RAHOITUSTARKASTUS RESPONSE TO THE GREEN PAPER ON THE ENHANCEMENT OF THE EU FRAMEWORK FOR INVESTMENT FUNDS

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1 STATEMENT 1 (5) The Commission of the European Communities Ref.: COM(2005) 314 final RAHOITUSTARKASTUS RESPONSE TO THE GREEN PAPER ON THE ENHANCEMENT OF THE EU FRAMEWORK FOR INVESTMENT FUNDS Rahoitustarkastus 1 agrees that the Green Paper on the Enhancement of the EU Framework for Investment Funds has identified many important issues in the field of investment funds. The efforts and actions already done to clarify and ensure the harmonised implementation and common reading of UCITS III Directive create a good basis for future work. The work done in areas like clarification of definitions concerning eligible assets for investment of UCITS and simplification of the notification procedure are excellent examples of this work which also market participants have considered very important. The investment fund industry has grown fast. At the same time substitute products, usually in a form of a deposit or a life insurance product, have emerged, evolved and become a genuine option for a fund unit. The same phenomenon appears in the asset management sector in which the discretionary portfolio management service is offered by investment firms and through life insurance products. This development, when seen from the level playing field as well as investor protection point of view, can not be considered balanced. The suitability test and disclosure requirements differ notably. The comparability of products is practically inexistent regarding costs of a direct fund investment and its substitute through a life insurance product. Rahoitustarkastus highlights a need to achieve a level playing field across all market sectors and ensure coherent investor protection standards regarding all the actors in the field of mutually competing savings products and investment management regardless of the form of the product, the type of service-provider, or the precise legal relationship with the investor or beneficiary. 1 The Finnish Financial Supervision Authority. Snellmaninkatu 6 PO Box 159 FI Helsinki, Finland phone fax first name.surname@rahoitustarkastus.fi or first name.surname@bof.fi rahoitustarkastus@rahoitustarkastus.fi or

2 STATEMENT 2 (5) Rahoitustarkastus puts forward the following responses to the questions presented in the Green Paper: Q1: Will the above initiatives bring sufficient legal certainty to the implementation of the Directive? The initiatives mentioned as priority actions in the Green Paper focus on the issues which are considered to be the most urgent and which need immediate attention. These initiatives bring sufficient legal certainty to the central areas 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? Rahoitustarkastus has not recognised any other key issues that need immediate actions and have to be tackled as a priority in addition to those already mentioned in the Green Paper. 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. In Rahoitustarkastus' view splitting responsibility for the supervision of the fund and its management company may give rise to problems in maintaining effective supervision. If the fund rules are not confirmed by the supervising authority of the fund management company, it is possible that the requirements in different jurisdictions vary regarding the subscription and redemption methods, NAV calculation, unit-holder register keeping and risk management methods. This may affect the fund management company's ability to manage the fund. Another disadvantage of the splitting responsibilities may be that fund management company's would establish funds in Member States where the legislation is the most advantageous from the management company's point of view. The splitting responsibility may also give an opportunity for the management company to establish funds in another Member State in a situation where the home Member State authority is of the opinion that the company does not have enough resources, expertise or readiness to manage certain new types of funds or additional funds.

3 STATEMENT 3 (5) 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? In Rahoitustarkastus' view this should be a priority. At the same priority level should be the harmonisation of transparency, comparability and attention to investor needs of all the mutually competing/substituting savings products. Q6 : Will clarification of conduct of business rules applying to firms which retail funds to investors contribute significantly to this objective? Should other steps (enhanced disclosure) be considered? In Rahoitustarkastus' view it is important to have clear conduct of business rules. According to Rahoitustarkastus, the "toolbox" of MiFID could serve as a basis for the improvement. Alongside with the fund units there are substitute products marketed over the same counter. Therefore the extension of the MiFID conduct of business rules to fund products would solve the problem only partially. Rahoitustarkastus highlights a need to achieve a level playing field across all market sectors and ensure coherent investor protection standards regarding all the actors in the field of mutually competing savings products and investment management, regardless of the form of the product, the type of service-provider, or the precise legal relationship with the investor or beneficiary. Q11: Which are the advantages and disadvantages (supervisory or commercial risks) steaming 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? The responsibilities of the depositary consist of the safekeeping of the funds assets and the supervision of the fund activities. The depositary must ensure that the daily routines of the fund and its management company are conducted in accordance with the law and the fund rules. In order to carry out this duty the depositary must be familiar with the legislation in the Home Member State of the fund. Also practical problems arising from different company languages may make it difficult for the depositary to receive all necessary information in an understandable language when discharging its duties as stated in the Directive. The amended Directive also states, that a UCITS may not invest more than 20 % of its assets in deposits made with the same body. This means that safekeeping of the deposits must be decentralized and that the amount that can be held by the depositary is also restricted to 20 %. Therefore the

4 STATEMENT 4 (5) depositary is not directly able to monitor all transactions made with the assets of the fund, if the fund has invested its assets in deposits. Rahoitustarkastus would like to address the fact that it is already challenging enough for a depositary to adequately discharge its duties when it is situated in the same Member State as the fund. Rahoitustarkastus anticipates further difficulties arising if the depositary and the fund were to be situated in different Member States. Nonetheless it would also be necessary to clarify the duties and responsibilities of the depositary. Q13: Does heavy reliance on formal investment limits represent a sustainable approach to delivering high levels of investor protection? Rahoitustarkastus' shares the view of the Commission that with the reliance on formal investment limits, UCITS may struggle in the longer run to keep pace with financial innovation and more complex distribution systems. Investment limits are a significant step towards delivering high level of investor protection, but in order to ensure that the risks related to new financial innovations and more complex distribution systems are duly and accurately monitored, measured and managed overall sound risk management processes are needed. Q15: Are there instances resulting in a distortion of investor s choice that call for particular attention from European and/or national policy-makers? Rahoitustarkastus' highlights a need to achieve a level playing field across all market sectors and ensure coherent investor protection standards regarding all the actors in the field of mutually competing savings products and investment management regardless of the form of the product, the type of service-provider, or the precise legal relationship with the investor or beneficiary. The suitability test and disclosure requirements differ notably between different mutually competing savings products and investment management strategies. The comparability of products is practically inexistent regarding costs of a direct fund investment and its substitute through a life insurance product. Furthermore, different local tax regimes distort clearly investment decisions cross-border and locally. Q16: To what extent do problems of regulatory fragmentation give rise to market access problems which might call for a common EU approach to a) private equity funds; b) hedge funds and funds of hedge funds?

5 STATEMENT 5 (5) In many Member States there are collective investment undertakings under national regime. This framework is more flexible and the requirements concerning e.g. risk diversification may differ from the UCITS III Directive. Many hedge funds are established under the national regime. In some Member States only those foreign funds that are comparable to the local national funds are accepted to be marketed there. In this sense the regulatory fragmentation may cause market access problems if the requirements differ from each other. In Rahoitustarkastus' view the national regulatory framework is even more divergent regarding private equity funds. The legal form of private equity funds is diverse and in some Member States they operate under general company law provisions without any product specific legislation. If the aim is to encourage the cross-border offering of the products in question, uniform regulatory principles would improve the current situation. However, simultaneously the target group (general public, qualified investors) of these products should be taken into consideration and the actions should be drawn up respectively. Q19: Does the current product-based prescriptive UCITS law represent a viable long-term basis for a well-supervised and integrated European investment fund market? Under what conditions, or at what stage, should a move toward principle-driven, risk-based regulation be contemplated? In Rahoitustarkastus' view, a product-based prescriptive UCITS law does not present a viable long-term basis for an integrated and competitive European investment fund market. It may also endanger the objective to attain equal conduct of business rules for competing products in the investment market. Rahoitustarkastus is of the opinion that prior to considering changes to the current product-based approach, it is important to explore ways and means to avoid a more flexible principle-driven model adding on current obligations concerning information to be supplied to unit-holders. The priority in disclose requirements should always emphasize the quality and the simplicity. RAHOITUSTARKASTUS ANNELI TUOMINEN Anneli Tuominen Deputy Director EEVA GRANSKOG Eeva Granskog Market Supervisor