- Purpose: the UCITS regulation was introduced to passport funds that are intended to retail distribution. No surprises that it does not naturally fit any type of strategies

- Liquidity: UCITS funds do not have to offer daily liquidity. Weekly or bi-monthly are perfectly acceptable

- Risk reporting: UCITS funds have to make sure they comply with the portfolio and risk rules as defined by the directive. They need to produce and store documents that prove this daily compliance. It is also critical to have some procedure in place to make sure breaches are handled as regulation requires and eventually reported as the case may be.

- Liquidity: is not 100% guaranteed with UCITS; they can suspend redemption and “gate” if circumstances dictate

- Security: some UCITS funds have turned sour…. there is no such thing as a total guarantee.

Aware that I am even more Euro-sceptical than most,

it is really quite rare for me to suggest that an EU action might genuinely provide a benefit, either to the industry or to consumers. But so it is this time. However, as no silver lining comes without its cloud, we will get the good news quickly out of the way so that we can then focus on the inevitable drawbacks.

For really quite a long time, like ten years, the European Commission has been trying to introduce a ‘management company passport’ for UCITS. After a number of ham-fisted attempts, they may have finally pulled this off in UCITS IV. The purpose of the management company passport is to make it possible for a UCITS operator (NB we are not talking about the investment manager) to run a UCITS fund that is domiciled in another EEA country. However modest that may sound, it is quite a significant step and tackles head on the protectionism that is particularly noticeable in Dublin and Luxemburg. It is not difficult to see why this passport might be unpopular in countries that have developed financial services on an entirely export basis with no significant domestic sales. The regulators in those nations have little interest in investor protection and much in attracting the regulatory arbitragers and the business that clings to the coat-tails of investment funds, so well evidenced by the branches and subsidiaries established in those jurisdictions.

But for the UK it is a different story.

Few will be unaware that the Remuneration Code, originating from G20, codified by the European Commission and enacted by the FSA, is about to strike. The European directive – CRD3 – set the date at 1 January 2011 and all of us in Europe must scramble to comply with that unreasonable timeframe. Now that FSA has published its policy statement we know where we stand. Well, more or less.

Setting aside for the moment the big picture questions of whether the Code achieves its aim of risk limitation and the reduction of the probability of a further banking crisis, the industry needs to consider its position, as it is now revealed to us. Remembering that FSA has anything but a free hand, the Regulator’s use of the proportionality provisions to mitigate the impact on the fund management industry is most welcome. The greatest impositions in the directive have been disapplied to those who do not regularly commit their balance sheets to risk. They will not be compelled to apply deferral measures to bonus payments and they will not have to pay those bonuses substantially in shares. The sigh of relief is audible; a significant threat to the competitiveness of the industry is lifted, for the time being at least.

Time is of essence

The prize for the least well sign-posted rule change must surely go to the FSA’s work on the Stewardship Code. Indeed so obscure was the FSA’s publication of the new rule, that the probability must be that only a small minority of the firms affected will have complied by the now-passed deadline of 6^th December. Rule changes sneaked out through anonymous consultations and without any policy statement beg many questions, the most interesting of which is why is the FSA indifferent to mass non-compliance with this requirement?

But first the facts. The new rule (COBS 2.2.3R) requires all managers of institutional money to publish a statement setting out how and to what extent they comply with the Financial Reporting Council’s Stewardship Code. As the FSA announced just three weeks ago, this should have been done by 6^th December. If you did not know that, join the club.

Not a daunting task… yet a task

The good news – apart from the fact that the FSA obviously does not care – is that stuffing a one pager onto your website is not a labour that would have tested Hercules. The bad news is that this document, even if of no interest to FSA, may well become a hostage to fortune. The theory is that the information will inform the decisions of potential clients over who should manage their money. The reality may well be that these statements are surveyed and scrutinised by investigative journalists, government departments, company management and political agitators. Control of public companies will always be a hot potato and now the rod with which to beat the shareholders and their agents, the investment managers, is being crafted.

The temptation must be simply to construct an innocuous and disdainfully vague statement, adequate for public consumption even if insufficient to guide the potential clients for whom it is primarily intended. As a holding position this may work, but it seems unlikely to survive for long as the scrutineers begin to press for better particulars. Most importantly, though, the policy and the actions have got to be consistent. Anything less will emerge before long and prove indefensible.

Looks reasonable and easy, but…

The essential requirements of the Code look, at first glance, reasonable enough. Having a policy on stewardship is hardly inappropriate. Working with other investors, where permissible, seems eminently sensible if one wishes to magnify the impact of one’s vote. Liaising with company management and knowing how to escalate issues sounds useful. But when it comes to an obligation to tell the world how you have voted shares that belong not to you but to your clients, it is beginning to sound intrusive. And not just intrusive but actually creates a conflict of interest that was not there before. If fund managers go the whole way, they will be breaching client confidentiality and simultaneously opening themselves up to pressures to act in a way that may not be in the best interests of their client.

Public disclosure of voting should not be undertaken lightly. It will not be long before pressure groups use this information to cajole fund managers into casting votes which reflect the views of the pressure group but do not reflect the interests of the fund managers’ clients. With the experience of the tactics used to damage the legitimate business of Huntingdon Life Sciences, it is not difficult to see how publication of voting records could introduce significant conflicts of interest for fund managers. It is to be hoped that firms will make clear that they consider the voting of shares that belong to their clients to be a matter of client confidentiality and therefore interpret the Code, wherein much ambiguity lies, as requiring nothing more than statistical summaries.

With time very pressing, firms will need to draft, adopt and publish quickly. OWL will be happy to advise on process and articulation.