EUROPE: FSA Speech – UCITS, MiFID and the Simplified Prospectus

Thursday January 18 2007

Dan Waters, Asset Management Sector Leader at the FSA, has made a speech entitled `Opening up European markets for fund distribution: the impact of MiFID on UCITS distribution` which has published on the FSA website and is available at the above link.

In this speech (as well as referring to the designing and building of a `Mark IV UCITS Directive`), Mr. Waters notes that it remains `undeniably difficult to set out the full impact of MiFID on UCITS` and points out some anomalies such as the fact that whilst MiFID doesn’t apply to UCITS distribution by the scheme operator, it does apply where the UCITS is distributed by MiFID firms. He also goes on to discuss the MiFID `Appropriateness Test` and the impact of MiFID on the Simplified Prospectus, as discussed below.

The MiFID `Appropriateness Test`

Mr. Waters points out that one new aspect being introduced by MiFID is the MiFID `Appropriateness test` which may affect MiFID intermediaries processes and strategies when they are proactively targeting retail clients to enter into non-advised transactions in UCITS. Even though MiFID classes UCITS as `non-complex` instruments, if a client is responding to a `personalised communication` from a MiFID firm, the firm needs to establish whether the client has the knowledge and experience in order to understand the risks involved in the transaction envisaged. If not, the firm must warn the client.

Mr. Waters notes that this requirement may necessitate some changes in direct-offer and execution only distribution models for UCITS, across all Member States and that MiFID firms may want to modify any `personalised` content of relevant marketing and direct offer material, to avoid triggering the appropriateness test in the first place.

The Simplified Prospectus

The core of Mr. Waters ` speech focuses on MiFID and the Simplified Prospectus. Mr. Waters notes that the `fair, clear and not misleading` MiFID approach stands in contrast to the `particular format with particular content` approach of the current Simplified Prospectus which Mr. Waters acknowledges has had `almost universal criticism.`

After analysing the different approaches taken to fund distribution between different Member Sates, Mr. Waters suggests that one standardised document that captures the right information and is demonstrably effective as a consumer disclosure tool across the board `looks like a tall order`. Mr. Waters suggests that a better approach may be to isolate and rigorously harmonise the key information about a fund which must be provided to an intermediary or to consumers when selling direct.

Whatever one `s thoughts the question of whether the Simplified Prospectus needs more or less prescription as to both format and content, Mr. Waters is surely right on the need to `resolve the current nonsense of different member states having completely different formulae for calculation of the TER` and to tackle the question of disclosure of `risk and risk ratings, and ensure that all Member States take a similar approach.”