EUROPE: CESR publish call for evidence on UCITS Investor Disclosure

Thursday April 12 2007

CESR has published three calls for evidence following upon a request from the EU Commission for CESR assistance on Key Investor Disclosure for UCITS. This request can be found at the above link.

CESR has published a `http://www.cesr-eu.org/popup2.php?id=4470`general call for evidence and two specific calls for evidence:

a) `http://www.cesr-eu.org/popup2.php?id=4471`Specific call for evidence for retail investors and representatives of individual retail investors;

b) `http://www.cesr-eu.org/popup2.php?id=4472`Specific call for evidence on UCITS distribution.

All contributions can be submitted online via CESR´s website under the heading Consultations at `http://www.cesr.eu`www.cesr.eu by 25 May 2007.

The Commission believe that it may take up to two years to complete this work and has suggested that CESR organise its work in three phrases:

Phase 1 – codify an “ideal” set of requirements which succinctly and effectively communicates risk, cost and possible outcomes to the end-investors. This should be completed by end of 2007.

Phase 2 – consultation on and systematic testing of the proposed disclosures. This survey and consultation phase could take 10 to 12 months to complete and process.

Phase 3 – finalisation of CESR recommendations / proposals, following consultation and consumer testing, in the period to 1st March 2009.

There is recognition that this is an ambitious and complex project and indeed a flagship project in the area of investment funds and investment protection.

BACKGROUND

The UCITS Directive requires the use of the simplified prospectus for the purpose of informing clients before they invest in UCITS. However, responses to the Green Paper on Asset Management and the report of the European Parliament have highlighted the shortcomings of the simplified prospectus. “The simplified prospectus does not provide an effective basis for informing the retail end-investor about the relevant considerations associated with a proposed fund investment – such as the cost of investment, investment policy and associated risks. This results from a lack of clarity as regards the purpose of the document, inappropriate content and untimely delivery, as well as the divergences that have arisen in national implementation.”

In the White Paper, the Commission undertook to launch remedial work on the Simplified Prospectus and indicated that this work will require amendments to the UCITS Directive (Level 1) to clarify the fundamental objectives and guiding principles of the UCITS Directive. As part of that modification, the Commission will also provide for the adoption of legally binding implementing measures (Level 2) to give effective and uniform expression to those principles across the EU.

The overarching objective for this work is to replace the existing Simplified Prospectus with short, meaningful explanations of the risks, costs and expected outcomes associated with investment in a UCITS fund / sub-fund.

ON 22 March 2007, DG MARKT published an extensive body of material as a basis for public consultation on the shape of the guiding principles governing revamped fund disclosures. The formal Commission proposal to modify the relevant UCITS provisions is scheduled for publication towards the end of 2007/ early 2008. The Commission believe that the groundwork could already usefully start on the detailed content and form of appropriate investor disclosures and hence this request to CESR.

The requested groundwork would involve development of mandatory investor disclosures to be delivered by fund managers in respect of the UCITS they manage. This would include defining the key items to be disclosed: notably, investment policy/objectives, costs and charges associated to the investment, risk/reward profile of the proposed investment, as well as the forms and methods for providing the disclosures. The requested work would have to take into account the different sales channels and methods for distributing UCITS (direct sales, intermediated sales, wrapping or structuring of UCITS in other products), bearing in mind that the ultimate purpose is to provide adequate information to retail investors to enable them to take an informed investment decision.

A coherent approach to investor communication

Perhaps most importantly, in the EU Commission request to CESR, we can see recognition of the need to consider “establishing a coherent approach” to investor communication.

Firstly it is commented that the outcome of this project could serve as a benchmark for comparable savings products. Also, it is noted that another issue which will warrant consideration is whether similar levels of disclosure can be introduced when UCITS are sold through non-MIFID distribution channels. It is also recognised that these product disclosures will only be effective if this information is used in a timely and effective way by the intermediaries who sell or recommend UCITS and that there is therefore a need for an articulated approach between the rules governing the product disclosures by the UCITS regulated fund manager and those governing the provision of the relevant information by the fund distributor / advisor when selling or recommending UCITS to the end-investor.