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Brussels, 31 May 2000

Financial services: amended Commission proposals to improve and extend rules on collective investment undertakings (UCITS)

The European Commission has approved two amended proposals designed to update legislation on harmonised investment funds (UCITS). The aim is to broaden the scope of the allowable investments and update how they can be managed to take account of the rapidly changing financial environment. Collective investment undertakings (such as unit trusts and SICAVs), where investors' money is placed by a qualified fund manager in a diverse range of assets according to defined risk criteria, enable private investors with limited resources to invest in financial markets. They constitute a major market sector, with assets of more than €3 trillion at the end of 1999. The proposals form part of the Financial Services Action Plan which aims to build a truly harmonised single European financial market by 2005 (see IP/00/556) and was strongly endorsed at the Lisbon European Council The Commission's amended proposals take into account the European Parliament's February 2000 Opinion. The first proposal removes barriers to cross-border marketing of units of collective investment by widening assets in which they can invest. The second proposal gives management companies a "European passport" to operate throughout the Union and widens the activities which they are allowed to undertake. It also introduces the concept of a simplified prospectus which will strengthen investor protection by providing for more accessible and comprehensive information.

Frits Bolkestein, the Internal Market Commissioner said: "There is an explosion of interest in Europe's stock markets and collective investment vehicles are an extremely popular way of investing in a range of different markets and products. These proposals will tackle the remaining obstacles preventing the collective investment market from being fully developed across the Union while ensuring a high guarantee of investor protection. I urge the Institutions to find broad agreement as soon as possible."

Directive 85/611/EEC on Undertakings for Collective Investment in Transferable Securities (UCITS) established a "single licence" regime for collective investments undertakings (i.e. an authorisation for products to be sold throughout the internal market on the basis of approval in one Member State). As a result, collective investment undertakings are now established in all Member States and represent the equivalent of more than 35 % of EU GDP.

The licence regime, however, applied only to investment in transferable securities (essentially shares and bonds). The Commission is therefore proposing to maintain the basic principles of the 1985 UCITS Directive but to extend its scope to bring it into line with new practices to create a truly internal market for collective investment vehicles.

The proposed legislative framework would ensure a high level of protection for individual investors by setting standards for both the investment products and the managers undertaking the investment. As regards the products, the proposed rules would ensure that funds raised from the public are invested in suitably qualified assets and that basic risk-spreading requirements are fully respected. As for the portfolio managers, the rules would impose strict market access and operating conditions and controls. This dual approach would encourage a climate of investor confidence in which the markets can develop on an EU-wide basis.

The first proposal focuses essentially on the "product" (the investment fund). It would extend the range of financial assets in which collective investment undertakings benefiting form the single licence may invest. In future, UCITS would be permitted to invest not only in listed shares and bonds, but also in bank deposits (cash funds), money market instruments, financial derivatives (i.e., standardised option and futures contracts dealt on regulated exchanges and over-the-counter derivatives) and in other units of other collective investment undertakings (so-called "fund of funds"). The proposal's rules would also recognise investment management techniques widely and successfully employed such as "tracking" an index (i.e., investing in securities of different issuers according to the same weighting as is used in the basket on which a particular official index is based) or securities lending.

The second proposal focuses on the financial intermediary which may manage UCITS (the management company). It proposes co-ordinated rules on market access, operating conditions and prudential safeguards to be respected by management companies. This co-ordination would allow a "European passport" regime equivalent to that already enjoyed by all other financial operators (banks, investment firms, insurance companies), whereby financial intermediaries authorised to offer services in one Member State may offer their services through the Internal Market. It would also increase investor protection by ensuring that such intermediaries were sound, reliable, and duly supervised professional institutions.

The second proposal also overcomes the existing segmentation between individual and collective portfolio management. In future, management companies could be authorised to carry out both the management of collective investment undertakings and portfolios on behalf of private and institutional investors, including pension funds.

Directive 85/611 on Undertakings for Collective Investment in Transferable Securities is one of the oldest Directives in the field of financial markets. Proposals for amendments to it were first made in July 1998 (see IP/98/673). But the European Parliament was unable to finish its first reading before the June 1999 elections of and so the newly-elected Parliament had to re-start the process. The amended version of the Commission's proposals incorporate a significant number of points raised by the European Parliament. For example the Commission's initial proposal excluded investment in over-the-counter instruments these have now been included, with appropriate safeguards.

The amended proposals will now be discussed by Council of Ministers and go back to the European Parliament for a second reading. The approval of these Directives is one of the priority actions of the Financial Services Action Plan, the delivery of which was singled out by the Lisbon Summit as crucial for the establishment of an internal market in financial services by 2005.

The proposals will be available on the Commission's Europa website:

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