We welcome the opportunity to comment on the proposals made in the paper.

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1 21 March 2011 James Steer Savings and Investments HM Treasury 1 Horse Guards Road London SW1A 2HQ Dear James, Transposition of UCITS IV: Consultation Document The IMA represents the asset management industry operating in the UK. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of around 3.4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds under management in UK-authorised investment funds (i.e. unit trusts and open-ended investment companies). We welcome the opportunity to comment on the proposals made in the paper. Our detailed comments are attached and we would also like to highlight the following points:- We suggest that any deviation from pure-copy out from the Directive should be discussed within ESMA to ensure consistency of approach between Member States. It would be useful to understand how the FSA anticipates meeting the requirements of Article 39.3 (Assessment, monitoring and review of risk management policy) and Article 45.2 (Reports on derivative instruments). In addition, there are a considerable number of areas in relation to risk monitoring and measurement that require clarification by the authorities. In Handbook Notice 83, the FSA reported that the general question of whether relevant parts of the UCITS Directive apply at the umbrella or subfund level had become part of the negotiations on the recast UCITS Directive. The FSA stated that it would consult on and implement the outcome of those discussions as part of the recast UCITS Directive. The FSA should clarify the 65 Kings wa y Lo nd on W C2B 6TD Tel: +44(0) Fax: +44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 interpretation of this in the light of the recast UCITS Directive or, if it is unable to at this time, provide guidance on how managers should deal with this issue in the meantime. We suggest the FSA clarifies the situation in relation to mergers that are approved prior to 1 July 2011 but are effective post 1 July Would these fall under the Directive requirements? In addition, in this scenario, would the costs of the merger still be able to be charged to the fund? Article 34 of the Implementing Directive Number 2 includes a transposition arrangement that allows Member States to delay the coming into force of the laws, regulations and administrative provisions required to comply with Article 7 and Article 29 for a period of 18 months after the Directive comes into force. We urge the FSA to apply these provisions, which could mean considerable cost savings for firms. We urge the FSA to raise within ESMA harmonising the interpretation of Article 50.2 of the UCITS Directive, which allows UCITS to invest up to 10% of the fund in unapproved securities. It would be helpful if the FSA included guidance on Annex 1 (2)(c) as, otherwise, it might be taken to imply that UK depositaries have some sort of responsibility for AML in relation to fund investors. That is not the case. UK Depositaries have no relationship with individual investors, only with the fund and the authorised fund manager. Responsibility for AML compliance in respect of fund investors rests with the EEA management company or transfer agent. We need clarity as to whose AML rules would apply in relation to investors entering or leaving the fund. We warmly welcome the statements made in chapter 9 of the consultation document and the recognition of the opportunities that UCITS IV creates for the UK funds industry. The Government s commitment to launch an authorised tax transparent vehicle in 2012 will provide a suitable vehicle for UCITS IV Masters in the UK. Coupled with the certainty that the Government intends to provide to industry regarding technical concerns for Master Feeder structures, such as the Genuine Diversity of Ownership condition and the Controlled Foreign Companies rules, this should make a tangible difference to the attractiveness of the UK as a location for both Master and Feeder funds. We also welcome the Government s commitment to ensure that there will be no adverse UK tax consequences for a foreign UCITS as a result of having a UK management company. That leaves the anomaly of the Schedule 19 Stamp Duty Reserve Tax (SDRT) regime, which imposes an SDRT charge on investment funds in addition to the SDRT paid by funds on acquisitions of UK equities. It has for many years acted to make UK-domiciled funds less competitive than their European counterparts, because such a tax does not exist in other European jurisdictions. Within Master-Feeder structures, this problem will be exacerbated. We therefore call on the Government to commit to the abolition of this tax and, until that date, to provide a clear exemption for Master funds. 2

3 We look forward to hearing from you if there is any clarification that you would find useful on the points we have raised. 3

4 UCITS IV Transposition IMA Response Chapter 2: Simplified Notification Procedure Box 2.A: Question Do you agree that the draft regulation implements the Directive requirements in relation to cross-border notification correctly? Are there any other matters that should be addressed in the regulation? Box 2.B: Question Do you agree with the proposed amendments to COLL? Are there any other matters related to cross-border notification on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? We believe that the draft regulation and proposed amendments to COLL generally reflect the requirements of the Directive in this area. However, we request that the following points be corrected: Time limit for transmitting notification to the host state regulator new paragraph 20B of Schedule 3, FSMA, sub-paragraph (2) states that the FSA has 10 days from receipt of complete information to send the notification, the accompanying documentation and its confirmation to the host state regulator. The Directive allows 10 working days. Form of attestation new paragraph 20B of Schedule 3, FSMA; sub-paragraph (2) FSA's confirmation to the host state regulator is expressed to be in relation to both the operator and the UCITS. The Directive refers to the attestation being given only in relation to the UCITS and the model form of attestation contained in Commission Regulation No. 584/2010 does not require the competent authority to confirm that the operator fulfils the conditions imposed by the UCITS Directive. Use of centralised address - COLL R (4) provides that notification to the host state regulator of changes in the arrangements for marketing or in the share classes to be marketed can be made by to a specified address maintained by the FSA, to which each host state regulator has access. We question whether this is sufficient to discharge the obligation on the UCITS to give written notice to the host state regulator? (See Article 93 (8)). Also, as currently drafted, the use of this centralised address appears to be restricted to notifications regarding changes to marketing arrangements or share classes to be marketed and would not be available to notify host state regulators of changes to the other documentation submitted with the notification (e.g. prospectus, instrument of incorporation, latest annual and any subsequent half yearly report, key investor information). If the use of a centralised address is acceptable, should it not be used for both types of notifications? 4

5 Translations COLL R (1) refers to the requirements to keep documentation and their translations up to date. It would be helpful to clarify that for English language documentation the only document requiring translation is the key investor information document. Chapter 3: Management Company Passport Box 3.A: Question Do you agree that the draft regulation implements the Directive requirements in relation to the management company passport correctly? Are there any other matters that should be addressed in the regulation? Whilst the Statutory Instrument makes a necessary amendment to FSMA for unit trusts (Section 3.8), there has been no proposed amendment to the ICVC regulations (The open ended investment Companies Regulation 2001, Part 3 of the draft SI). The policy intention when developing the ICVC was to be based as much as possible on those for unit trusts. Hence, there is a specific corporate code for ICVCs allowing a single corporate Director to be the ACD of an ICVC, akin to the manager of a unit trust. Paragraph 15(3) of the ICVC regulations requires that the ICVC must have its head office in England and Wales, or Scotland and 15(6) requires that if one Director is appointed, the Director must be a body corporate which is an authorised person with permission to act as an ACD. Paragraph 15(6) is met if the ACD is not a UK authorised person (e.g. a Luxembourg UCITS management company), since Schedule 5, FSMA (Persons concerned in collective investment schemes) states that an operator of a UCITS is an authorised person providing they have the relevant permission. However, what about the location of the ICVC s Head Office as required by paragraph 15(3)? There is no definition of head office in the ICVC rules or FSMA. There is guidance in the FSA rulebook (COND 2.2.3G) as follows (our emphasis added): Neither the Post BCCI Directive, MiFID, the Insurance Mediation Directive nor the Act define what is meant by a firm's 'head office'. This is not necessarily the firm's place of incorporation or the place where its business is wholly or mainly carried on. Although the FSA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of: (1) the directors and other senior management, who make decisions relating to the firm's central direction, and the material management decisions of the firm on a day-to-day basis; and (2) the central administrative functions of the firm (for example, central compliance, internal audit). For an ICVC with a Luxembourg management company, say the management company s Directors will be in Luxembourg (as likely will be the senior management etc). So, it could be failing the first test of 15(3) of the ICVC rules. 5

6 We believe this should be clarified and either a similar change to the ICVC rules is needed in 15(3) as for unit trusts, or additional guidance is needed in terms of the definition of Head Office. Box 3.B: Question Do you agree with the proposed amendments to SYSC and SUP? Are there any other matters related to the prudential and organisational requirements for a UCITS management company on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? Many of the proposed rules within this Directive have already been implemented by firms following the UK s implementation of MiFID and therefore will not cause too many issues for our members. In particular, many of the requirements of SYSC apply whether or not the firms are common platform firms and have been implemented in the UK through the prudential sourcebooks UPRU and BIPRU. The current requirements of SYSC already apply as guidance to firms, rather than rules; therefore, our members do not anticipate any particular issues with these amendments. An additional requirement will be for firms to consider their Conflicts of Interest Policy and determine if there are any conflicts between activities for UCITS and other clients. We are not, though, aware of any particular concerns among members in this regard. Box 3.C: Question Do you agree with the proposed amendments to COBS and COLL? Are there any other matters related to the conduct of business requirements for a UCITS management company on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? There do not seem to be many changes to the COBS requirements arising from this Directive, as they have generally been taken from MiFID. This means firms will already have in place requirements to adhere to the requirements in this Directive, although firms will need to ensure some of their existing policies are in line with UCITS IV. In particular, as regards Best Execution and Inducements Polices: Best Execution UCITS IV refers to the policy being made available to all unitholders in the Prospectus or similar documentation. We welcome the openness and transparency, but request that any changes to existing documentation can be made in line with other rule requirements, such as RDR and KIID requirements. Inducements Firms may need to review their own third party agreements to ensure that any outsourcing enhances the quality of service and does not stop or reduce the best interest of the client. We seek clarification on the requirements of COBS R and how this requirement would work in the context of unitholders. Also, we seek confirmation that COBS R (1) does not apply to a management company providing collective portfolio management activities for a UCITS scheme or an EEA UCITS scheme. 6

7 In addition, we seek clarification of the definition of a Letter Box Entity. In particular, if a management company delegated its functions overseas, would it be possible for the oversight of those functions also to be based overseas? Confirmations of Trades Annex C, setting out the draft amendments to COBS rules, proposes two additional sections for COBS around the information that must be on each Confirmation of Trade (COT) and six monthly COTs. COBS (7)(c) requires that COTs must contain "the date and time of receipt of the order and method of payment." This is a substantive departure from the existing requirement to report trading day / trading time etc. (COBS 16 Annex 1R) and would appear to require Members to report only once they had established that they have an 'in good order application' (i.e. at the time of receipt rather than the time the deal is priced.) We suggest that the FSA deal with this with rules that allow firms to use a generic statement at the head of each COT. This could be something explanatory around the difference between the time of order-receipt, the time of order-execution and the fact that the time of order-execution is set on a fund-by-fund basis regardless of the time of order-receipt (i.e. you get the next execution point). Box 3.D: Question Do you agree with the proposed amendments to COLL? Are there any other matters related to the risk management and measurement requirements for a UCITS management company on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? Box 3.E: Question Do you consider that the proposed amendments to SYSC, COBS, SUP and COLL implement the split of responsibilities between the UCITS home State and the management company home State correctly? Are there any other matters related to the exercising of passport rights by a UCITS management company on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? There does not appear to be a revision to the definition of UCITS Directive. The glossary currently refers to: UCITS Directive - the Council Directive of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (No 85/611/EEC), as amended. But the UCITS Directive has not been amended under UCITS IV, it has been re-cast so the definition in Annex A needs to include an amendment which refers to Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the.(ucits) (re-cast). 7

8 Should there also be a reference to Article 14(2)(c) in SYSC? It currently refers to the other two sections that are mentioned immediately below the heading of Chapter III of the UCITS implementing Directive (Article 12.1(b) and Article 14.1(d)). It is not clear whether the omission is intentional or not. It would be helpful if the notes referring to the implementing Directives detailed the full name (or meaningful abbreviation) of the particular implementing Directive rather than just implementing Directive or implementing Directive No. 2 with a link to the Glossary. It would be helpful if the FSA could publish guidance on its expectations in relation to the requirements of COLL R (2) and how it intends to use this information and meet its responsibilities under Section 283B of the amended Financial Securities and Markets Act 2000 (Article 45.2 of the Implementing Directive). Glossary Definition: Operational Risk - The definition should refer to Article 3.10 of the UCITS Implementing Directive and not Article 3.1. SYSC (2) should say of a transaction carried out on behalf of the client or another client to reflect more precisely the wording of Article 17.1 (b). SYSC The Note should simply refer to Article 12.1(b) as that is all it covers. SYSC The Note should simply refer to Article 14.1(d) as that is all it covers. COLL The note to this rule indicates that it implements Article 52. We note that COLL Art 52.1, second sub-paragraph (a) and (b) permit up to 10% exposure when the counterparty is a credit institution referred to in Art 50(1)(f), or 5% in other cases. Art 50(1)(f) refers not only to credit institutions in the EU but also to third country credit institutions provided that they are subject to prudential rules considered by the competent authorities of the UCITS home member state as equivalent to those laid down in community law. In the interests of promoting harmonisation, we encourage the FSA to suggest that ESMA produce a list of non-eu countries considered to have prudential rules for credit institutions equivalent to those laid down by EU law. Given the introduction of the management company passport, a list agreed by the competent authorities of Member States would be helpful in bringing about a harmonised understanding of eligible OTC counterparties. A common application across Member States would assist those using the passport. COLL B R (2) and (8) The reference to COLL R (7) in COLL B R (8) is incorrect. COLL B R (2) correctly transposes Article 43.2 of the Implementing Directive (on Counterparty Exposure). COLL B R (8) transposes Article 43.8 of the Implementing Directive and refers to issuer concentration i.e. the diversification limits. Therefore, the reference to COLL R (7) (counterparty exposure) is incorrect and should be removed 8

9 COLL B (6) and (7) Clarification is required that these rules relate only to collateral due but not yet received (i.e. unrealised profit) and not to collateral that is required to be posted to cover a realised loss on a position. DELETED COLL (14) This rule should not be deleted, as exchange-traded derivatives and counterparty risk is not adequately catered for in either the L2 Directive or ESMA s (then CESR s) guidelines. The latter is vague and at odds with the Commission Recommendation. We urge the FSA to raise this within ESMA and with the Commission. We ask that this rule be retained until the matter is further clarified. DELETED COLL (3) and (4) As this is a general section on cover, it should still make reference to the fact that the rule does not apply where risks relating to derivatives are appropriately covered. This could refer to the ESMA Guidelines, which set out cover rules for derivatives (section 5). COLL As mentioned in relation to COLL above, the UCITS Directive permits the risk exposure of up to 5% to an OTC counterparty, which is not a credit institution covered by Art 50(1)(f). The FSA rules should reflect this permission by allowing up to 5% to be transacted with any counterparty the AFM considers appropriate. Currently, the FSA rules restrict eligible counterparties to two types of entity (as set out in COLL (1)). This should not apply in respect of the 5% limit. COLL R and COLL R (1) do not properly reflect Article 56 of the Directive. Not only is COLL R currently gold-plating Article 56, but it does not seem to address the current situation of an ACD (which is a UCITS management company). Following the introduction of the management company passport, the rule needs to reflect the fact that the management company can operate non-uk funds which may be of different forms. We offer an amendment to COLL R below but would suggest that COLL R and COLL R are replaced by a copy-out of Article 56 with a reference to the Directive. (COLL R currently is an empty vessel as we do not have self-managed ICVCs): Proposed Amendment (option) (1) An authorised fund manager must not acquire, or cause to be acquired for any AUT UCITS Scheme or EEA UCITS scheme of which it is the manager, transferable securities issued by a body corporate and carrying rights to vote (whether or not on substantially all matters) at a general meeting of the body corporate if: a) immediately before the acquisition, the aggregate of any such securities held for that AUT, UCITS Scheme or EEA UCITS scheme taken together with any such securities already held for other AUTs UCITS schemes or EEA UCITS schemes of which it is also the manager, gives the authorised fund manager power significantly to influence the conduct of business of that body corporate; or (b) the acquisition gives the authorised fund manager that power. (2) For the purpose of (1), an authorised fund manager is to be taken to have power significantly to influence the conduct of business of a body corporate if it can, because of the transferable securities held for all the AUTs UCITS schemes or EEA 9

10 UCITS schemes of which it is the manager, exercise or control the exercise of 20% or more of the voting rights in that body corporate (disregarding for this purpose any temporary suspension of voting rights in respect of the transferable securities of that body corporate). Proposed copy-out option NEW COLL A R (1) An authorised fund manager, acting in connection with all the UCITS schemes and EEA UCITS schemes which it manages, shall not acquire any shares carrying voting rights that would enable it to exercise significant influence over the management of an issuing body. (2) For the purposes of (1), significant influence means 20% or more of the voting rights of an issuing body. [Note article 55 of the UCITS Directive] We use the definition authorised fund manager as the definition of manager does not include the ACD of an ICVC. COLL 5.3.3A (1) states that global exposure relating to derivatives and forward transactions should not exceed the net value of the scheme property. However, this rule fails to take into account the different ways of calculating exposure (i.e. commitment, VaR), which are different types of measure. COLL A(2) appears to be duplicating COLL (2). COLL & 8 - We recognise that these rules are taken from the Implementing Directive but would appreciate clarification in this area. In particular, how do the requirements of COLL relate to COLL 5.3.8? COLL (1) Given that Article 51(2) of the UCITS Directive is referred to in Article 42(1) and that efficient portfolio management is not in Article 51(2) limited to stock lending, the reference to EPM in COLL (1) should not be so limited. COLL G Given this is guidance we suggest it be amended to state,...cesr has issued guidelines which.. should consider in applying the rules in this section.... In addition, the reference to CESR should now be to ESMA. COLL (2) It is understood from Chapter 3 of the consultation document that the position of branches is unclear, so this may change as regards its application to UK UCITS management companies providing services from a branch in another EEA State. COLL 6.6A R (1) should also cross-reference Article 56 of the Directive COLL 6.6A.1(b) - It is understood from Chapter 3 of the consultation document that the position of branches is unclear, so this may change as regards its application 10

11 to UK UCITS management companies providing services from a branch in another EEA State. COLL 6.6A.3 The reference should be to 6.6A.2R(3) rather than to (2). Given that the guidance already draws on one part of Recital 18 in relation to 6.6A.2R(3), there should be a reference to that part of Recital 18 that deals with unreasonable charges and activities to provide guidance on COLL 6.6A.2R(5). COLL 6.6A.4(4)(a) requires firms to formulate forecasts and analyse the investment s impact on the portfolio composition, liquidity and risk and reward profile of the scheme before carrying out the investment. We seek FSA guidance on this requirement. COLL R (1) (b) requires the permanent risk management function to ensure compliance with the risk limit system including statutory limits and global exposure as required by COLL 5.3. However, COLL 5.3 covers solely global exposure. We therefore suggest it should also reference the relevant counterparty exposure rules under COLL 5.2. COLL G - As this is guidance, we suggest it be amended to state,...cesr has produced guidelines which should be considered in applying the rules in this section.... In addition, the reference to CESR should now be to ESMA. We also make the following points in relation to risk measurement and management for UCITS and we urge the FSA to take these points up with ESMA.:- Leverage Disclosure and Calculation The requirement under Box 24 and 25 of CESR s (now ESMA s) Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS require managers using VaR to disclose the level of leverage employed which should be calculated as the sum of the notionals of the derivatives used. There are significant concerns in the industry that this requirement is not consistent with current market practice and will therefore be misleading to investors. For example, a fund reducing exposure to foreign exchange by hedging would be leveraged whereas the equivalent un-hedged fund would not be leveraged (assuming it does not use any derivatives). In this scenario, the hedged version of the fund would appear to be the riskier of the two given the disclosure requirements when in fact this would not be the case. The disclosures would require significant detailed explanation on what these numbers mean, how they have been calculated and how they should be interpreted. Consideration should be given to refining the disclosure requirements to exclude, for example, funds that use derivatives for risk reduction purposes. Intra-day calculation of global exposure We seek clarification of this requirement (see CESR s Risk Measurement Guidelines, Box 1). Again, there are significant industry concerns in relation to this requirement, particularly if these guidelines become binding standards under ESMA. There are significant systems issues for Members in meeting this requirement, which appears to be totally impractical. 11

12 Correlation between OTC Counterparty and Collateral We see clarification of the FSA s expectations of this requirement (CESR Risk Measurement Guidelines, Box 26). There is a possibility that Members would need to re-negotiate ISDAs and CSAs as a result of this requirement, which could lead to a reduction in counterparties willing to contract and an increase in transaction costs. The requirement for Members to be able to monitor correlation and concentration risk across different pools of collateral would require significant system changes. Cash Collateral Management There is a requirement in Box 26 of CESR s Guidelines on Risk Measurement that Collateral can be only invested in risk-free assets. This requirement is very restrictive. Our understanding is that counterparties generally require a return of SONIA (Sterling Overnight Interbank Average) on cash collateral. Investing only in risk-free assets (e.g. US T-Bills) would generate an insufficient return to meet their requirements. Any shortfall would be required to be met by the fund. Certain rules in COLL will need to be amended as a result of the proposed definition of an EEA UCITS Scheme. For example, COLL (1)(a). Senior management responsibilities COLL It is noted that this requires that senior management receive written reports (our emphasis), whereas the implementing Directive simply requires senior management to receive reports (Article 9.5). We note that Article 9.4 requires certain other reports to be in writing. Given that the Commission chose not to specify that the reports required under the next paragraph of the same article be in writing, the difference appears to be intentional. The COLL rules should follow the language of the implementing Directive. It should be the responsibility of senior management to decide how reporting in respect of items covered by Article 9.5 should be delivered. Management company and product passport under UCITS Directive COLL (4) Should not the reference in the first line to (3) be to (2) as well as (3)? COLL (4) appears to be implementing Article 32.1 and 2 of the UCITS Implementing Directive no 2. This relates to the updating of documents referred to in Article 93.2, in accordance with Article 93.7 (UCITS Directive), rather than dealing with changes to arrangements made for marketing/changes to share classes to be marketed, which is the subject of Article 93.8 of the UCITS Directive. If ing the address also satisfies Article 93.8, the reference should be to both (2) and (3). Box 3.F: Question Do you agree with the proposed amendments to COLL in relation to the duties of the depositary when dealing with an EEA UCITS management company? Are there any other matters related to the general responsibilities of the depositary on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? 12

13 General Glossary related comment With the introduction of the management company passport, the definition of Authorised Fund Manager ( AFM ) includes (through the further definitions of authorised corporate director and manager ) EEA management companies, if relevant (our emphasis). The words if relevant make the FSA rules difficult to navigate for EEA management companies as such management companies need to work out if the rule is relevant. It would make the rules more navigable if AFM were the term used where a rule applies to all management companies (i.e as an umbrella term) and where a rule does not apply to all entities included within that term, the term should not be used, but rather the entities to whom the rule applies should be spelled out in the relevant rule. For example, in the case of depositaries, the term depositary means generally both the depositary of an ICVC and the trustee of an AUT, but in cases where it is not intended to cover both types of entity, the entity concerned should be made clear in the relevant rule. COLL 6 Annex 1 In the opening paragraph, the words which is an authorised fund manager are not necessary and may lead to confusion. We therefore suggest that these words be deleted, so that the relevant section reads...between an EEA UCITS management company of a UCITS scheme and the depositary of that scheme. The applicability of the Annex is clearly set out in COLL 6.6.4(6). Annex 1 (2)(c) We appreciate that this is a copy-out from the relevant Implementing Directive (2010/43/EU). However, it would be helpful if the FSA included guidance as, otherwise, it might be taken to imply that UK depositaries have some sort of responsibility for AML in relation to fund investors. That is not the case. UK Depositaries have no relationship with individual investors, only with the fund and the authorised fund manager. Responsibility for AML compliance in respect of fund investors rests with the EEA management company or transfer agent. We need clarity as to whose AML rules would apply in relation to investors entering or leaving the fund. Box 3.G: Question Do you agree with the proposed changes to DISP to implement the complaintshandling requirements of UCITS IV? We agree with the proposed changes and have no comments. Box 3.H: Question Do you agree that FOS referral rights should be available in respect of complaints by eligible complainants where the UCITS scheme is FSA-authorised, irrespective of the location of the management company or the type of passport it is using (that is, scenarios 1 and 2 above)? We have the following comments on the proposed scenarios: Scenario 1 - if there are no changes to the current rules under DISP 2.6.1R, we have no issue. 13

14 Scenario 2 - We have some concerns about this proposal. It is not clear how fees could be collected for management companies outside the UK, as there is a suggestion that such fees would be voluntary. We question whether this would increase consumer confidence. Box 3.I: Question Do you think FOS referral rights should continue to be available for complaints by eligible complainants against a UK management company operating an EEA UCITS authorised in another Member State via a cross-border services passport? Scenario 3 - it is possible that this scenario may become anti-competitive for UK management companies paying the fees to FOS, when other Mancos operating cross-border services may not volunteer to pay such fees. Box 3.J: Question Do you think FOS referral rights should be available for complaints by eligible complainants against a UK management company operating a UCITS authorised in another Member State via a branch passport? Scenario 4 it is not clear from the Directive how this would work in practice and, again, it could result in anti-competitive practices. Box 3.K: Question Do you agree with the proposal that the FSCS should provide compensation coverage where valid claims arise from the default of a management company (irrespective of its home State), if the claims relate to an FSA-authorised UCITS scheme? If not, what do you think the scope of FSCS coverage should be? As per paragraph 3.87 in this paper, there are no requirements for Member States to provide compensation cover for UCITS management companies. Therefore to propose an expansion of the current scheme to cover all valid claims, irrespective of the home state, may have anti-competitive consequences for UK management companies. Chapter 4: Investor Disclosure Box 4.A: Question Do you agree that the draft regulation implements the Directive requirements in relation to key investor information and marketing communications correctly? Are there any other matters that should be addressed in the regulation? Section 90ZA the new civil liability provision refers to the prospectus of the fund being published in accordance with rules made by the FSA under section 248 of FSMA. Technically, section 248 of FSMA applies only to AUT's. The power to make these rules in relation to an OEIC comes from Regulation 6 of the OEIC Regulations, which extends the application of section 248 to OEICS. 14

15 Box 4.B: Question Do you agree with the proposed amendments to COLL? Are there any other matters related to producing the KID on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? Box 4.C: Question Do you agree with the proposed amendments to COBS and COLL? Are there any other matters related to providing the KID or marketing communications on which the FSA should publish rules or guidance to ensure the Directive is transposed effectively? We welcome and have continuously supported the Commission s objective of providing a fully harmonised disclosure document that would be the same for all consumers throughout the EEA. We also welcome the UK Government s decision to adopt the full 12-month transition period as permitted under Article 118 of the Directive. Generally, we welcome the copy-out of the Directive as a sensible method of its transposition. However, there may be some unintended consequences of adopting some of the requirements into the UK market. Our members seek clarification on the following areas: General We would urge the national regulators to arrive at a common set of terms and definitions so that pan-eu investors have a pan-eu frame of reference for comparison. It is important to mitigate the risk of their being a gap between what different national regulators mean by material, substantive, majority (51% or 99%?) and various other words. It is worth noting that CESR/ESMA s KID template as it stands already consists of words that the FSA, in their several previous publications, have labelled as jargon (e.g. leverage ). By way of a parallel example (but also a point in its own right), the draft rules suggest that where the net asset value of a UCITS scheme or EEA UCITS scheme has, or is likely to have, high volatility owing to its portfolio composition or the portfolio management techniques that are or may be used, the firm must ensure that a marketing communication relating to the scheme contains a prominent statement drawing attention to that characteristic. Will the FSA be defining volatility or will firms be left to work upon a range of (possibly contradictory) bases removing a key tool for comparison from the investor. There are numerous places in the UCITS Regulation where content is stipulated but in no great detail. For example, the Regulation calls for disclosure of an 'implied benchmark' without clarification of what such a benchmark is. Internal benchmarks can be (and are) used for a variety of purposes as part of business-as-usual fund management, and there is varying freedom to move away from them. 15

16 The Luxembourg trade association, ALFI, has issued guidelines on what constitutes an 'implied' benchmark - i.e. when a benchmark 'internal' to the fund management team passes over into the public realm and becomes a benchmark 'implied' to the end investor:. "If the benchmark is implied (for example, if the name and a tracking error are stated in the marketing material or if the investment manager's internal design documents say that the portfolio is constructed and managed with respect to a benchmark) it must be included in the KID." Over-onerous disclosure requirements of internal benchmarks could hamper internal freedom of movement for actively managed funds in particular, so it is important to understand what is meant by 'internal'. The need to harmonise the definition would suggest either that the FSA (and all other national regulators) should issue guidance or that there should be some sort of ESMA binding guidance on the meaning of 'implied benchmark' and on other interpretitive elements of the KIID Regulation. Transitional Provisions COLL TP 1.1 is amended to include a twelve month transitional period to comply with the requirements in relation to key investor information. The transitional provision operates simply to state that the authorised fund manager or ICVC need not comply with the rules in relation to key investor information, provided it continues to produce, publish and provide a simplified prospectus. There does not appear to be any specific guidance to reflect CESRs guidelines of 20 December For example, the guidelines make it clear that new UCITS authorised after 30 June 2011 should prepare a KII from the outset COLL 4.7.7R contains new provisions implementing the Directive's requirements to keep the KID up to date. There are more detailed provisions on this in the KID Regulation (Articles 22 and 23). These are not referred to in COLL, presumably because they are directly applicable. It would be helpful to have included within COLL guidance to cross refer to the KID Regulation on this point. COBS R which provides an exemption from the requirement to prepare a key features document, is to be amended to update the terminology to refer to a UCITS scheme and an EEA UCITS scheme that is a recognised scheme. It would be helpful if it could also be made clear that a key features illustration is not required for these schemes. As currently drafted, COBS R(2) requires a firm to prepare a key features illustration for each packaged product it produces. There is no exception for UCITS schemes. The only element of a key features illustration which is relevant to a UCITS scheme is the appropriate charges information, which requires a description of the nature and amount of the charges, an effect of charges table and reduction of yield information. COLL 4.6.9R makes it clear that the requirement to include effect of charges and reduction in yield information in the simplified prospectus ceases as of 30 June The proposed drafting of COBS provides that a key features document and key features illustration are not required to be provided to retail clients where the packaged product is a UCITS schemes, simplified prospectus scheme or an EEA UCITS scheme which is a recognised scheme. There does not therefore appear to be any logic to retaining the requirement to prepare a key features illustration in COBS

17 CESR Guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document We believe that there are two errors in the above guidance. In paragraph 6 (below) we believe the underlined text was supposed to have been deleted: The exclusion in 5(d) for transaction-related costs shall not extend to: (a) transaction-based payments made to any of the persons listed in 4(a) or (b), in respect of which the recipient is not accountable to the UCITS; all such amounts shall be taken into account in the published figure; The phrase in paragraph 5 of annex 2 should have been amended following the consultation, as follows: The exclusion for transaction-related costs does not extend to transaction-based payments made to the persons listed in 4(a) or (b)operator, depositary or custodian, or anyone acting on their behalf, for which the recipient is not accountable to the UCITS; all such amounts must be taken into account in the disclosure figure. This appears to be the intention expressed in the feedback statement: In paragraph 6(a), the scope of the exclusion for transaction-based payments has been slightly expanded to make clear that any payment to anyone who is responsible for operating the fund must be disclosed as part of the ongoing charges figure. The second error relates to the two references in paragraph 8 to Article 50. These should be to Article 55. Definition of Market Communication We note that the Directive introduces a new requirement for the disclosure of certain factual and risk information in any Market Communication and that the requirement would apply to firms that sell units in the UCITS as well as to its management company. It is proposed that this requirement be implemented through COBS 4.2 and 4.3 and will apply to a communication that: Comprises an invitation to purchase units, and Contains fund-specific information. However, in the absence of any definition of marketing communication, our Members are concerned that material designed for professional use, such as factsheets, would be captured by this requirement. The consultation document indicates that consideration was given to replacing the term with financial promotion, which has an accepted and understood meaning within the UK, but that HMT and the FSA considered this would widen the rule beyond what was intended by the Directive. 17

18 The resulting proposal, to leave the term undefined and rely upon its natural meaning, will lead to considerable confusion, particularly since it is the case that fact sheets and other documents intended for professional use are not financial promotions but, rather, are intended for the purpose of informing competent professionals. These professionals, in turn, interpret this information and use this and other material, together with their skill and expertise, to advise retail customers. We would urge the FSA to offer some clarification over what constitutes market communication so that resources are not unnecessarily expended in reviewing and modifying professional documents. There also appears to be no transitional period for the factual and risk disclosures to be included in marketing communications. It is therefore assumed that all marketing communications will need to comply with the Directive from its introduction date of 1 July This reinforces our assertion that the industry needs clarification over this point to avoid unnecessarily expending resources. We note that rule (2) does not fully reflect the requirement of Article 54 of the Directive. We suggest it would better reflect the article if it were amended as follows: The first line should read, Where a UCITS scheme or an EEA UCITS scheme has the power to invest more than..., and The last line should read intends to invest or has invested more than 35% of its scheme property. COBS R (1) refers only to financial promotions. Article 77 requires the concept embodies in COBS R(1) to be applied to marketing communications to investors. The FSA states that the concept of financial promotion is potentially wider than marketing communication, so presumably it would regard COBS 4.3.1R (1) as automatically applying to marketing communications, being a subset of financial promotion? This should be clarified by guidance. Institutional funds, classes or unitholders The Consultation document reminds firms that the Directive makes no exemption for institutional funds, classes or unitholders and, therefore, a KIID should be prepared for all funds. We agree that firms would be able to meet this requirement by preparing a KIID that contains a representative share class for funds intended for institutional investors. However, such a document would be superfluous in the sense that such institutional investors will have carried out extensive diligence checks far in excess of the information available on a KIID. Indeed, the need to provide a KIID could lead to delays in investment of funds and result in consumer detriment (see below). We ask the FSA to review its scope for applying some limited form of exemption (legal or practical) in this area. 18

19 Removal of exemptions in COBS 14 We note the proposed amendments to COBS 14, whereby the current exceptions to the timing rules regarding distance contracts and telephone communications that apply to the supply of the Simplified Prospectus after the placing of the contract have been removed for the KIID. The removal of these exceptions and the ability to send the regulatory information post-sale will have the effect of causing the industry to delay a significant number of deals. These deals may be received from either retail or institutional investors and could be: By telephone In writing by letter and/or cheque From institutional investors such as life funds, nominees etc. Top-up deals Switches Regular savings One of the key benefits of dealing in CIS is the ability to place a deal at any particular point in time, at a price determined at the next dealing point, and therefore to have immediate access to the market. Indeed, placing such a deal by telephone is regarded as a legally binding contract. The proposed change to the rule would mean that the fund manager could not place the deal if the consumer was unable to confirm they had seen an up-to-date KIID. Instead, they would have to send the KIID to them or direct them to a website to view it. This inevitably would lead to delays in completing the deal with potential opportunity loss for the consumer together with a rise in complaints and damage to industry reputation. Such consumer detriment could also arise in the case of placing a deal in an ISA just before the deadline as such a deal cannot be backdated and a year s tax allowance could be missed. The facility for placing deals at short notice over the telephone is also used by many institutional investors and occurs frequently through deals being placed internally from other parts of the business in large groups e.g. from a life company to an asset manager in the same group. The denial of this facility through the requirement to supply an up-to-date KIID could result in considerable lost investment opportunities particularly given the sums involved. Top-up/switches between classes COBS Rule AR indicates that a top-up investment into a UCITS scheme in which the investor has a holding, or where an investor is switching classes of the same fund, are not considered new transactions and therefore will not require the supply of a KIID, provided the most up-to-date version has already been provided to that investor. It is unclear how this could result in any other outcome than the need to supply a KIID when the switch or top-up is affected. The investor would have been provided with a KIID at the point of sale, as required by the Directive, but this will cease to be the most up-to-date as soon as the manager undertakes its annual review. 19

20 Therefore, if the top-up/switch is at any point after that review, the investor must be supplied with the latest KIID. We would ask the FSA for further clarification on the intention of this rule as it does not seem to offer any lessening of the administrative burden on the manager. Position of NURS It is most important that separate proposals for the treatment of non-ucits retail schemes (NURS) are considered as soon as possible and we note the intention to bring forward proposals in the first half of The current position of a NURS, for which the manager can opt either to use a simplified prospectus or supply Key Features Documents (KFD) as prescribed by the FSA rules, is clearly going to lead to confusion in the market place during the development and proliferation of KIIDs in the transition period. It is important that some clarity is offered by the FSA. However, it is also important that account is taken of the Commission s work on PRIPs. The PRIPs initiative proposes a form of disclosure very similar to the UCITS KIID. This could impact the operators of NURS who chose not to opt for the KIID or, indeed, are unable to do so in future as a result of the PRIPs legislation. This would arise particularly if the NURS operator were permitted to move to a KIID disclosure regime as an option, similarly to the current option regarding the SP, but the PRIPs initiative resulted in a different disclosure requirement. NURS operators could end up switching from one disclosure method within a short time frame to another to comply with the various requirements. We therefore ask that maximum flexibility be given to firms during the transition period, so that towards the end of that period, when the direction of the PRIPs disclosure is clearer, firms can take business decisions best suited to them and the investors in their funds. Cancellation Rights etc. We note that COBS R has introduced a new requirement for consumers to be provided with relevant pieces of information set out in COBS R (2). The relevant information would consist of disclosure to the consumer of complaints handling, compensation rights and cancellation rights, where applicable. This information would need to be disclosed to the consumer separately from the KIID, in a clear, fair and not misleading manner. No guidance is offered as to the manner in which that disclosure may be made. Whilst it is most likely to be in a document that would accompany the KIID at the point of sale, there could be a number of effective methods which would have the same outcome. Therefore we would urge the FSA to be pragmatic in its assessment of disclosure methods. Durable medium We note that Rule B, regarding the provision of key investor information, makes reference to providing such information in a durable medium or by means of a website. However, the rule does not take account of Article 38 of the regulation which says using such a durable medium is appropriate to the context in which the business between the management company and the investor is, or is to be, carried 20