European asset management firms will soon be able to market a greater variety of mutual funds throughout the European Union. While they currently can sell only equity and bond mutual funds across the EU, by the middle of 2003 they will also be able to sell money market funds, fund-of-funds, index tracker funds and funds that use derivatives.
In Europe, only products deemed Undertakings for Collective Investments in Transferable Securities (UCITS) have been granted an EU "passport" that allows them to be sold across country borders. Until now, only equity and bond mutual funds have been given such a status. All other funds can only be marketed and sold within the country in which they are domiciled.
After much debate, the European Parliament voted to pass a new UCITS directive to extend to these additional types of mutual funds. The Ministers of Economics and Finance subsequently adopted the new rule at the end of last year, and the Official Journal of the European Communities published the new amendment on Feb. 13. European countries have until Aug. 13, 2003, 18 months from that date, to implement it.
"This is quite important for a lot of European [asset management firms] because fund-of-funds and money market funds have become very popular here in the last few years," said Diane Mackay, a partner at European Fund Information Services, a London-based mutual fund research and consulting firm. Mackay, the founder and former managing director of Lipper Europe of London, acted as an expert witness to the Economic Committee of the European Parliament during its deliberations on the amendment.
Adopted in Stages
According to a recent report by Boston-based Cerulli Associates' London office, EU member states will all adopt the new amendment at varying paces, which will initially limit the effectiveness of the directive.
"The smart money is that Ireland and Luxembourg, the two major rivals as UCITS domiciles, will be the swiftest compared to other nations to adopt the new UCITS into national law," the Cerulli report said.
However, what might be even more important than the time it takes European nations to adopt the directive is the time it takes their regulatory authorities to actually act on it and approve the new products as UCITS, according to Mackay.
"Getting the regulators to authorize the new funds, especially if they are at all unfamiliar with their structures, can [be] quite slow," Mackay said.
That could thwart the whole purpose of the directive, according to Claude Kremer, a partner at Arendt & Medernach, a Luxembourg-based law firm that specializes in commercial finance and fund management practice.
"So far in Luxembourg, the view has not been finalized as to the best course of action to be taken," Kremer said. "I think we should move as quickly as possible, but even still, the distribution of the new products will not be guaranteed in all of the member states because some countries will take the view that until they authorize the products, they can't be sold there from other countries. So even if Luxembourg moves quickly, we won't be able to tell our clients that they can immediately sell the products in other countries."
According to Cerulli, one country that will likely be eager to adopt the amendment is Germany, where it has become known colloquially as "Super UCITS" because of the advantages it affords.
"[The amendment] is expected to lend further impetus to the German retail fund-of-funds market, a relatively new market segment created with the passage of legislation in 1998," according to the Cerulli report. By the end of 2001, German fund-of-funds held about $23 billion, roughly 9% of total locally domiciled fund assets.
The amendment is also likely to be well received in Spain, where only 191 foreign UCITS were registered at the end of 2001, according to the Comision Nacional del Mercado de Valores, the Spanish regulatory authority in Madrid. Assets in the foreign UCITS registered in Spain stand at only $6.3 billion, or 4% of the total Spanish mutual fund market, according to Spain's mutual fund trade association, the Asociacion de Instituciones de Inversion Colectiva in Madrid.
Mackay believes that the initial adoption of the amendment will be relatively swift in all of Europe's key markets. However, Cerulli anticipates that investors in the U.K. will not react positively to the new products that will be offered for the same reasons they have not invested significantly in existing UCITS.
The market there is already crowded with well-known local names and there is concern, although it's largely unwarranted, about relative tax treatment, regulatory supervision and the level of investor protection of outside funds, according to Cerulli.
Also, most independent financial advisers are hesitant to consider non-local funds because they are excluded from established performance tables, according to Cerulli. That is particularly significant because roughly two-thirds of mutual fund sales in the U.K. go through independent financial advisers, according to the Investment Management Association of London.
There is a second part of the amendment to the UCITS directive still under discussion, according to Mackay. It would allow asset management companies to provide certain services, directly or through a branch, in other member states without formally registering there.
That would be especially helpful for firms looking to manage pension funds in outside countries, Mackay said. However, there are still several unresolved questions, such as what constitutes an asset management company and what services those firms will be permitted to provide abroad, Kremer said.
For both parts of the amendment, it will be important for Luxembourg, as well as for all the EU members, to move quickly in the implementation process while maintaining somewhat of a moderate approach, Kremer said.
"If [member states are perceived as] too liberal with the new rules, other member states can blame [them] for authorizing inappropriate products," Kremer said. On the other hand, if they are "too restrictive, other member states [could] blame [them] for being counterproductive."