Efforts to improve risk management and investor protection are central to the European drive for increased efficiency in the Ucits framework, says Invesco Europe CEO Jean Baptiste de Franssu.
He was speaking at the Fund Forum Asia conference in Hong Kong this week to update the market on progress being undertaken to advance the Undertakings for Collective Investment in Transferable Securities (Ucits). The new Ucits IV version is set to come into force this July.
De Franssu reminded the audience that Ucits IV was actually prepared and voted on before the financial crisis broke in September 2008.
But now, more than ever, he suggested the Ucits label was recognised as a quality benchmark worldwide, with an estimated 20% of the overall €6 trillion ($8.5 trillion) Ucits base sold outside Europe, including a fair share in Asia.
“However one cannot ignore a quickly changing environment and growing investor needs, and ultimately the financial crisis has presented an opportunity to strengthen Ucits,” he said.
Ucits IV contains measures expected to result in economies of scale, annual savings for the funds industry as well as investors and better risk management processes, he said.
He pointed to the move to rationalise a “profound inefficiency” which rendered it almost impossible to cross-border funds between Luxembourg and Ireland, the two dominant domiciles in which Ucits are created.
The average Ucits fund size is still only about €150 million, he reminded attendees, versus about $1 billion for a US mutual fund.
But he said safeguards had been put in place to protect the rights of shareholders of the funds. Improved monitoring will also see risk management rules for asset management companies strengthened and harmonised throughout the European Union and various domiciles, including the calculation of global exposure and counterparty risk for Ucits.
De Franssu noted an increased need to define Ucits by the growth of non-Ucits, which have been regulated country by country and involve different regulations and approaches to risk.
“All those products that did not benefit from such pan-European regulations as Ucits were in many ways starting to potentially endanger the reputation of Ucits and something needed to be done,” he says.
The European Commission and European Parliament got to work on the Alternative Investment Fund Management Directive (AIFMD) to change the regulatory landscape in Europe for such products.
The EU has felt the need to regulate all non-Ucits funds and is now trying to establish one system for authorisation and registration of alternative investment funds across Europe and one set of requirements to be fulfilled by those funds and their managers. All of those rules will be applicable for new funds and their managers in the summer of 2013.
“I think in the future this will help to clarify one of the most recent evolutions we have seen, whereby a number of hedge-fund-type players have started to use Ucits as a way to promote their investment expertise in an environment they felt was probably more stable than the world of hedge funds was.”
De Franssu added that the rules that have been set within the AIFMD are now very close to those that exist for Ucits products. “That is good news, including for asset managers based outside of the EU.”
On investor protection, he made reference to challenges faced worldwide, including with less regulated products in Hong Kong such as Lehman mini-bonds and accumulators.
But he said major steps have been taken, including the setting up of three supervisory bodies: the European Securities & Markets Authority (Esma); the European Banking Authority (EBA); and the European Insurance & Occupational Pensions Committee (EIOPC).
“What is important is that those entities will pay attention to the issue of improved investor protection and they will help to restore confidence,” he said.
An important aspect of Ucits IV will be the key information document (KID), a standardised two-page document to make sure investors receive clear information, understand proposed Ucits investments and that they suit their needs.
The KIDs should also allow for easier comparison among products of different fund promoters, he added, fostering increased competition.
When it comes to Ucits V, the EU is setting out to harmonise the function of the depositary regime in terms of risk and responsibility across Europe.
And a few weeks ago the European Commission spoke of its desire for convergence in the sanctioning of players across Europe regardless of the market they operate in.
“You may have Ucits based in Luxembourg or Ireland, but the fact is the asset manager or the custodian of those Ucits may be based anywhere else in Europe and the need to have an organised way in which we can address the sanction of those various players is extremely important,” added De Franssu.
He briefly addressed the distribution debate going in Europe with regard to complex and non-complex products and what Ucits fall into. “It is only when we are in a position of having better information and a better and more well-designed distribution mechanism and distribution rules that we will be able to address the notion of investor protection in a more efficient way,” he said.
He also pointed to the importance of having unbiased fund classification principles across Europe, and said he wants to engage the broader industry to see how to respond to this challenge. “Close cooperation and the sharing of information with your industry [in Asia] is therefore a necessity and we are progressing in that direction,” he added.