“Perhaps the most significant review of UK collective investment schemes that has ever taken place,” is how one leading law firm described the FSA's consultation on a new set of rules governing collective investment schemes.
The review has been completed and the new rules are now published as the CIS Sourcebook – A New Approach. This bland title understates the impact of the new rules, equivalent to saying that JK Rowling has sold a few books.
There are 348 pages of FSA feedback and new rules to read but, for the compliance and product development teams at fund manufacturers, it is a page-turner of the highest order. There is a lot to get excited about in the new rules.
First is the timeframe for the new rules to be adopted. From April 2004, the new rules introducing non-Ucits retail and qualified investor schemes can be applied and all UK authorised investment funds must adopt one of three sets of rules by February 2007. The new rules offer three regimes for investment funds – Ucits, non-Ucits retail and qualified investor schemes – with a hierarchy of investment flexibility from one to the next. Fund managers can therefore take advantage of the new rules immediately.
Indeed, the new Ucits rules were launched in November 2002 and we have already seen innovation as a result. The Threadneedle limited-issue fund was first off the mark and the new rules offer even more flexibility.
The fly in the ointment is that the Inland Revenue appears to be somewhere behind the FSA in implementation. There is no sign of whether non-Ucits retail funds will be eligible investments for Isas and Peps or of a tax regime for qualified investor schemes.
It took 10 months for the Revenue to say whether new-style Ucits were going to be allowed in Isas and there is no reason to expect a swifter response this time round. This is likely to slow the rate of innovation in the marketplace as, for most retail fund managers, assets held within Peps and Isas are a big chunk of money.
But the opportunity for innovation exists, both for Pep and Isa funds and via funds not available for Isas. Expect the next 18 months to see a flurry of new funds being launched as asset managers come to realise how the flexibility in the new rules can be stretched. The Baring directional global bond fund using futures and forwards to manufacture short positions is a great example of the kind of innovation we can expect.
We also expect to see qualified investor schemes developing a marke. With 100 per cent gearing allowed and the ability to short-sell, this could be the stealth launch of authorised hedge funds to the UK market. The challenge will be to see how well fund managers cope with this flexibility as freedom can be a double-edged sword.
Investors must also be able to benefit. It is one thing to set up a new fund with a highly innovative investment process but, unless consumers buy in, it is an exercise in futility. Given how much confidence has been rocked in recent years, we need to consider what reassurances can be built into a fund. Expect a move away from benchmark-driven mandates to funds which target an absolute positive return – perhaps going so far as to operate as limited-issue or limited-redemption funds incorporating a derivative strategy in the investment policy to underwrite a positive return to a point in the future.
The FSA deserves a fair amount of praise for the new rulebook. Asset managers should benefit from a flexible set of rules, allowing products to be targeted at sectors of the market with an appropriate level of regulation rather than the one-regime-fits-all approach we have had in the past. Investors should benefit from a revitalised marketplace with innovation in product design to better reflect their needs – primarily that of actually making a positive return. Now we just wait to hear what the Revenue thinks.
Toby Hogbin is head of retail product development at Credit Suisse Asset Management