UCITS IV

Introduction

The UCITS Directive 85/611/EEC (entered into force in 1988 as amended by UCITS III in 2002) has been the key driver contributing to the significant development and success of the European investment fund industry over the last two decades. However, with the rapid evolution of the investment fund market, it was necessary to further enhance the UCITS market and brand.

For that purpose, the recent recast UCITS Directive (“UCITS IV”) introduces five key modifications in the UCITS regulatory landscape, three of which offer fund managers the opportunity to undertake a strategic reflection on their product range and management structure, whilst the other two are compulsory measures to enhance speed-to-market and investor protection.

Strategic opportunities

UCITS IV addresses the proliferation of UCITS of a sub-optimal size and the lack of organisational flexibility to achieve a global decrease of the cost for operating funds in the EU and provides fund promoters with a helpful toolbox.

• Merger of UCITS and Master-Feeder structure

  UCITS IV introduces a framework for amalgamating assets, be it through the cross-border merger of UCITS irrespective of their legal form, or by allowing master-feeder structures. However, a number of issues arise which need to be evaluated on a case-by-case basis. Moreover, the lack of harmonisation of tax flowing from these events fails to eliminate a major issue, most notably for fund mergers.

  Main challenges:

  • Definition of target set-up (fund range, local management company(ies), distribution, etc)
  • Taxation (investors’ level / portfolio’s level) and VAT issues
  • Migration of funds (marketing and distribution issues, accounting and tax reporting, contractual arrangements, risk management process, corporate governance, etc)
  
  

• Management Company Passport (MCP)

  Today, of the top 30 asset management groups in terms of cross-border distribution, 50 % have existing management companies in four jurisdictions or more. The UCITS IV management company passport will permit the remote establishment and cross border management of UCITS funds and the centralisation of their asset management, administration and risk management operations.

  Main challenges for cross-border promoters of UCITS:

  • Definition of target corporate set-up, country of location and delegation arrangements (delegation rules remaining at the discretion of each Member State)
  • Taxation (personal and corporate tax) and VAT issues
  • Migration of fund operations (staffing, contractual arrangements, risk management process, corporate governance, cooperation between the country of domicile of the UCITS and the management company, etc
  • Non-EU distribution issues
  • Management of non-UCITS funds and impacts of the AIFM Directive

Mandatory changes

UCITS IV will rationalise the notification process and replace the existing simplified prospectus by July 2012 at the latest.

• Notification process

  The new notification process will be a regulator-to-regulator process, the UCITS’ Home Member State regulator having only 10 working days to review a standardised (in form and content) notification file and to transmit it to the Host Member State, thereby triggering the immediate right to start marketing activities in that country.

  Main challenges:

  • Regulator facing by cross-border management companies
  • Adequate internal process to fully benefit from such a reduced time-to-market opportunity
  • Compliance of the marketing arrangements with local regulations (local marketing activities remaining subject to the supervision of the host regulators on an ex-post basis)
  
  

• Key Investor Document (“KID”)

  The KID will be a short document containing Key Investors Information, the content, form and presentation of which being fully harmonised so as to facilitate its understanding and direct comparisons between UCITS.

  Challenges:

  • Sourcing information to feed the KID and fund documentation management
  • Consistency between the various information sources (prospectus, KID, website, factsheets, etc.)
  • Review of distribution contracts

Increased Competition

The political appetite in Europe for harmonised regulations regarding the information of investors and regarding the conduct of business rules at point of sale is strong and obvious. On April 30, 2009, the European Commission published a communication on packaged retail investment products (PRIP) confirming the trend. Investors should be able to make informed investment decisions and effectively compare different product offerings, whilst remaining confident in any investment advice they receive. Rebuilding consumer confidence in financial markets is a priority.

In that context of increased competition fund operators will definitely need to work hard to manufacture distinctive and innovative products which nevertheless prove to be proportionate in terms of cost efficiency.

Future outlook

Another item on the regulatory agenda, which should impact these reflexions, is the future AIFM Directive which may, if passed, allow restricted passporting of non-UCITS funds and their management companies. Fund promoters with UCITS and non-UCITS products will need to closely monitor the evolution of this draft Directive even in the course of their UCITS IV evaluation and implementation.

Considering the number of key factors to take into consideration, fund promoters need to take the time to carefully analyse the different and complex options offered by UCITS IV before deciding on their next steps.

PwC solutions and services

With the help of our UCITS IV Leadership Team composed of highly qualified and experienced professionals in Luxembourg and our UCITS IV network throughout the Europe, PwC offers:

• Assistance in the form of ad hoc advice or analyses
• Organisation of training sessions and bespoke workshops
• Fund restructuring integrated advisory and tax services
• Fund redomiciliation and migration services (operating model definition, business, regulatory and tax analysis, project management, operational support, contributions in kind)
• Implementation of master-feeder structures (business, regulatory and tax analysis, project management, operational support, contributions in kind)
• Offshoring and outsourcing strategies (operating model definition, business, regulatory and tax analysis, project management, operational support)
• Global fund distribution solutions (fund and management company set-up assistance, support in definition of distribution strategy, support in fund registration, project management)
• Tax impact analysis and tax management (of both the management company and investors)