UCITS IV 'Could Be Dropped,' Say Market Specialists

LONDON/DUBLIN-UCITS IV, the amendment to the UCITS III regulatory directive aimed at creating a single European market for investment funds, could potentially be dropped after the European Commission has postponed publication of a draft proposal, according to market participants.

The aim of the UCITS directive was the creation of a pan-European funds market to make open-ended funds investing in transferable securities subject to the same regulation in each member state.

The UCITS IV draft was initially set to be published by the end of April, and specialists question if it could now be dropped, since open proposals or bills that have not been transposed before the 2009 dissolution of the European Parliament will not be introduced.

"The whole directive machinery is still in standby," says London-based Anthony Kirby, director, financial services advisory, regulatory & risk management at Ernst & Young.

"Postponement (of UCITS IV) will allow for a consultation process regarding the management company passport, which affords the opportunity for funds to have a different domicile to the management company," say Dublin-based Andy O'Callaghan Partner, Assurance, Investment Management and Deirdre McManus, Regulatory Compliance Services Manager, at PricewaterhouseCoopers.

UCITS III has already been introduced and is expected to increase the focus on reference data management, as firms will have to review counterparty risk to comply with the directive.

The directive requires firms to identify the ownership hierarchy and the ultimate beneficiary of funds' counterparties, fuelling a growing focus on business entity data maintenance.

The hope was that enhancements to the directive under UCITS III would bring the industry closer to a pan-European funds market, say O'Callaghan and McManus.

"The existing directive was meant to set standards for authorized funds in the UK and make sure that the portfolio had an adequate spread of risk and a higher degree of liquidity," says Kirby.

UCITS III

UCITS III is a European legislation that regulates funds sold across EU member states. It consists of two directives:

The Management Company Directive

- Seeks to give management companies a 'European Passport' to operate throughout the EU and widens the activities they are allowed to undertake;

- Introduces the simplified prospectus which must be investor friendly and include all relevant information to enable investors to make an informed judgment.

The Product Directive

- Aims to remove barriers to the cross-border marketing of units of collective investment funds by allowing funds to invest in a wider range of financial instruments.

- Andy O'Callaghan, partner, assurance, investment management, PWC, and Deirdre McManus, regulatory compliance services manager, PWC.