The European Commission proposed on July 16th an important revision of the EU framework for investment funds, which provides consumers with access to professionally managed investments on affordable terms. The new provisions will increase the efficiency of the current legislative framework in a number of key areas.

The funds concerned by this revision, known as 'UCITS' (Undertakings for Collective Investment in Transferable Securities) accounted at the end of 2007 for over €6.4 trillion of assets in total which is equivalent to half of the Union's GDP and represents 11.5% of European household financial assets.

The proposed changes to the UCITS Directive will:

• Remove administrative barriers to the cross-border distribution of UCITS funds: Current burdensome notification procedures can take several months before completed. They entail unnecessary red-tape and administrative costs estimated to around €45 million. The new notification procedure will be reduced to a simple, electronic, regulator-to-regulator communication. The distribution of units of funds will start immediately after such communication.
• Create a framework for mergers between UCITS funds and allow the use of master-feeder structures: Fund mergers will be allowed, on both a domestic and a cross-border basis, and their authorisation procedure will be harmonised, as will the required level of information to be provided to investors. Subject to approval and the appropriate information of investors, a UCITS fund (feeder) will be allowed to fully invest its assets into another fund (master). It is estimated that these new management opportunities will allow UCITS to make up to €6 billion in savings and economies of scale. These could in turn be shared with investors in the form of lower investment costs.
• Replace the Simplified Prospectus by a new concept of Key Investor Information (KII): KII will be contained in a short document conveying key facts to retail investors in a clear and understandable manner so as to assist them in taking an informed investment decision.
• Improve cooperation mechanisms between national supervisors.

These improvements will help reinforcing the competitiveness of UCITS on global markets. Currently 40 % of UCITS originating in the EU are sold in third countries, mainly Asia, the Gulf region and Latin America. As the Internal Market and Services Commissioner, Charlie McCreevy, pointed out, “the expected benefits of this package to the EU industry are estimated to more than €6 billion. We expect these benefits to lead to lower costs for investors. During the last years, we have carefully identified the areas where improvement in existing provisions needed to be introduced.”

As regards the Management Company Passport (MCP) (the possibility for funds authorised in one Member State to be managed remotely by a management company established in another Member State), the most recent consultation process has revealed that there are a series of potential supervisory and investor protection concerns. These need to be tackled if the MCP is not to lessen the protection of retail investors or endanger the UCITS brand. The Commission has therefore decided to consult the Committee of European Securities Regulators (CESR) on these issues. Following that advice the Commission will come forward with an appropriate proposal in time to allow for its adoption during the current legislature".

As part of the Commission's Better Regulation Strategy and its firm commitment to simplify the regulatory environment, the new Directive will replace 10 existing directives with a single text. The proposal now passes to the European Parliament and Council for consideration.

UCITS (Undertakings for Collective Investment in Transferable Securities)

Investment funds are investment products created with the sole purpose of gathering assets from investors, and investing those assets in a portfolio of financial instruments such as stocks, bonds and other securities. In this way, small investors have access to a professionally managed and diversified basket of financial instruments at affordable costs. Investment funds are a long-term savings product widely used by European households. They account for 11.5% of European household financial assets.

UCITS (Undertakings for Collective Investment in Transferable Securities) are investment funds established and authorised in conformity with the requirements of Directive 85/611/EEC. Once authorised, a UCITS fund can be distributed to investors across the EU upon notification to the corresponding national authorities. The Directive has been key to the successful development of the European market for investment funds. Today, UCITS funds manage assets amounting to € 6400 billion.