Gavin Haynes, investment director, Whitechurch Securities,
Juliet Schooling, head of research, Chelsea Financial Services The FSA's new more flexible regime for authorised collective investment schemes replaces a prescriptive and overly detailed regime containing too many rules while maintaining a robust regulatory environment.
The changes should mean that the UK becomes a more attractive domicile for funds. But there is one important proviso – to ensure that the new regime works to its best advantage, the UK needs to get its tax regime right. A workable and simplified tax regime is crucial to UK competitiveness.
Given that this is the biggest regulatory change to affect the UK collective investment scheme industry since rules governing the sector came into force in 1988, the IMA welcomed the FSA's decision to consult with the industry. The objectives of the review – to remove prescription, to increase flexibility and to maintain a robust regulatory structure for authorised collective investment schemes for a broad range of consumers – could not have been met with a top-heavy approach which did not take into account the benefit of the industry's experience. The IMA hopes the process will serve as a model for future FSA consultations.
As with any new regime, there is often a need for a transitional period to avoid the “big bang” conversion phenomenon. The FSA has allowed for newly authorised funds – those authorised after implementation of the CIS review – a transitional period for compliance with the new sourcebook. This will run until February 2007 and will allow managers to continue providing new products under the old regime while setting in place their plans for conversion of their complete range of funds.
The IMA particularly welcomes three specific changes. First, the introduction of a wider range of products for retail investors, which will allow more suitable products to be developed for a whole range of investors, from the very cautious to sophisticated institutional investors. These new products will be an important step towards helping to improve the UK's position in a competitive market.
Second, the introduction of short reports which will provide investors with a concise, consumer-friendly overview of their funds twice a year. These are a welcome addition as a means of improving transparency for investors by providing them with an easy-to-understand overview of fund performance, investment objectives, policy and changes to the fund but they will not replace interim and annual reports which will still be made available on request. It is hoped that the short reports will play an important role in helping investors gain more of an understanding of the nature of their investments. The IMA, alongside the FSA, is producing a pro forma short report with guidance notes. The pro forma is not compulsory but will be an example of what managers could produce to comply with the new requirements.
Third, clarification of the use of fair value pricing. The IMA believes this is an important addition to the tools which fund managers have, as it will allow them to price funds accurately and avert market timing. The rules will also incorporate helpful clarification of a manager's ability to refuse to sell units to people whose dealing activities may cause detriment to other investors in the same fund. The IMA is working with the Depositary and Trustee Association on draft guidance for members, outlining the processes involved when using fair value pricing.
The new rules will trans-form the fund world. They will allow all investors to be catered for and competitiveness will be enhanced. There will be fewer rules, which will allow managers to manage their funds more effectively and efficiently but investor protection should not be harmed.
But a note of caution -a more efficient and simplified tax regime has to follow as a natural complement to the new rules.