It is time to make plans, the clocks are ticking

UCITS, AIFMD, Private Placement rules in Europe are very topical subject at the moment. And many people find it quite a daunting task to try to understand what the options are, what the implications are and quite simply which path to follow in the mine field of ever changing regulations.

Bottom line is it is going to be extremely difficult to avoid all kind of regulation in Europe; this is if the fund intends to be distributed in Europe. The good news is that it will clarify the limbo in which many funds stand at the moment, and which distribution capabilities relay in pretty obscure and imprecise private placement rules. So give or take, in 2 to 3 years, every single fund in Europe will be regulated. And if it has found a way not to be, it will in any case have a very hard time being distributed; so very likely, AUM will suffer.

Some might think that there is quite some time before decisions have to be made.

It might be so. But the trend is for regulations to be tighter, not more accommodating. So waiting for new ones to come into force is a decision which is not free of consequences in itself. Take for example the case of UCITS regulations. We are now under the regime of UCITS III. Coming in the near future is UCITS IV; value July 1^st. From July first, any new UCITS fund will need to be structured and launched according to the UCITS IV rules; pre-existing funds will have 2 years grace period to comply. So just in case you had in mind to launch one, it would be advisable to speed up the process and focus on it now.

Regardless, it is advisable to take a view as to the kind of status you want your fund to have in the coming years and prepare for it. The points to consider are numerous and decisions have to be taken carefully but the bottom line is going to be distribution. Who are your investors, what are they allowed to invest in and what are the regulatory consequences/impacts on them?  And further than that, which type of products are they going to be willing to invest in? UCITS is a piece of regulation that has been put in place to allow for retail distribution of investment products across Europe. Nevertheless, research indicates that institutions are the largest buyers by far of such products and this phenomenon extends to Asia, due to the “brand” appeal of UCITS funds. So it might be the case that you should consider it regardless.

In a similar vein, consideration needs to be given to the impact if solvency 2 on Insurance Companies and rippling effects on Pensions Funds. Having the appropriate structure might avoid being allocated to the “wrong” Equity Investment bucket…

Any choice will have its constraints and it is advisable to start drawing plans sooner rather than later.

Points to consider range from service providers, using a platform or going “on your own”, legal structure, investments regulatory constraints and limits monitoring, distribution channels…

But the rewards should be there for those who get it right.

- 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.