DEVELOPMENTS IN EUROPEAN FINANCIAL SERVICES LAW & REGULATION

As many readers will know, the European Union is as keen as others to put in place a proper regulatory system in the area of financial services. In the last week of March it agreed to create two new supervisory bodies. More on this in a later issue. A comment later in this piece will make reference to the new climate in the markets after the advent of the current ‘crisis’. However, the attention of fund managers and many investors is bound to be on the fate of UCITS IV. 

 

In this piece, I call attention to the fact that the EU has in fact been tracking developments in the financial services industry and been working (some might say, struggling) to keep abreast of developments with a view to regulating them. One such area is that of collective investment schemes or, more technically, “undertakings for collective investment in transferable securities” – hence “UCITS”. Indeed, in January the European Parliament finally gave the nod to UCITS IV, the fourth major European Community directive in a long train of Directives (there have been nine) that apply to the marketing and regulation of ucits and go back to the original UCITS Directive adopted in 1985. It is this Directive that has been amended and supplemented by all the later legislation. UCITS III, was only adopted as recently as 2002 with a transitional period ending in February 2007. It had broadened the range of investments that could be covered by the passport and introduced the “Management Company Passport’ and the Simplified Prospectus. It clearly did not go far enough for the industry, or for investors. The Simplified Passport had been deemed by most players not to have worked. Some called it a ‘disaster’.  

 

UCITS IV will amend and codify the previous Directives, making life a bit easier for everybody. It will become the main law on ucits at European level, with further implementing measures designed to bring its main rules into effect. At the moment, since we have had the agreement of the European Parliament and of the Committee of Permanent Representatives (which presages formal agreement by Council), the Commission has sought the technical advice of the Committee of European Securities Regulators (“CESR”, pronounced in the trade in the same way as in Julius Caesar) on the preparation of the required implementing measures, in order that the new systems can be operative with all speed after the final formal adoption of the recast Directive by Council in April or May of this year. 

 

For some time, industry bodies and players had been calling for the revision of UCITS III, in order to make it more efficient for fund managers to do business cross-border and to allow funds to compete against substitute products. The Commission saw the need for this but also for better regulation [see the Commission’s website http://ec.europa.eu/internal_market/securities/ucits/index_en.htm ]. As the Commission saw it, there was the need  

 

Therefore, the aims were to build scale and liquidity, to facilitate mergers, and to facilitate the management by a manager in one state of funds in another state, relying on improved proper disclosure and better supervision to protect the investor. A consultation process was launched in March of 2007. These led to a Commission proposal to recast the original UCITS Directive, without radically altering basic principles. Main features of the Recast Directive are: 

 

The Commission would be empowered to take implementing measures. This it will do under the so-called Lamfalussy Procedure (or Process), through which the Commission can issue regulations further defining terms and developing the basic legislation, in this case the Directive. This allows law and regulation to keep up with further developments in something like real time. 

 

When the Recast UCITS Directive is formally adopted, this sector of the industry will be presented with real new opportunities. Fund managers should be gearing up to them. Already, UCITS represent some 75% of the investment fund market with assets under management amounting to around 6 trillion euro. Now the pooling and marketing of funds is set to become freer and easier, and therefore cheaper also for the investor. 

 

There are no plans to shelve the recast Directive, UCITS IV, despite, in the light of the current crisis of markets and confidence, the emergence of some doubts at the level of national regulatory authorities. Has mutual faith really been lost in the ability of “home states” to adequately supervise their banks and fund managers, and so ucits, in the eyes of fellow regulators? While some advise caution, a counter argument is that UCITS IV is in fact needed more than ever, marrying as it does the twin principles of market efficiency and heightened investor information and protection. I shall be posting comments in due course as to how this debate goes, but in the meantime I am sure that fund managers will do well to seriously consider their options, in prime place that of taking advantage of the new opportunities as and when, indeed immediately, they arise. Some may well materialise well before 2011, when the new Directive is expected to have been implemented by all Member States. That date is not very far away. 

 

PETER G. XUEREB Dip.NP, LL.D, LL.M, Ph.D. Professor Peter G. Xuereb is a consultant at MamoTCV, and teaches and writes in the area of financial services law, company law and other fields of European law.