Leading the pack
Retail and institutional investors often choose UCITS investment funds for their savings. Luxembourg has developed into the domicile of choice for UCITS, as well as an ideal gateway for cross-border distribution. It was also the first country in the EU to implement UCITS IV into national law. Thierry Blondeau, Partner at PwC Luxembourg, presented the first assessment of UCITS IV and also analysed UCITS V, recently disclosed by the European Commission.
The Undertakings for Collective Investment in Transferable Securities Directive, known as UCITS IV, has two main objectives: rationalising investment funds and operations on one side and enhancing investor protection. Thierry Blondeau, Partner at PwC Luxembourg says that the main idea was to have a toolbox where you can rationalise a certain number of operations – hopefully resulting in diminishing costs for investors as well. “If you look at this toolbox, you have cross-border fund mergers and the possibility of using master-feeder structures with a feeder in one country and a master in another country. So far, UCITS IV has been very beneficial for Luxembourg. In all the cases we have seen, the Luxembourg fund has swallowed the foreign fund. We have seen people setting up a feeder fund in Luxembourg because there is a good master in another country”. The third measure is the company management passport; a company located in one country can manage a fund in another, which was not possible before. These are the three measures in order to improve the efficiency of the European market.
On top of that, you have two other measures. The first is linked to the time to market: if you create a fund in one country, what is the time and effort needed to sell it in another EU country?
“Not all the results have been achieved yet, partly because it is only valid for new registrations. The issue is that for changes to existing funds, you need to do it the old way and go directly to the German regulator if you want to sell a Luxembourg-domiciled fund in Germany and not to your local regulator (CSSF), which in the end is not any easier than before”, Mr Blondeau notes.
A new kid in town
The last point concerns information disclosure to investors. The objective of the European Commission is to make sure that European investors make decisions based on relevant information that they can understand easily. This is what you call the Key Investor Information Document (KIID), which has replaced the Simplified Prospectus. This prospectus failed to bring more transparency to the UCITS world and it has also been seen as a much too technical document. The main objective of the KIID is to offer the retail investor information that is easy to understand and digest.
You can basically use the KIID since July 1st 2011, but most players have waited until the end of the grandfathering period, July 1st 2012. Thierry Blondeau underlines that it is too early to say if the new tool has accomplished its goals. It will probably take another six months before results can be measured. “The process for fund promoters has become more complex than originally thought because of all the languages that are used. Some of the players have had to produce more than 10,000 KIIDS, which is quite substantial. That has been a real challenge. It is not 100% perfect, but the simplified prospectus was less useful than the KIID. To me it has been an improvement in any case”.
Getting the ball rolling
Luxembourg has been the first EU Member State to adopt UCITS IV into its national law. Thus, the Grand Duchy has created legal certainty for asset managers to analyse and prepare for general implementation on July 1st 2011. Even though it might not be a huge advantage, it certainly helps to be more attractive as a fund centre because of the more practical sense gathered, Thierry Blondeau states. “The fact that in the past Luxembourg had that first-mover advantage now makes it easier to sell a Luxembourg fund to Germany or France than a German fund to France or vice versa, because this is a product fund promoters and regulators have become quite familiar with. If you look at the total assets of UCITS funds over the last ten years, the proportion of Luxembourg and Irish funds has been constantly increasing. Both international fund centres have increased their market share.” Luxembourg has a competitive advantage compared to Ireland because of its sound public finances, its better ratings compared to other countries and its stability, a factor that is very reassuring for fund promoters and for investors.
In July 2012, the European Commission unveiled its proposed UCITS V regime. One of the objectives is to improve investor protection by developing a solid, harmonised EU framework for depositaries. Thierry Blondeau highlights two more objectives: the remuneration of fund managers and the sanctions regime. ”You want to avoid encouraging asset managers to take excessive risks; we must make sure that the incentives are not conducting people to take too high risks. The sanctions regime has not been harmonised yet, and the power of the different regulators can vary significantly from one country to another, if we are speaking of fines and sanctions imposed. The idea is to raise the bar so that you have a minimum level of sanctions in every country. Some countries can decide to even go further, but at least there will be a minimum baseline in common”.
If you look at the history of UCITS funds, there have been very few setbacks over the last 25 years. At the end of the day, it is a product that is well regulated and easy to understand and to use. That is why this product is so popular in Asia. Mr Blondeau warns, however, that there is a risk that UCITS funds – already one of the most regulated products – will be rendered less attractive because of the additional burden of regulation put on them. If legislation goes too far, the risk is that players might be pushed away and launch less regulated products instead because there are fewer requirements. CW