Ucits IV: More flexible, but more costly?

Margaret Harwood-Jones of BNP Paribas outlines some key changes that will be introduced by Europe's forthcoming fund-passporting standard.

The next evolution of the Ucits fund standard is set to prove as appealing as its predecessor, thanks to the increased flexibility it offers asset managers and the greater protection it gives investors.

Having said that, Ucits IV may incur greater costs for fund managers than Ucits III in certain areas. That may explain why some of the most vocal demand for the new standard is coming from investors themselves.

Due to be introduced from July 2011, Ucits IV has three broad aims, says Margaret Harwood-Jones, London-based global head of the institutional investor client segment at BNP Paribas Securities Services. They are: to boost efficiency in the operation and organisation of the fund industry; create more opportunities for cross-border distribution; and enhance investor protection.

She also recently argued that Asia would benefit from having a fund-passporting regime like Ucits, although some question the need for another passport scheme in Asia when there is already effectively a one-size-fits-all scheme available.

Either way, Ucits IV aims to streamline the workings of its predecessor and provides a number of tools intended to do that.

First of all, the 'key investment document' (Kid) seeks to simplify the information that's made available to the investor. "Under Ucits III, the short-form prospectus is terribly complex and doesn't have a standard form and template," says Harwood-Jones. "So you could argue it's pretty confusing for the investor to decide what they should and shouldn't do and to be clear on the risks they're exposing themselves to if they invest in a Ucits III structure."

Under Ucits IV, asset-managers must produce a two-page Kid in a "non-technical style", which must allow the investor to make comparisons. While this is beneficial for investors, it will represent an additional workload for fund providers, which will have to replace the simplified prospectus.

BNP Paribas Securities Services offers a Ucits IV Kid-compliant reporting pack to help asset managers in tackling the complex regulatory landscape.

The pack includes performance and market risk indicators for simple and complex funds. It also provides quantitative aspects (performance, charges and risk), while the asset manager handles qualitative aspects (description of investment policy and fund objective) by contributing to the production of the Kid through BNP Paribas Securities Services' online interactive tools.

Another area where Ucits IV will build on the previous standard is with regard to the so-called management company passport. The current structure is such that wherever a manager seeks to sell funds, it needs to have an established management company infrastructure domiciled in that jurisdiction. "That makes it pretty costly for [asset-manager] clients," says Harwood-Jones. 

"With Ucits IV, you get the ability to have a single management company passport you can use in a several jurisdictions," she says. "It's a simplification and streamlining of operations, and it gives easier access to multiple markets than we have today."

There are also other new measures providing flexibility, notes Harwood-Jones. One is a new structure for cross-border mergers, which enables easier merging of funds from one jurisdiction with those in another. "It doesn't necessarily take away individual tax constraints on a market-by-market basis," she adds, "but compared to today it's still an easier way to merge cross-border funds."

Another change introduced by Ucits IV concerns the master feeder regime, says Harwood-Jones. This will enable managers to concentrate a fund's performance in one or more master structures and have one or more feeders below those. That way, the fund houses will be able to access main distribution markets and multiple markets beyond those.

"This should result in a lower-cost operation," she adds, "and give flexibility and manoeuvrability some managers would argue we don't have today."

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