Comments on the Commission s Green Paper on the Enhancement of the EU Framework for Investment Funds (COM(2005) 314 final)

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1 European Commission Directorate General Internal Market and Services attn. Mr. GD Dr. Alexander Schaub B 1049 Bruxelles Unser Zeichen: bm/mhz/win Vienna, 11 November 2005 Tel DW 3123 Comments on the Commission s Green Paper on the Enhancement of the EU Framework for Investment Funds (COM(2005) 314 final) Dear Mr. Schaub, Raiffeisen Capital Management ( RCM ) as a corporate Member of the European association EFAMA 1 appreciates the opportunity to provide comments on the European Commission s Green Paper on Investment Funds 2. First of all we would like to congratulate the Commission for the deep analysis of the current European fund market. The Green Paper and the annexed Background Paper identify the relevant challenges that have to be dealt with in the future. RCM supports EFAMA s position statement on the Green Paper that was developed in several working group meetings and through written comments of EFAMA and its Members. From our point of view which is largely in line with EFAMA s position we would like to point out the following five fundamentals that should be constantly taken into consideration when dealing with future concerns of the European investment fund industry: > Maintaining high standards within the fund industry, like a high level of investor protection, transparency of the product and the company, a sound investment spectrum of the investment fund. > Improving the existing UCITS III Directive before implementing wholly new legislation. > Preventing - under the keyword of efficiency - a displacement of competition to big players and thereby discriminating smaller competitors. 1 EFAMA is the representative association for the European investment management industry. 2 Green Paper on the enhancement of the EU framework for investment funds [COM (2005) 314 of 12 July 2005] > Raiffeisen Kapitalanlage-Gesellschaft m. b. H. Am Stadtpark 9 A-1030 Wien Bankverbindung: Raiffeisen Zentralbank Österreich AG, BLZ , Kto.-Nr.:

2 > Avoiding regulatory arbitrage through fostering the harmonisation of legal regulations within the Member States and intensifying the cooperation of the regulators throughout the EU. > Creating a real Level Playing Field of competing retail saving products and securing a fair competition within the increasing numbers of these products. > Creating a real single market in occupational pensions where investment funds will need to play an important role. With respect to the single issues of the Green Book we would like to comment as follows: Cross-Border Distribution of Investment Funds: A crucial step towards the facilitation and increase of cross-border distribution of investment funds is the simplification and harmonisation of the notification procedures within the Member States. Uniform standards would be needed since the existing different requirements within the Member States lead to a distortion of competition and comparability. Some Member States for example require authorised translations of all needed documents, for others a simple translation is sufficient; moreover the costs of the authority hugely differ among the Member States, amounting from up to to none. A standard definition of the documents to be submitted for the fund-notification with a uniform fee would be desirable, like: > Prospectus (incl. simplified prospectus plus local appendix) > Fund regulations > Annual and semi-annual fund reports > EU conformity certificate > Simple translation of all documents In the medium term the cross-border distribution should be free of any additional notification if the investment fund has been once approved in the Home Country. Passport for the Management Company: In principle and in the medium term RCM welcomes 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. However, to take full advantage of the economic efficiency, it would require more convergence of the different legal and regulatory frameworks, especially it would require an increase of the cooperation of the regulators within the Member States. This is especially necessary to avoid regulatory arbitrage. Fund Pooling and Cross-Border Fund Mergers: Fund pooling and cross-border merger could bring advantages, especially it could lead to a consolidation of the European fund industry and resulting in economies of scale and to an increase of cost-efficiency. Nevertheless subjects of taxation and regulation remain unsolved and have to be tackled before. It is furthermore evident that the advantages of cross-border pooling and cross-border merger mainly apply to the industry s big players. > Raiffeisen Kapitalanlage-Gesellschaft m. b. H. Am Stadtpark 9 A-1030 Wien Bankverbindung: Raiffeisen Zentralbank Österreich AG, BLZ , Kto.-Nr.:

3 Competition from Substitute Products ( Level Playing Field ): RCM welcomes the fact that the Commission started looking at the regulatory framework for UCITS in the wider context of asset management and considers this as a top priority. While investment funds, in particular UCITS provide for a high level of investor protection, this is not always rewarded by the market. On the contrary, many competing products are sold to investors instead of UCITS because of the lack of transparency in the sales process and because their margins are higher. At issue is not the protection from competition for investment funds, but rather the removal of differences in regulatory and tax treatment to the benefit of investors and of the asset management industry in equal measure. Therefore the topic should be discussed under the heading Level Playing Field (used in the Background Paper). The achievement of a Level Playing Field in the financial services industry would greatly increase competition, lead to the creation of a truly efficient single market with higher growth rates, and directly benefit investors through lower costs and better products. At the same time, investor protection would be greatly enhanced by improved disclosure and competition. Transparency is without doubt the most important factor ensuring investor protection. In practice, a retail investor does not usually decide to buy a specific product, but receives advice on how to reach a financial goal. Not all product characteristics are examined, and highest consideration is usually given to performance and costs. It is therefore imperative that all costs and risks associated with the products are fully disclosed, to enable the investor to make a well-informed investment decision. At production level and at distribution level, most competing products are subject to less stringent requirements. This underlines the necessity for the creation of a Level Playing Field. RCM recognizes, of course, that to achieve a Level Playing Field for financial services, significant changes in regulation would be required, both at production and at distribution level including an upgrade of the Insurance Intermediation Directive. However, we strongly encourage the Commission to consider taking the necessary steps within a new regulatory framework (see EFAMA s position paper, Modernisation of the UCITS Directive ). The attached table presents a comparison of UCITS, unit-linked life insurance, and structured securities, which were deliberately chosen to highlight the difference in regulation for nearly identical products. However, the industry s demand for a Level Playing Field is not limited to cases such as these, and includes all competing products. Summarizing, the following measures would be needed most to achieve a Level Playing Field for all competing savings products (see the enclosed spreadsheet): > At production level, they should be subject to the same organizational and overall business conduct requirements as UCITS. > Transparency at the point of sale must be enhanced for competing products to bring them up to the same level as UCITS. > The rules regarding national product authorization should be simplified for UCITS to the level of competing products. > Raiffeisen Kapitalanlage-Gesellschaft m. b. H. Am Stadtpark 9 A-1030 Wien Bankverbindung: Raiffeisen Zentralbank Österreich AG, BLZ , Kto.-Nr.:

4 > Taxation rules must be harmonized across Member States, and the need for costly tax representatives for funds should be eliminated. The EU Savings Directive should be modified to apply equally to UCITS, insurance and structured products. Passport for the Depositary: The introduction of the passport for the depositary could bring benefits to the industry in fostering the economies of scale. However certain difficulties have to be overcome, especially the necessity to promote the level of harmonisation within the Member States. This is especially crucial as the depositary serves as the controlling entity of the investment fund and that implies deep knowledge of the complex local regulations. The passport for the depositary would also mean a challenge to the national regulator having to audit the depositary without the underlying investment fund in the same jurisdiction. European Alternative Investment Market: An European approach to alternative investments is desirable since individual legislation of the Member States will not achieve the primary goal of adequate regulation, such as investor protection and strengthening of the financial market. The construction of a fund of hedge fund offers a diversified way to enter this sector of alternative investment. This is the reason why an amendment to the UCITS Directive should enable the public distribution of these kinds of funds. Fund of hedge funds should therefore be able to invest in single hedge funds (as a target to expand their investment spectrum. The direct purchase of single hedge funds should not be treated within the UCITS Directive, but through a separate legal framework at EU level and should ensure criteria like a sound and integral management, a professional risk management system, a wide disclosure of information regarding strategies and risk involved. Raiffeisen Capital Management is sure that its comments will be taken into consideration by the European Commission. For further information please do not hesitate to contact us. Kind regards, Raiffeisen Kapitalanlage-Gesellschaft m. b. H. Mathias Bauer Heinz Macher > Raiffeisen Kapitalanlage-Gesellschaft m. b. H. Am Stadtpark 9 A-1030 Wien Bankverbindung: Raiffeisen Zentralbank Österreich AG, BLZ , Kto.-Nr.:

5 Regulations of Production Transparency regulations in relation to Legal basis: UCITS Directive, MiFID (2004/39/EC) UCITS Directive: Under EU law a UCITS management company may only issue funds in accordance with the UCITS Directive (risk management, strict investment regulations etc) Organizational requirements in accordance with art 5 ff UCITS Regulations on liquidity ( UCITS must repurchase or redeem its units at the request of any unit-holder) 3 Assets of the fund must be entrusted to a depositary for safekeeping (segregation of assets) 4 Transparency regulations are based on UCITS Directive Prospectus, simplified prospectus, contractual terms of the fund, annual Legal basis: Life Insurance Directive (2002/83/EC), Insurance Mediation Directive (2002/92/EC) An insurance policy may use UCITS or an unregulated internal fund as its base value 5 (no risk management in the fund etc.) Organizational requirements in accordance with Life Insurance Directive No regulations on liquidity Life Insurance Directive has no specific regulations on segregation of assets Transparency regulations are based on Life Insurance Directive No prospectuses; only information to policy holder 6 Legal basis: Prospectus Directive (2003/71/EC), Transparency Directive (2004/109/EC), MiFID (2004/39/EC), various Banking Directives: 77/780/EEC, 83/345/EEC, 89/646/EEC (Coordination Directives); 89/299/EC (Directive on the own funds of credit institutions); 89/647/EEC (Solvency Directive); 92/30/EEC (Supervisory Directive) An issuer may use each fund as a base value (no risk management in the fund etc.) Organizational requirements in accordance with art 13 ff MiFID (refers to organization of investment firms as distributors, not to the issuer) Liquidity via (regulated) markets No specific regulations on segregation of assets Transparency regulations are based on Prospectus Directive Basis prospectus with an attached brief summary, 3 Art 37 UCITS Directive 4 Art 7 and 14 UCITS Directive 5 Art. 25 Life Insurance Directive 6 Art 36 in connection with Annex III to Life Insurance Directive

6 products fund report, semi-annual fund report Ongoing obligation to update the prospectus information Thus high cost transparency (TER, PTR, fee sharing information), risk transparency, information on investment objectives and performance Ongoing publication of fund prices Only the fund and the investment structure are indicated No cost transparency in insurance wrapper (sole disclosure of means of calculation and distribution of bonuses; no information in respect of savings, risk and cost portions) No cost transparency for funds (no indication of TER, PTR) No equivalent annual and semi-annual reporting (portfolio composition, performance, etc) 7 No ongoing publication of redemption prices No obligation to publish prospectus for: offers of securities addressed to qualified investors, offers of securities to fewer than 100 natural or legal persons per member state or offers of securities with a total consideration of at least Euro per investor 8 Validity of prospectus for 12 months since publication if significant new factors are disclosed in a supplement 9 No cost transparency in security wrapper (no disclosure of cost structure of issuer) No cost transparency for funds (no indication of TER, PTR) No comprehensive disclosure of investment strategy and risk profile 10 (however, disclosure of factors for assessment of market risk and some information on base value is required 11 ) No equivalent annual and semi-annual reporting (portfolio composition, performance, etc) 12 7 Only annual information on the state of bonuses, see Annex III item b.3 Life Insurance Directive 8 Art. 3 (2) Prospectus Directive 9 Art. 12, 16 Prospectus Directive 10 See working document, page See regulation for the Prospectus directive 809/2004, Annex XII, item 2 (risk factors) and 4.2 (information on base value) 12 However, obligation to disclose financial reports in relation to credit institutions as issuer of securities according to Annex I IX of the Prospectus Directive; see also regulation 809/2004, Annex XI item 11

7 Transparency regulations in relation to distribution Transparency rules are based on MiFID No application of MiFID to distribution of self-issued UCITS by management companies 13 Provision of client information prior to conclusion of the contract or provision of investment services 14 Detailed information on investment firm, including a description of conflict of interest policy 15 Description of the nature and risks of financial instruments or services 16 Information about costs and associated charges, including the calculation basis of the price and all fees, commissions, charges, expenses and taxes payable by the client 17 Reporting obligation in relation to order execution, including disclosure of unit price and total consideration 18 Transparency in accordance with the Insurance Mediation Directive (IMD) No application of IMD to mediation activities under the responsibility of insurance companies 19 Provision of client information prior to the conclusion of the contract in the relevant national language 20 Information on intermediary s relations to represented insurance undertakings and on his ability to advise the client on the basis of fair analysis 21 No disclosure of remuneration models and actual costs of intermediation in relation to contributions made by the client Transparency according to MiFID-provisions 13 Art. 2 (1) (h) MiFID 14 Art. 19 (3) MiFID in conjunction with Article 4 of the Draft Working Document ESC/23/ Art. 19 (3) MiFID in conjunction with Article 5 of the Draft Working Document ESC/23/ Art. 19 (3) MiFID in conjunction with Article 6 of the Draft Working Document ESC/23/ Art. 19 (3) MiFID in conjunction with Article 7 of the Draft Working Document ESC/23/ Art. 19 (8) MiFID in conjunction with Article 12 of the Draft Working Document ESC/23/ Art. 2 (3) 2 nd paragraph IMD 20 Art. 12, 13 (1) IMD 21 See Article 12 (1) and (2) IMD

8 Cross-border distribution of single products 22 Cross-border distribution language provision Host member state rules are applicable 23 Notification duty for fund marketing in host member state incl. comprehensive documentation duties (fund regulations, prospectuses, latest annual and semiannual report, marketing modalities) Marketing veto right for host member state 2-month waiting period Prospectus and simplified prospectus, annual fund report and semi-annual fund report, fund regulations to be published Publication in national language of host member state 28 (ongoing updating and preparation obligation, this means translation expenses) Host member state rules are applicable. 24 No notification duty or authorization duty No waiting period The information provided by insurance mediator must be provided in the relevant national language 29 No provision concerning legal and administrative regulations of the host member state which must be observed 25 No approval or administrative procedure in host member state Notice of international marketing (approval of prospectus) only provided to host member state (contact with host member state through the domestic authority) In principle, host member state has no marketing veto right, only Precautionary measures 26 3-day waiting period 27 Prospectus may be produced in the host member state in English instead of the national language 30. Only a brief summary has to be translated into national language. Likewise, information in accordance with the Transparency Directive may be produced in English instead of the national language of the host member state General procedure related to the right of establishment or the freedom to provide services is not analysed here. 23 See Art 44 ff UCITS Directive 24 Art 32 Life Insurance Directive 25 See Art 17 ff Prospectus Directive 26 See Art 23 Prospectus Directive 27 Art 17 Prospectus Directive 28 Art 47 UCITS Directive 29 Art 13 Insurance Mediation Directive 30 Art 19 ff Prospectus Directive 31 Art 20 Transparency Directive

9 Regulations for home state marketing (National) authorization MiFID regulations Member states may choose not to apply MiFID 32 Each new UCITS has to be authorized by the national authority 38 MiFID does not apply. Instead: IMD No application of IMD to mediation activities under the responsibility of insurance companies 33 Simplification for tied insurance intermediaries concerning registration and professional requirements are possible 34 The IMD stipulates notification duties for mediators (e.g. whether advice is objective or is provided on behalf of a specific insurance company). Prior to the conclusion of the contract the demands and the needs of the customer and the reasons for the advice given to the customer shall be specified 35 A form of best advice provision is envisaged 36 In a detailed analysis, the discrepancies between MiFID and the Insurance Mediation Directive must be shown (e.g. does the ban on cold calling cover insurance companies? Is there a provision analogous to best execution etc.?) Authorization is valid for a whole insurance class 39 MiFID regulations Member states may choose not to apply MiFID 37 Each prospectus has to be authorized by national authority Art 3 (1) MIFID 33 Art. 2 (3) 2 nd paragraph IMD 34 Art 3 (1) 2 nd paragraph IMD, Art 4 (1) and (2) IMD 35 Art 12 (3) IMD 36 Art 12 (2) IMD 37 Art 3 (1) MIFID

10 for new products Taxation 42 No set deadline for authorization Authorization includes approval of the management company, fund rules and the choice of depositary Changes concerning the management company or the depositary and amendments of the fund rules need the approval of the competent authorities. UCITS are covered by EU Savings Directive In most countries a tax representative is needed for national and cross border distribution. Thus high cost for ongoing tax reporting and approval by chartered accountant No authorization process for (new) single products (policies) Insurance companies are explicitly excluded from EU Savings Directive No tax representative Authorization procedure: approval of the prospectus within 10 or 20 working days after provision of complete information 41 No material supervision No specific provision is made for structured products in the EU Interest Directive. Implementation in the member states varies accordingly No tax representative 38 Art 4 UCITS Directive 39 Art 4 Life Insurance Directive 40 Art 13 Prospectus Directive 41 See Art. 13 Prospectus Directive 42 In most countries there are high differences concerning taxation between the products. Regularly life insurance policies have tax advantages. In some countries UCITS are discriminated against structured products. There are also different requirements concerning tax reporting in various member states.