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Fragile future

There is danger lurking on the horizon for fund management as EU finance ministers discuss the future of collective investment. In advance of the new Ucits (undertakings for collective investment in transferable securities) agreement, which could be reached next month – and amid low general industry awareness – what is the current state of play?

Fund management could face a major shake-up if a proposed EU directive gets the go-ahead. The Ucits directive is the framework under which fund managers can market and sell their products in other EU countries.

Originally agreed in 1985, it provides, in effect, passports for certain investment products. As the EU has set itself the goal of establishing an integrated financial market by 2005, this directive is to be amended. The first amendment, extending asset range, has been welcomed in the UK. The second raft of amendments, however, has been met with consternation.

Political agreement was reached on the first proposal at a meeting of Ecofin, the council of European finance ministers, last October. The second is still under discussion and the Chancellor of the Exchequer Gordon Brown is understood to have opposed it at the last meeting. It is possible that agreement could be reached when Ecofin next meets on March 12.

The controversial second proposal, opposed by Autif, contains a variety of measures.

Some are uncontentious. Unit trust managers would, for instance, see restrictions on their activity eased and be allowed to carry out more work – discretionary portfolio management, for instance.

Then there is also a proposal for a harmonised and simplified prospectus. This would be a single marketing document from which a company would be able to sell across Europe and which would require no more than translation. This would be a web-friendly measure in line with the amendment&#39s aim of meeting ongoing developments in e-commerce.

Now for the proposals that Autif feels would put UK fund managers at a disadvantage. Corporate funds, Oeics and Sicavs (their French counterparts), will have passports across Europe whereas contractual investment funds will not. So countries would potentially be able to acquire UK investors with no cost base in this country.

In two major markets, Germany and Italy, retail investment is contractual rather than corporate, which means that the UK will not be able to reciprocate.

Autif senior international policy adviser Julie Patterson says: “The passport will be discriminatory in effect and create distortions in the market.” She does not see it as contributing to a single market, and thinks it a retrograde step.

The second contentious measure relates to capital adequacy. The current proposal would require investment companies to keep the equivalent of 13 weeks of fixed overheads in reserve or an as yet unagreed percentage of funds under management.

Patterson believes that this measure would unduly affect the UK, which has a preponderance of smaller companies. Whereas the UK and France have a diverse sector with small, medium and large investment companies, the rest of Europe is dominated by the large banking groups, which have a lot of capital.

Patterson is also unhappy that no analysis has been done to back this measure, and she disagrees with the assertion that the total of funds under management would, on its own, provide a proper assessment of risk.

The third disputed measure relates to delegation. In the UK a large amount of delegation takes place, be it asset management or marketing that is farmed out. But some countries are very opposed to delegation – Germany in particular. They would retain the power to refuse it whereas it would continue to be allowed in the UK.

The proposals that have already been agreed and welcomed by Autif extend the range of assets that a fund can invest in and still be passportable. In addition to the equities and bonds which are currently allowed, fund managers will be able to invest in derivatives, deposits, funds of funds and mixed funds. Property, venture capital, master-feeder or geared and hedge funds will still be excluded.

This has been broadly welcomed as putting things on a more equal footing. One overall possible effect of the new directive, according to LeggMason product director Brett Greatex, would be a further stimulation for trusts to convert into Oeics.

As the range of assets is extended so are the investment limits, but this would still be broadly in line with current UK regulations.

With the greater range of assets, a new limit of exposure to a single group rather than stock is introduced. For equity and debt, this limit will be 10 per cent, with an overall limit of 20 per cent to any particular group.

Patterson believes this will not be a problem for UK fund managers, other than as an extra compliance cost.

UK products would become more passportable. But when taken together with the negative impact of the second proposal, Autif is urging the Government to withdraw from the directive unless significant alterations are agreed.

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