Setback to reform of funds directive

Date: 05/09/1996

By Chris Johnstone

THE European Commission has been given a slap in the face by member states in response to its attempts to relaunch work on a stalled proposal to give greater Europe-wide freedom for investment funds.

Officials have reacted with consternation to the mix of national positions revealed in the wake of its July request for governments to set out their bottom-line positions on what they wanted and where they were prepared to compromise.

Internal Market Commissioner Mario Monti had hoped member states would point to an acceptable path for a re-shaped proposal on Undertakings for Collective Investment in Transferable Securities - or UCITS to those in the know. Just over half replied to the Commission request within the six-week deadline.

“There are very large differences in positions. We had hoped for more positive replies,” said one Commission official.

A September meeting of the UCITS standing committee, made up of national regulatory authorities and the Commission, has been scheduled to consider how fresh progress can now be made on a relaunch of the last, 1993 proposal, to update EU rules on what funds can and cannot do.

Commission sources say charting a path for a new proposal will be doubly difficult since the European Parliament wants a tough set of conditions in return for allowing more freedom for investment funds - the exact opposite of what most member states and the industry are demanding.

The European investment fund industry, in which around 14,000 funds have net assets of 1.25 trillion ecu and most major banks are players, says the original 1985 directive on UCITS urgently needs to be updated. The original 1985 directive gave a European passport for investment funds cleared in one country to be offered in other EU member states.

Now, however, the directive is seriously showing its age.

Its failure to cover the latest developments in the fast-moving world of financial instruments means that many European investment funds are now bypassing it and only seeking national clearance for their latest products, because the European rules simply do not cover them and cannot provide cross-border clearance.

“We are already seeing this taking place in some countries. We are seeing a fragmentation of the European market. That is the exact opposite of what we want,” said Steffan Matthias, secretary-general of the European Federation of Investment Funds and Companies (FEFSI).

The FEFSI has four main demands for an updated directive. It wants the new legislation to cover new money market instruments; allow so-called funds of fund investment; allow greater use of hedging; and clearance for the use of feeder funds.

Funds of fund investment allow one UCITS to invest in another. The instrument is common in the US, but banned in Europe. The FEFSI argues that the wider use of hedging (investment protection against loss by spreading risk) should be allowed as long as the overall risk attached to a fund is not increased.

Feeder funds allow one fund to take on and offer the products of other funds to its shareholders, perhaps with their own slightly altered conditions. Feeder funds would, in theory, allow companies where investment funds are less developed to plug into the latest innovations from more dynamic markets.

The industry is opposing Commission moves to allow investment funds to have foreign depositories. Under the current rules, depositories - which are effectively the guardians of investment funds and finally responsible for their actions - can only be established in the same country as the investment fund.

The Commission, working on the principle of free movement of services, has insisted in the past that cross-border depositories should be allowed.

But the FEFSI says no move should be made until national regulatory rules are more streamlined. It now appears the Commission is willing to drop its insistence on this point in order to get agreement on a new directive.

But the investment fund industry is itself divided on whether a new-look directive should include greater freedom for cash funds - the common practice in some countries of investing in attractive short-term bank deposits.