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White Paper on the single market for investment funds
This Commission White Paper defines a package of targeted amendments to the current EU framework for investment funds (the "UCITS Directive"), with a view to simplifying the European legislative and operational environment while providing attractive and secure investment solutions to investors.
Commission White Paper of 15 November 2006 on enhancing the single market framework for investment funds [COM(2006) 686 final - Not published in the Official Journal].
The UCITS Directive is no longer able to support the European fund industry as it restructures to meet new competitive challenges and the changing needs of European investors.
Supporting a more efficient European fund industry
The Commission's White Paper proposes several ways of improving the current Directive:
- removing administrative barriers to cross-border marketing. The existing administrative procedures that must be satisfied before a fund can be marketed in another Member State - in particular, detailed ex ante verification of fund documentation by the host authority and the current two-month maximum waiting period - will be scaled back;
- facilitating cross-border fund mergers. The Commission will propose additions to the UCITS Directive to create the appropriate legal and regulatory conditions for the merger of funds coordinated on a Europe-wide basis;
- asset pooling. Amendments to diversification rules are envisaged with a view to enabling an expansive approach to entity pooling;
- the management company passport. Authorised management companies will be able to manage coordinated corporate and contractual funds in other Member States;
- strengthening supervisory cooperation. Given the greater legal and technical complexity involved, provisions relating to competent authorities and cooperation will have to be strengthened;
- efficiency improvements that do not require changes to the Directive. There are many steps that individual Member States can take to improve their domestic operating environment for coordinated investment funds, e.g. expediting initial fund approvals.
Making the single fund market work for the end-investor
If the end-investor is to see tangible improvements, the sector must be subject to strong competition across the single market. Two measures appear to be required for this:
- a simplified prospectus. This information instrument must be improved: it is, first and foremost, supposed to be a short and understandable statement of charges, risks and expected performance which is meaningful and easily understandable for the end-investor;
- distribution systems: putting investors' interests first. As fund distribution accounts for the biggest single component of costs in the investment fund industry, distribution systems must work efficiently. Investors should, in particular, be able to count on objective and professional intermediaries and distributors.
Non-harmonised funds distributed to retail investors
Non-harmonised funds distributed to retail investors, which are not covered by UCITS legislation (e.g. open-ended real estate funds), constitute an ever more important sector. The Commission will undertake a systematic analysis of the risk and performance of these funds and assess whether or not a framework enabling the establishment of a single market for non-harmonised funds distributed to retail investors is a realistic option and, if so, in what way.
The MiFID places responsibility on the distributing investment firm to ascertain, on a client-by-client basis, whether a particular investment is suitable or appropriate. The Commission will study the types of marketing and sales restrictions that should be repealed in favour of reliance on the investment firms exercising responsibility for the sale of products which are suited to the clients for which they are intended.
The Commission and CESR will perform a systematic inventory and analysis of national barriers to "private placement" of financial instruments with institutional investors and other eligible counterparties.
Since the UCITS Directive was adopted in 1985, the European investment fund market has increased significantly in size and the number of funds continues to grow. By the end of 2005, there were more than 29 000 UCITSs. In 2005 the total volume of assets managed by investment funds in Europe grew, representing 59% of EU GDP (EUR 5 000 billion).
Core elements of the Directive are no longer functioning effectively due to the significant changes of the last twenty years.
The Commission has drawn up this White Paper, which aims to simplify Directive 85/611/EEC (l24036a), on the basis of extensive consultation and debate since 2004 with consumers, industry practitioners and policymakers, and with due regard to the replies received to the Green Paper [COM(2005) 314 final] and to the three reports drawn up by ad hoc expert groups. The Commission intends to put forward the necessary amendments to the Directive in the autumn of 2007.
For more information, please visit the page on asset management.