Tough debate ahead over mutual fund rules

Date: 26/10/00

By Peter Chapman

EU GOVERNMENTS face an uphill struggle to clinch a deal on the next round of proposals to boost the Union's 3-billion euro single market for mutual funds, diplomats warned this week.

The prediction comes after finance ministers reached agreement earlier this month on harmonised rules to govern which products and assets can be bundled into mutual funds - known in the jargon as Undertakings for Collective Investments in Transferable Securities, or UCITS.

The agreement would give UCITS fund managers more freedom than they are allowed under existing rules, which were adopted in 1995. They would, for example, be able to invest in unlisted money market instruments such as commercial debt and bank deposits, and also in unlisted mutual funds not covered by the current rules.

The blueprint approved by member states would relax restrictions on index-tracking funds invested in some European markets which are dominated by one large stock. It would allow UCITS also to invest up to 100% of their assets in derivatives - a direct challenge to MEPs, who signalled earlier this year that they wanted a 30% ceiling on such investments, which are renowned for being high-risk in the wrong hands.

But governments must now reach agreement on a separate and much thornier part of the draft directive which sets out proposed rules on how UCITS should be regulated and marketed to EU citizens. "I think it would be wrong to give the impression that it is all sewn up," said one national finance expert, highlighting two key potential obstacles to a deal.

The first arises from technical concerns over the planned 'passport for fund managers', which would allow financial services providers to be legally recognised in all member states. Governments support the measure, but have yet to agree on details of the proposals.

Tougher still, say experts, will be the debate over the requirements for the content of a new 'mini-prospectus'. The proposed new rules would drastically reduce the information which mutual funds must offer potential investors, but diplomats point out that it took a decade to reach agreement on the current prospectus-content rules. "If it took ten years for the prospectus, how do you decide on something that is a mini version of that?" asked one.

Governments are keen to introduce the two facets of the UCITS rules together because they claim it makes little sense to bring forward one without the other. But diplomats admit the technicalities of 'UCITS2' could jeopardise ministers' hope of seeing both measures formally adopted at the same time.

The European Parliament could also delay their introduction still further, as the assembly must scrutinise the details of whatever agreement is reached by governments on both issues before the legislation can enter the EU's statute book.

EU governments face an uphill struggle to clinch a deal on the next round of proposals to boost the Union's €3-billion single market for mutual funds, warn diplomats.