UCITS IV: the dangers of a two-speed Europe
There are three months to go until UCITS IV comes into force. It is an important issue for the EU funds market. Luxembourg was the first European Member State to transpose this directive into national law. In an interview with LFF, Jean-Michel Loehr, RBC Dexia’s Head of Industry and Government Relations, speaks about implementation of the Directive in Europe’s main fund centres and the different attitudes of asset managers. He fears that a two-speed Europe is emerging.
Luxembourg has become the first EU Member State to adopt UCITS IV into its national law. What is the advantage of early implementation?
Luxemburg has developed into the domicile and servicing hub of choice for UCITS, as well as an ideal gateway for cross border distribution in the EU and beyond.
Being the first country to adopt UCITS 4, Luxembourg has created legal certainty for asset managers to analyse and prepare for general implementation on July 1st 2011. The country is leading the pack, which is a visible sign of Luxemburg’s long term commitment to the fund and asset management industry.
We expect this to play out positively for all those already using Luxemburg and possibly attract new promoters from less diligent locations, under the assumption that UCITS 4 will lead all of them to review their operating models and make strategic choices for their future development.
Being a key contributor to what is one of the most visible success stories of European law – the UCITS product - creates a legitimate sense of pride but definitely also a responsibility for Luxembourg. There has to be alignment of all stakeholders to ensure the country stays ahead, maintains leadership in expertise, and demonstrates long term commitment to its clients.
What does the situation look like in other fund centers of domiciliation such as France, Germany and Ireland?
We’ve published a heat map on our website (www.rbcdexia.com/ucitsiv) which regularly monitors progress made by Europe’s main fund centres in implementing the directive. While the situation is constantly evolving, we see 3 categories today among the important UCITS domiciles:
- those that have adapted already with Luxemburg as the sole member;
- those that have started a legislative process and should be ready on time: France, Germany, Ireland, UK and to a certain extent Spain. Although it is not an EU member, it is interesting to note that Switzerland is closely monitoring the evolution and has started communicating its views on certain UCITS 4 options;
- those likely to be late joiners such as Italy and Belgium.
What are the dangers of a two-speed Europe?
Depending on the perspective I see two major dangers:
a) as the Directive will de facto be applicable in all 27 member States on July 1st, whether they have implemented it or not, the industry could face important administrative complications and costs if some countries are not ready. An obvious example is the new cross border notification process for which regulators in certain countries might not be prepared to accommodate the new rules even though they come into effect on July 1st.
b) late-comers could be faced with an outflow of domestic funds to other locations offering the necessary certainty and visibility. Let’s not forget that UCITS 4 comes with features designed to achieve economies of scale and more operational flexibility such as master-feeder funds, cross border mergers and management company passports.
While we believe there is no reason to rush, we are convinced however that fund promoters will not miss this opportunity to make a strategic review of their fund ranges and operating models and reconsider their options for the future
Member States may be tempted to “gold plate” the Directive when they implement it into national legislation. What is your view on this?
UCITS is a highly visible brand and investors’ trust in the product and the regulatory framework is of utmost importance. Transparency and consistency are key factors. UCITS funds have also developed into a major export product for distribution in Asia, Latin America and the Middle East, so Europe would be well advised to provide clarity and uniformity.
It would be confusing for investors and regulators from those geographies if individual Member States created diverging positions or confusion by adding domestic rules on top of agreed EU rules.
What is the attitude of asset managers at the moment? A wait and see approach?
We observe different attitudes today between those who have already declared their intentions; those who still need to get certainty on certain aspects of the legislation that are important for their operating models and those who believe they are well set up and see no need for change.
UCITS 4, with some exceptions like the KIID, should be considered as an efficiency toolbox with a lot of interesting options that you may or may not take up depending on your individual needs and strategies.
That being said, RBC Dexia has invested substantial resources and is prepared to accompany and assist its clients going forward .We have observed that this is also true of our supervisory authority, the CSSF, which is moving fast to define precise market rules.
Are you optimistic that the current uncertainty will have disappeared soon?
We are reasonably optimistic that all major countries will meet the July 1st deadline. On that date all measures will be applicable according to the Directive and if any uncertainties arise, stakeholders will be forced to make decisions. CW