Luxembourg already have in place. To replicate that elsewhere would take a great deal of time and cost. Moreover these two centres will compete tooth and nail to hold on to all aspects of asset management work because of their significance to their local economies both in terms of income and the employment of human resources.

Meanwhile before many firms can begin to address such issues KPMG’s Pettifer goes on to point out that they need to better understand their existing businesses especially where they are spread across several locations around Europe. “Just preparing an inventory and understanding their own cost structures will be a challenge for some firms,” he says.

In summary, UCITS IV’s impending implementation addresses a number of longstanding industry issues. But it also raises a number of structural and strategic questions that many firms are not yet necessarily well positioned to answer. Meanwhile those that are, could be best placed to seize valuable first-mover advantages in the new, Europe-wide investment management market.

UCITS IV – Key features UCITS IV ushers in several measures intended to promote grater efficiency in pan-European management of funds: Management Company Passport – A management company located in one country will be able to set up and run a fund in another (A fund’s nationality will be determined by the country where it has been authorised); Supervision – a management company will be subject to the supervision and regulation of the country where it is based; Notification Procedure – quicker, more simplified regulator-to-regulator communication; Key Investor Information – to be simpler than the existing ‘simplified’ prospectus; Mergers – framework governing both domestic and cross-border mergers between funds; Master-Feeder Structures – allow funds to build economies of scale across borders.

UCITS IV – Timetable Following approval by the European Parliament, the remaining timetable is clear and is unlikely to change: Level 2 detail is currently being worked through and Directive is due to be issued in summer 2010; Member states to adopt and implement rules which should be effective through the EU by 1 July 2011; Economies of scale across borders.

Richard Willsher is a London-based financial journalist and former investment banker.