EFAMA COMMENTS. on the EU COMMISSION GREEN PAPER ON THE ENHANCEMENT OF THE EU FRAMEWORK FOR INVESTMENT FUNDS (SEC(2005) 947) 15 November 2005

Transcription

1 EFAMA COMMENTS on the EU COMMISSION GREEN PAPER ON THE ENHANCEMENT OF THE EU FRAMEWORK FOR INVESTMENT FUNDS (SEC(2005) 947) 15 November 2005 EFAMA 1 is grateful for the possibility to comment on the European Commission s Green Paper on investment funds 2 and the annexed Background Paper, issued as a staff working paper. We congratulate the Commission for a very good and broad report on the state of the industry, representing an excellent execution of the review requested by the European Parliament during the second reading of the UCITS 3 proposals. The two papers are a very good reflection of the concerns expressed in the report of April 2004 by the Asset Management Group, which was set up by the Commission to evaluate the success of the Financial Services Action Plan (FSAP) and they represent a good starting point for a much needed and thorough debate on principles regarding the regulatory framework for our industry. The papers are precisely aimed at launching the public discussion. The Commission will publish in early 2006 orientations for action to enhance the UCITS framework, and we understand that this White Paper will reflect the comments made during the current public consultation. In this respect the consultation on the Green Paper offers a unique window of opportunity for the industry to participate in the creation of a better regulatory framework of our industry and we would like to underline EFAMA s commitment to this undertaking. 1 2 EFAMA is the representative association for the European investment management industry. Formerly known as FEFSI, EFAMA represents through its member associations and corporate members about EUR12 trillion in assets under management of which EUR5.9 trillion managed by around investment funds. For more information, please visit Green Paper on the enhancement of the EU framework for investment funds [COM (2005) 314 of 12 July 2005]

2 2 EXECUTIVE SUMMARY GENERAL COMMENTS GENERAL REGULATORY PRINCIPLES PRIORITY ACTIONS MAKING BETTER USE OF THE CURRENT FRAMEWORK THE PASSPORT FOR THE MANAGEMENT COMPANY DISTRIBUTION, SALES AND PROMOTION OF FUNDS LONG-TERM CHALLENGES ENHANCING THE COST-EFFICIENCY OF THE INDUSTRY MAINTAINING HIGH LEVELS OF INVESTOR PROTECTION OUTSOURCING, OPERATIONAL RISK AND CAPITAL REQUIREMENTS COMPETITION FROM SUBSTITUTE PRODUCTS THE EUROPEAN ALTERNATIVE INVESTMENT MARKET MODERNISATION OF THE UCITS DIRECTIVE PENSIONS TAXATION ISSUES OTHER ISSUES CONCLUSION ANNEXE... I

3 3 EXECUTIVE SUMMARY EFAMA welcomes the publication of the Green Paper and congratulates the European Commission for a high quality and wide ranging report on the state of the investment fund industry. We appreciate the possibility to contribute our views regarding the future regulatory environment for our industry, as our industry is called to play a fundamental role in securing the savings of European citizens and providing for their future retirement benefits. Increasing efficiency is key to delivering higher returns to investors in order to cover the financial needs of an ageing society. We share the Commission s analysis of the sector s structural inefficiencies and present in our reply proposals to eliminate them. If implemented, they would help the industry reach its full potential, furthering the single market while maintaining the current high levels of investor protection. It is important to note, however, that consumers could reap significant benefits not only thanks to operational cost cutting, but also due to higher transparency of financial products, which would in turn lead to increased competition and lower costs overall. In particular, EFAMA has identified several issues that are crucial to the competitiveness of the investment fund industry and could significantly reduce costs: Simplification of registration procedures; Definition of a simple, harmonised format for the Simplified Prospectus; Fund mergers and pooling (master feeder funds and virtual pooling); Passport for the management company. In the longer term, solutions need to be found to three other problems: Level playing field with competing products such as insurance and structured products, particularly at distribution level; Reshaping of the regulatory architecture to make the UCITS Directive Lamfalussy-conform Modification of the product passport to eliminate notification entirely. EFAMA also supports the passport for the depositary and has taken a leading role in fund processing standardisation group. EFAMA also wishes to point out three issues vital to the healthy development of the investment fund industry that are not included (or only marginally discussed) in the papers: the creation a real single market in occupational pensions where fund managers and investment funds will need to play an important role; taxation, acting as a significant barrier to the single market; the global nature of the investment fund industry and the global distribution of UCITS. While some of the issues can be solved within the existing regulatory framework, others will necessitate legislative changes and cannot therefore be realized in the short term. Given the urgency for our industry, we strongly encourage the Commission to go beyond the assessment stage quickly and start implementing the initiatives outlined in this paper. We are presenting in

4 4 our reply immediate actions to be taken, as well as intermediate steps and a long-term vision for the modernisation of the overall regulatory architecture for asset management regarding savings/investment products. This latter concept follows the business logic and the value chain and is Lamfalussy-conform.

5 5 1. GENERAL COMMENTS We very much agree with the Commission s analysis and in particular - we welcome the fact that the Commission, in examining how well the current regulatory framework meets the needs of the industry, recognises that: the 1985 UCITS Directive and its 2001 updates were important steps towards achieving a single market for investment funds and a high level of investor protection; thanks to the UCITS Directive, investment funds are emerging as the main market-based mechanism for asset-gathering and long-term savings management in Europe. Worldwide, the European regulatory framework for investment funds has become a model for efficient regulation; notwithstanding these achievements, the industry cannot exploit its potential to the full. Furthermore, we agree with the Commission that much can be done to facilitate the successful development of the fund industry in Europe by building on existing legislation, but we must also underline that a number of truly important issues to our industry does require modifying current legislation and we urge the Commission to start considering this immediately. Indeed, whilst broadly agreeing with the Commission s proposed priority actions under the header Making existing legislation deliver, further industry priorities are to be found in the last part of the Green Paper titled Beyond the existing legislative framework Long-term challenges and will be at the centre of our comments. Let us also underline that three issues vital to the healthy development of our industry are not included in the Papers, or only marginally touched upon: the necessity to create a real single market for occupational pensions; the need to work on taxation issues, which are often significant barriers to the single market for financial services; the fact that we are not only acting in an environment governed by EU directives and supervised by European authorities, but globally. We will come back on the two first points, later under sections 6 and 7. The last point is recognised by the Commission ( Worldwide, the European regulatory framework for investment funds has become a model for efficient regulation ), but without drawing any consequences. Indeed, the global nature of UCITS should be taken into account by the Commission on two levels: in regulating, Commission and CESR (on Level 3) should look beyond the EU borders and ensure that excessively burdensome regulation does not reduce the competitiveness of the European investment funds industry;

6 6 regarding distribution, the Commission should always be aware that a significant number of UCITS is distributed in third countries, in particular in Asia and South America. We would therefore like to encourage the Commission to ensure that non-european regulators are kept informed on a regular basis about UCITS and new regulation (if possible already during preparation), thus enhancing the UCITS brand and image as well as facilitating the development of Europe as the centre for globally distributed funds. In general, our comments will address the issues and the 19 related questions posed by the Commission. The following four issues are crucial to pave the way for a regulatory framework enabling the European investment fund industry to remain competitive, and to exploit its potential to the full: by simplifying registration procedures; by making the Simplified Prospectus what it should be: a short notice allowing investors to compare product features across borders through a harmonised document informing investors in an easily understandable language about the key features of a fund, thus enabling them to make well considered investment decisions, as well as a marketing document simplifying cross-border distribution; by enhancing the efficiency of the industry, in particular by creating possibilities for crossborder mergers and pooling; in addition, a clear majority of members is of the opinion that creating a real passport for the management company is also necessary to enhance the efficiency of the industry. In the longer term, three other issues are of high importance in the view of nearly all EFAMA members: creating a level playing field in the choice among competing investment products both at distribution and at production/business conduct level, in order to ensure consistent investor protection; reshaping the product passport to eliminate notification entirely; reshaping the regulatory architecture and making the UCITS Directive Lamfalussy conform to make it more flexible, facilitating innovation and helping to realise the above-mentioned issues.

7 7 Notwithstanding the long-term perspective of some of these issues and their complexity, the Commission should not postpone the discussion and start working on them now. However, any such work should be dealt with separately and not distract from what must be done immediately. We will come back to each of these issues following the structure of the Commission s Green Paper. 2. GENERAL REGULATORY PRINCIPLES Before discussing specific issues we would like to repeat four regulatory principles which underpin EFAMA s approach and which we believe should be at the heart of all regulatory initiatives: How much regulation is needed? As little as possible without damaging the single market, as much as necessary to make the single market work; Both legislators and regulators should bear in mind a threefold benchmark for any regulation: does it advance the single market? is it meaningful in the interest of investor protection? is the cost-benefit relationship acceptable? Level 2 regulation should not be too detailed and rather be completed by guidance for consistent interpretation and implementation by regulators; Regulators should leave room for industry self-regulation and active involvement of the industry in the standard setting process. However, more important than new regulation is creating more trust between regulators to reach a common interpretation and/or to accept each other s decisions within the given framework, which in turn will lead to the necessary regulatory convergence while avoiding cumulation of national rules and regulatory arbitrage. This is, indeed, conditio sine qua non for a successful solution of any problem raised in this paper. 3. PRIORITY ACTIONS While monitoring the consistent and efficient implementation of existing rules, the Commission intends to: publish in the autumn of 2005 an interim report on how national authorities have implemented the CESR guidelines on transitional provisions regarding UCITS III;

8 8 encourage CESR to adopt by the autumn of 2006 guidelines on how to simplify notification procedures; publish in the autumn of 2005 an assessment of how Member States have implemented the Commission s two Recommendations of April 2004 on the use of derivatives and the simplified prospectus; 3 adopt in the second half of 2006 implementing legislation on eligible assets of UCITS. This issue is currently dealt with by CESR, which will deliver its advice to the Commission in January While fully supporting these four priority actions, we would like to make the following comments: Firstly, notification procedures have degenerated during the past 15 years into extremely burdensome multiple registration procedures, and they must be brought back to what they should be, i.e. notification. However, simplification and harmonisation of notification procedures can only be a first measure. Ultimately, a passport must allow for border-crossing free of notification. This, however, would require new regulation making it a longer term issue (see later). In our EFAMA/IMA report of April 2005 on a harmonised and simplified UCITS registration, we show the way for such a procedure. 4 Secondly, assessments and reports on how CESR s guidelines on transitional issues and the Commission s Recommendations on derivatives and the simplified prospectus are implemented at national level are an important step, and FEFSI/EFAMA has always supported the UCITS Contact Committee, the Commission and CESR in finding appropriate solutions regarding these topics. However, assessments and reports are not enough. If necessary, action must follow to provide for consistent implementation across Europe. Any absence of consistency in implementation unavoidably leads to new cross-border barriers. In this context we would like to point out that the Commission should not wait until bad implementation of EU legislation has happened, but should pro-actively be involved during the implementation process, providing precise advice where necessary. Regarding the Simplified Prospectus, and without anticipating the Commission s assessment, we must state today that it has fallen short of achieving its goal to create a fully harmonised marketing tool to the benefit of the fund industry and European household investors. Worse still, we now have an additional layer of superfluous, if not confusing information: (i) in many cases the Simplified Prospectus contains too much information, lacks focus and (ii) prospectuses from different countries are no longer comparable. Finally, instead of becoming cheaper and easier, cross-border distribution has become more expensive and more complex. This is a very good example of how a good piece of legislation can turn to bad as a result of institutionalised gold-plating. 3 4 Recommendations 2004/383/EC on the use of financial derivatives and 2004/384/EC on the simplified prospectus. A first report on the implementation of these Directives was published by CESR on 7 July 2005 See:

9 9 In assessing the implementation of its Recommendation, the Commission should bear in mind that the simplified prospectus was aimed at: making cross-border distribution easier by using one single harmonised document on the basis of which units of UCITS may be purchased while the host country s competent authority may no longer ask for additional information; providing European household investors with simple, reliable and comparable information he/she should know before investing in a fund. This would involve reconsidering the approach taken by the UCITS Contact Committee which resulted in the above-mentioned Recommendation, and we suggest returning to the way shown by the FEFSI model. 5 EFAMA itself will finalize the update of its model prospectus in the near future and thus it is hoped contribute to more clarity. Thirdly, clarification of what can be defined as eligible investments for UCITS is of the utmost importance to our industry as it is an essential element of the UCITS definition. Our opinion was set out in a position paper in reply to CESR s Consultation. While at this stage we do not wish to discuss the subject further as we are waiting for the result of the second round of consultation at CESR level, we would like to draw the Commission s attention to the fact that it might be very difficult to find entirely satisfactory solutions under the current framework of the UCITS Directive. The UCITS III approach based on product definition with strict investment limitations is too inflexible for today's rapidly changing financial markets and as CESR s possibilities for adaptation are very limited under the current framework, the Commission may need to consider whether other regulatory approaches (which would require new regulation) might be more appropriate. Finally, the announced MiFID Level 2 regulation 6 should not be forgotten. Without modification to the UCITS Directive, the Commission should use the section on distribution and suitable advice to bring the single market for investment funds one step closer, thereby largely solving the two key problems, that of quality distribution and good advice and that of the creation of a level playing field between funds and other retail saving products at the point of sale. The first has been on the top of the agenda of the Asset Management Expert Group and the second an important part of the EFAMA agenda. We suppose that these comments also sufficiently answer the two first questions included in the Green Paper: Q1 : Will the above initiatives bring sufficient legal certainty to the implementation of the Directive? Q2 : Are there additional concerns relating to day-to-day implementation of the Directive which need to be tackled as a priority? 5 6 See: Directive 2004/39/EC of 21 April 2004 (OJ L 145 of , p.1) on Markets in Financial Instruments

10 10 Summarising, the realisation of the initiatives proposed under this chapter would bring the industry much closer to a single market for investment funds and they should therefore have top priority and not be delayed any further. However, we would like to reiterate that the above initiatives per se may not bring sufficient legal certainty to the implementation of the Directive. What is needed is a commitment of the Commission to action if the implementation of CESR s guidance on transitional issues and of the two Commission Recommendations is not consistent across Europe. 4. MAKING BETTER USE OF THE CURRENT FRAMEWORK This section deals with two very important issues, i.e. that of the management company passport and the question of distribution and advice. THE PASSPORT FOR THE MANAGEMENT COMPANY From the industry s point of view, a real management company passport would mean the ability for a management company to establish and manage a UCITS constituted in another Member State - regardless of its legal structure by means of a branch or under the freedom to provide services. Even if the current difficulties encountered in UCITS cross-border registration are solved, there will still be reasons to set up local funds (local investor preferences, type of client, tax regulation). This is why the real management company passport is a high priority for most EFAMA members. To overcome the absence of a real passport, delegation arrangements are currently used, but certain functions (fund administration) cannot be delegated across borders. The multiplication of management companies entails significant costs and increases operational risk by adding complexity to the chain of command. A true management company passport is therefore preferable, reducing costs and operational risk. Without being able at this stage to estimate these economies of scale exactly, it is clear that a number of significant cost factors would be eliminated or reduced: capital requirements for several companies (for each establishment: up to EUR 10 million depending on assets under management, or one quarter of the management company s preceding year s fixed overhead), personnel costs, audit & legal fees, office rental, costs for operational risk management, systems, etc. We have a couple of real-life examples of management costs that could be eliminated entirely by the passport: Costs of appointing two "dirigeants" or "conducting officers" to a self-managed SICAV (AUM EUR 25 billion) in a specific EU Member State: around EUR 500,000 per annum,

11 11 mainly salary and administrative costs. This is not a fully-loaded cost and does not include costs for premises, accounting services, etc. Fully-loaded cost of a Management Company (including administrative and transfer agent costs) in a EU jurisdiction: approximately EUR 1 million per year. Today, such a real passport is theoretically already possible in two Member States: Italy and the United Kingdom. In the UK, HM Treasury and the FSA accepted there was a Management Company passport for UCITS Management Companies carrying out collective investment scheme management services. Changes were made to both legislation and FSA rules as a result of implementing the Management Directive. 7 In Italy, the Consolidated Finance Bill 8 has been modified in 2003 to grant SICAVs the right to designate as management companies harmonized management companies 9 authorised in other EU Member States. Although there are no practical examples of such arrangements yet, it seems to be a good example for a future passporting mechanism. Although in Italy the model is limited to corporate funds, the same concept should be envisaged for contractual funds. Following the Italian model, the fund would remain under the supervision of the regulator of the Member State where the fund is established, while the authorisation and supervision of the harmonized management company is left to the supervisor of the Member State where the management company is registered. The supervisor of the Member State where the fund is located supervises the compliance with fund rules by the management company and could have the right of inspection and review of fund documentation, based on national regulation. As a result, the management company would be subject to the supervision of two regulators, one concerned with the fund (= the product), and one concerned with the fund manager. As there is a clear delineation of the roles and the responsibilities between the respective supervisors in this model, most EFAMA members are of the opinion that the splitting of responsibility would not give rise to additional operational risk or supervisory concerns. However, it must be underlined that it can only work if supervisors have effective exchange of information arrangements in place to ensure that risks within the management company and its fund are dealt with on a consistent and proportionate basis. As regards such split supervision concerns, CESR has presented possible tools for supervisory convergence and enforcement coordination in the Himalaya Report of October In particular, the report suggests as solutions cooperative arrangements (among them the delegation of supervisory powers and tasks between members where legally possible) and the See explanation in the joint HM Treasury/FSA policy statement The UCITS Management Directive. Implementing the UCITS Amending Directive, (2001/107/EC), August 2003, response to paragraphs 3.19 and See: Legislative Decree 58/98 of 24 February 1998 Harmonized management company is a company having its registered office and head office in an EU country other than Italy authorised under the UCITS Directive to provide the service of collective portfolio management (as per Legislative Decree 58/98 and following amendments) Preliminary Progress Report Which supervisory tools for the EU securities markets? An analytical paper by CESR, CESR f of 25 October 2004

12 12 elaboration of a standard MOU for the supervision of trans-european market participants. This MOU describes the cooperation obligations and the appropriate governance of the Home/Host(s) relationships, and has already been implemented in the supervision of Euronext. While any solution clearly would have to be adapted to the fund management industry, EFAMA believes that CESR should be encouraged by the industry and the Commission to find a workable solution for trans-european business models. While the supervisory duties for funds would entail more mobility across the EU, the reduction in management company structures would decrease supervisors workloads. Such necessary closer cooperation among regulators entailed by the management company passport might also contribute to a better functioning of the true network of regulators mentioned by CESR and thus benefit the single market for investment funds. As a result, an effective management company passport would provide benefits for all three: investors, supervisors and management companies. We hope that the above comments answer sufficiently the two questions raised by the Commission in this context: Q3 : Would an effective management company passport deliver significant additional economic advantages as opposed to delegation arrangements? Please indicate sources and likely scale of expected benefit. Q4 : Would the splitting of responsibility for the supervision of the management company and the fund across jurisdictions give rise to additional operational risks or supervisory concerns? Please describe sources of problem and steps that would have to be taken to manage such risks effectively. Finally, we would like to underline that we do not see any reason to have a true passport for institutions for occupational retirement provision but not for a fund management company. DISTRIBUTION, SALES AND PROMOTION OF FUNDS For the Commission s Asset Management Experts Group quality distribution and good advice was one of the key issues and a significant factor in the asset management value chain. EFAMA congratulates the Commission for taking this issue on board. In this context, the Green Paper and the Background Paper raise a number of issues, which are also vitally important items on EFAMA s agenda. Our comments relate to the Commission s concerns regarding distribution, in particular crossborder distribution, an issue which is dealt with in two different sections of the Background Paper: Regulation of sales process and New distribution pattern.

13 13 Regulatory environment Fund distribution is mainly governed by two directives: the UCITS Directive and MiFID. The UCITS Directive regulates the conditions under which UCITS can be marketed to the public, including notification to the host country authorities and the information provided to the public by the fund management company, in particular the simplified prospectus. MiFID regulates the relationship between the distributor/advisor and the final investor, in particular regarding advice. Under this approach, MiFID will probably solve one of the main problems raised in the report of the Commission s Asset Management Experts Group, i.e. the provision of quality distribution and good advice. However, this will depend on how these MiFID Level 2 measures are drafted by the Commission. Neither the UCITS Directive nor MiFID define the relationship between the management company and the distributor. As this relationship is an important issue regarding investor protection, the gap should be filled and the most adequate way to do so would be by establishing industry best practices. The EFAMA Board of Directors just agreed on such a Code of Conduct, including a set of rules on policies as to selection, use and monitoring of distributors. EFAMA is now ready to start discussion with the European Commission and CESR on these rules and how to implement them. This dual regulatory framework also has a significant impact on investor protection, since under the current UCITS Directive investor protection is achieved through product harmonisation and disclosure, whereas under MiFID investor protection regarding distribution is to be achieved through distribution regulation, and in particular through suitable advice. The Commission will have to ensure that both perspectives are consistent with each other, but also be aware that trying to achieve investor protection on the production side mainly through product regulation is restrictive and inhibits innovation. Furthermore, it must be noted that the complexity of the regulatory environment regarding public distribution of investment funds was significantly increased by two other regulatory initiatives by the Commission: the e-commerce and Distance Marketing Directives. 11 Whilst we welcome the precise description of problems linked with those two directives 12, we must state that the only conclusions drawn yet, a Commission Communication on the e- Commerce Directive 13 and the 2003 Guidance Note regarding the application of certain rules laid down in the e-commerce Directive, did not improve the situation and a solution is still outstanding Directives 2000/31/EC of 8 June 2000 (e-commerce Directive) and 2002/65/EC (Distance Marketing Directive Distribution of non-harmonised products via internet even if their distribution is restricted or even prohibited in the Host Member State COM(2001) 66

14 14 Transparency, comparability and disclosure to investors As already pointed out above, quality distribution and good advice are key issues for the investment funds industry not only in Europe, but worldwide. However it must be underlined that speaking in this context only about investment funds does not reach far enough and does not take into account the environment in which fund distribution takes place. In fact regarding distribution, investment funds are competing with an increasing number of other savings/investment products, which often can operate under less onerous conditions with respect to taxation, investment regulation, supervision and disclosure. The product range is very broad, covering regulated products from life insurance and pension products to far less regulated and supervised products like certificates, securitized derivatives and structured notes. Some of them are so similar in content and purpose to investment funds that it is often difficult for the normal retail investor to distinguish them from a UCITS. However, they often lack transparency and do not provide for an appropriate level of investor protection, although they might seem more attractive in terms of price (for more details, see later under Competition from substitute products ). In any case, in the context of the discussion about a level playing field at the point of sale, this issue is one of the top priorities for the European investment fund industry. Already when responding to the various CESR consultations on MiFID Level 2 measures, we noted that this issue was of greatest importance to us and, while accepting that higher transparency of fees of financial products, in particular investment funds, was at the top of regulators agenda, EFAMA opposed any further regulation regarding product transparency (as compared to the information that fund managers must already today provide under the UCITS Directive and in particular in the simplified prospectus). On the other hand we very much agreed with CESR s approach to leave the transparency of fees to the distributors. They, in turn, must have a policy with respect to retrocessions (which must not have any impact on the advice given) 14 and must explain this policy to their clients. Finally, we would like to point out that uncoordinated national initiatives such as the recent action by the Swiss supervisory authority are one of the hurdles to a single market, in particular if they only target investment funds and thus increase the inequality in treatment among investment products. We feel that the following three questions are answered hereby: Q5 : Will greater transparency, comparability and attention to investor needs in fund distribution materially enhance the functioning of European investment fund markets and the level of investor protection? Should this be a priority? 14 FEFSI comments of 17 September 2004 on CESR s Advice on possible implementing measures of MiFID. See:

15 15 Q6 : Will clarification of conduct of business rules applying to firms which (distribute) retail funds to investors contribute significantly to this objective? Should other steps (enhanced disclosure) be considered? Q7 : Are there particular fund-specific issues that are not covered by ongoing work on detailed implementation of MiFID conduct of business rules? Guaranteed/protected funds At the end of 2002 FEFSI wrote to the Commission 15 about this issue and concluded that the controversy around the admissibility of guaranteed/capital protected funds under the UCITS Directive is largely due to the varying guises under which these types of secured products appear across the EU. Consequently, appropriate information to the investors is a crucial aspect. The investor needs clearly to understand the nature of the fund, i.e. is there a simple capital protection provided by the fund s investment techniques or is there a real legal guarantee, and in the latter case who provides the guarantee and to whom is this commitment extended 16. Consequently, consistency in the labelling of these types of funds would be required and EFAMA would strongly support the provision that only those funds with a formal guarantee should be entitled to use that feature in their branding and communications. The investment policy as well as the expected return and the conditions to achieve such return should be clearly described to the investor, and any hurdles to exit must be addressed through adequate disclosure towards the investor. Regarding capital adequacy rules relating to guaranteed funds, we are of the opinion that management companies that are underwriting guarantees expose themselves to a specific form of market risk and contingent liability that should be managed in a specific manner. 5. LONG-TERM CHALLENGES As already stated above, the issues raised in this last section of the Green Paper are those which go beyond the existing regulatory framework and will, by definition, need new regulation to be solved. From the industry s point of view, some of these issues are first priority, as they are closely linked with its efficiency. We welcome the fact that the Commission recognises that the industry is currently undergoing profound structural changes and that the environment in which it acts is becoming increasingly competitive. The Commission has understood that a single market in investment management is to be achieved through the creation of a level playing field not only among funds across See: In the above-mentioned statement, FEFSI underlined that granting of guarantees by the fund management company should not pose insurmountable difficulties regarding the compatibility with the UCITS passport, if properly addressed in the context of capital adequacy

16 16 borders, but also between funds and other retail savings/investment products. The Commission also recognises that any future regulatory framework for the fund industry must be capable of representing a viable basis for the successful development of the fund industry over the longerterm while assuring a high level of investor protection. Regarding the five main issues the Commission is focussing on, we agree that before starting significant changes of the current regulatory framework, one must discuss what is needed in order to achieve the above-mentioned goal. We also agree with the Commission that in many cases progress cannot be achieved within the existing framework and that far-reaching regulatory adjustments will be necessary. ENHANCING THE COST-EFFICIENCY OF THE INDUSTRY Enhancing the cost-efficiency of the industry is of course high on EFAMA s agenda and we are encouraged by the fact that the Commission has taken the four issues of cross-border fund mergers, fund pooling, passport for the depositary and fund processing on board. As a general comment on fund mergers, pooling, and product passport for cross-border marketing of UCITS, we would like to underline that their relative usefulness will depend on the specific investment company strategy, geographic presence, history (in case of past mergers or firm acquisitions), as well as national specificities. It is therefore incorrect to think of pooling necessarily as an alternative to mergers, or to believe that improving the registration process will automatically reduce fund duplication. The industry needs all of these tools because one size does not fit all. Fund mergers and pooling Both issues are of high priority for almost all EFAMA members. Both subjects are very complex, but preparatory work has already been carried out. EFAMA fully supports the Commission proposal to set up an Experts Group and urges the Commission not to deal with them in a long-term perspective. Pooling Our UK member, the IMA, published on 25 July 2005 a study on the subject 17, suggesting multiple options to make pooling possible, although many problems (both regulatory and fiscal) need to be solved through regulation at EU and/or at OECD level. Different issues arise in the case of entity pooling (master-feeder funds) and virtual pooling, but both are equally important techniques. Regarding the so-called masterfeeder structures, many years ago, the European Parliament already agreed on the need to introduce this option into the UCITS Directive and following this opinion the 17 Pooling - how can fund managers respond efficiently to different investor needs? See:

17 17 Commission made a proposal, later to be withdrawn. 18 For a full discussion of tax and accountancy issues, we would like to refer to the above-mentioned IMA report. Fund mergers INVESCO, a corporate member of EFAMA, recently published a study 19, which clearly shows the economic need for action by the European Commission. Among others, INVESCO has estimated that economies of scale [from mergers] would produce cost savings equivalent to between 5 and 15 basis points fall in the cost of manufacturing the funds, or between EUR 2 billion to EUR 6 billion each year (the extent of the savings would depend on the scale of consolidation). Added to this, there would be savings to be made from lower administration costs in having fewer funds in each domicile. INVESCO s Research Group estimates that this alone could produce additional savings of EUR 1.1 billion to EUR 2.6 billion. More fund mergers would constitute an important step towards the consolidation of the European fund industry, resulting in significant economies of scale. A possible regulation of fund mergers could be based on relevant principles of the Directive on cross-border mergers of companies with share capital 20 and on the recently modified Directive on taxation of mergers 21, taking into account the special features of the fund industry. Indeed, the Directive on cross-border mergers of companies with share capital provides an interesting precedent for fund merger regulation, harmonising some aspects of regulation and requiring mutual recognition of others. It may be possible to use this principle for an EU-level fund merger regime, in order to introduce the following: Technical mechanisms for cross-border mergers: a merger should be possible through both of these two methods: a pure merger where two entities merge to build one continuing or new entity, without a shell remaining, or a transfer in specie (redemption and subscription in specie), with the remaining shell to be wound up; Voting requirements: if applicable, it seems necessary to put provisions in place to ensure that voting does not become an insurmountable barrier for cross-border mergers. Votes casts (actual votes) should be taken as the basis for determining quotas, rather than referring to the total number of unit holders As part of an amended proposal for UCITS II, which was withdrawn when UCITS III was launched [COM(94) 329 final, OJ C 242 of , p. 5] Building of an integrated European Fund Management: Cross border merger of funds, a quick win? - January 2005 See: %20- %20FULL%20PAPER% pdf 10 th Company Law Directive, Directive 2005/56/EC of 26 October 2005 [COM(2003) 703 final]; Publication in OJ pending Directive 2005/19/EC [OJ L 58 of ] amending Directive 90/434/EEC on the common system of taxation applicable to mergers etc.

18 18 In the interest of investor protection, minimum harmonisation could also be considered regarding disclosure requirements. A paper recently published by IOSCO 22 gives a good indication of a number of regulatory issues involved. It might be appropriate to consider provisions allowing investors to redeem/switch their units free of charge. Tax can act as a barrier if a fund merger causes a chargeable event for unit holders, i.e. if the merger results in the crystallisation of unrealised gains. This can happen at three levels: Investor level: as regards taxation of investors in the case of a merger, a precedent is set for introducing a measure of legislation on this subject by the Taxation of Mergers Directive, which establishes the principle that a merger should not result in a taxable event for the investor in the case of a cross-border merger of joint stock companies. 23 This principle should also be used as a solution for fund mergers. Fund level: a merger of funds should not incur tax at fund level throughout the Member States. The Taxation of Mergers Directive provides an exemption from tax also in such circumstances. 24 Portfolio level: a merger of funds should not result into a taxable event at portfolio level typically in the form of stamp duty or transfer tax on the sale of assets. An EU-level cross-border fund merger regime would need to borrow these principles. However, the same taxation problems can arise from domestic mergers, and are of particular importance if fund investors reside in various countries. This situation shall arise even more in the future, as the notification procedure improves and more funds are sold cross-border. Any future merger regulation should cover cross-border as well as domestic mergers, so as to ensure equal treatment of investors regardless of their country of residence and of the type of merger. We would also like to underline that current practices whereby some national authorities accept tax-neutral cross-border mergers and others do not, are in contradiction to the idea of the single market. These comments should also answer questions 8 and 9. Q8 : Is there a commercial or economic logic (net benefits) for cross-border fund mergers? Could those benefits be largely achieved by rationalisation within national borders? Q9 : Could the desired benefits be achieved through pooling? " An examination of the regulatory issues arising from CIS mergers - a report of the Technical Committee of the International Organization of Securities Commissions" (November 2004). See Article 8: On a merger, division or exchange of shares, the allotment of securities representing the capital of the receiving or acquiring company to a shareholder of the transferring or acquired company in exchange for securities representing the capital of the latter company shall not, of itself, give rise to any taxation of the income, profits or capital gains of that shareholder. Article 3: A merger or division shall not give rise to any taxation of capital gains calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes

19 19 The passport for the depositary This issue has been on the Commission agenda for years; it was already part of the 1993 UCITS II proposal 25, it came up again in the context of the discussion on UCITS III and culminated last year in the Commission s Communication on Regulation of UCITS Depositaries in the Member States: Review and possible developments. 26 In the context of the public consultation preparing the above-mentioned Communication, FEFSI recognised the potential benefits from economies of scale (particularly for services such as custody) as a result of the cross-border provision of depositary services, but underlined the difficulties involved and the need for a certain level of harmonisation. 27 Without classifying it as priority, the majority of EFAMA s members would welcome such a passport, provided that core depositary functions, qualifications and eligible type of institutions are harmonised. EFAMA has identified the core functions to be harmonised, relating to safekeeping of securities, bookkeeping of custody accounts and to supervision/compliance 28. With regard to the type of legal entity that should be eligible to exercise depositary functions, limiting eligibility to credit institutions might ease supervisors acceptance of the passport, since credit institutions are already accepted everywhere as depositaries and their capital requirements are harmonised at EU level. We would underline that delegation of functions by the depositary cannot solve a number of problems, in particular as rules on delegation differ from country to country COM(93) 37 of 10 February 1993, OJ C 94of Communication COM(2004) 207 final from the Commission to the Council and the European Parliament of 30 March See: Bookkeeping of Custody accounts Accounting for cash accounts and securities accounts in the name of the UCITS Safekeeping of assets and their transfer on demand of the UCITS according to the measures laid down by the market authorities. Settlement of instructions from the management company Clearing of derivatives instruments traded on regulated markets Payment of dividends and income on assets held in the name of the UCITS Processing corporate actions on these assets Tax treatment linked to the UCITS Centralizing the money flows related to purchases and redemptions when the UCITS is not listed on a market Supervision The depositary should check the compliance with, and ensure the respect by the management company of the : Investment policy set out in the relevant regulation or in the prospectus Rules for calculating the value of UCITS units Legal provisions

20 20 In principle these comments should have also answered question 11: Q11: Which are the advantages and disadvantages (supervisory or commercial risks) stemming from the possibility to choose a depositary in another Member State? To what extent does delegation or other arrangements obviate the need for legislative action on these issues? Fund processing EFAMA s position on fund processing is well known to the Commission: we believe that cross-border processing of fund units is a key issue for the European investment management industry. Outdated communication methods, different communication standards, lack of common identifiers and different payment methods and business practices in general result all together in high operating costs and possible operational risks and present a limitation to the future development of the industry. To address this issue, EFAMA s Fund Processing Standardisation Group (FPSG) has published a number of recommendations, which if embraced by the industry, will serve to converge towards industry-wide standards, thereby making possible for firms to communicate electronically, using messages constructed to international open market standards (ISO 20022) and referring to universally recognised unique identifiers for funds and the actors involved in back-office procedures. The FPSG has also proposed that fund managers summarized in a fully harmonised single pan-european document the Fund Processing Passport the essential information on their investment funds in order to facilitate funds processing. We believe that EFAMA s effort to promote standardisation in fund processing will deliver fruit within a reasonable time frame as a large majority of its members both corporate members and members of national associations endorse the FPSG recommendations, especially the use of ISO messaging standards, and start implementing them in the short to the medium term. We hope that a clear endorsement by the buy-side will give a clear signal to other market participants involved in fund processing, especially fund distributors, that the fund industry is moving to a more harmonised and efficient system of fund processing. This will facilitate their necessary decisions to adapt their back-office systems to the new standards, and this will result in more standardisation and automation of fund processing. To encourage industry-wide endorsement by all players involved in fund processing, the Board of Directors of EFAMA decided to support fully : a business case model to facilitate the endorsement and implementation of the FPSG recommendations by fund groups, distributors, service providers as well as national associations; the application for identifier codes (BIC/BEI) by EFAMA member associations for their members and the use of ISIN codes to identify funds at the level of each individual share/unit class;