EUROPE: European Commission publishes White Paper on Investment Funds

Thursday November 16 2006

The European Commission has published its long-awaited White Paper on Enhancing the Single Market Framework for Investment Funds. In the White Paper, the Commission notes that the UCITS Directive is no longer sufficient to support the European fund industry and that core elements of the Directive are not functioning effectively. The White Paper notes that the inefficiencies and constraints are reflected in higher costs and lower returns and that a reduction in European Fund operating costs to US levels would boost nominal investment returns by 3%. The White Paper concludes that, on balance, there are insufficient grounds to undertake a fundamental revision of the Directive but does instead envisage a structured review of the needs for changes to the scope and regulatory approach of the Directive as the contours of the fund market evolve.

To support the White Paper, the Commission has also published a Feedback Statement to the responses on the Expert Group Reports as well as publishing studies on:

*Potential Cost Savings of a Fully Integrated European Investment Fund Market;

*Current trends in the European Asset Management Industry ;

*Investment funds in the European Union: comparative analysis of use of investment powers, investment outcomes and related risk features in both UCITS and non-harmonised markets.

All of the above can be found at the above link.

The White Paper foresees action to:

1. Strengthen single market freedoms, thereby enabling the fund industry to serve European and global investors more efficiently:

This includes action in respect of: removing administrative barriers to cross border marketing; facilitating cross border mergers; asset pooling; management company passport; strengthening supervisory co-operation; efficiency improvements that do not require changes to the Directive; message routing and fund order processing / settlement; and depositary passport.

2. Ensure that investors are in a position to make informed investment decisions and rely on qualified intermediaries for objective expert assistance:

This includes on work on the Simplified Prospectus. The White Paper calls for the Directive to be amended to clarify the fundamental objectives and guiding principles of the Simplified Prospectus. It also calls for the adoption of legally binding implementing measures to give effective and uniform expression to those principles.

The White Paper also notes that distribution accounts for the biggest single component of costs in the investment fund industry – ranging from 46% of total costs in France to 75% in Italy. The White Paper notes that move from foreclosed distribution towards open or guided architecture – where intermediaries offer a range of third party products – is gathering pace.

3. Assess whether a single market framework should be created to allow the cross-border sale of some types of non-UCITS to retail investors and how this could be most effectively done:

The Commission undertakes to study the likely costs, benefits and risks of providing an enabling single market framework for non-harmonised retail products and whether such products are suitable in the first place for marketing to investors on a cross-border basis. The Council will report to Council and to Parliament on the conclusions of this assessment in 2008.

4. Launch work on a European “private placement” regime to facilitate the sale of harmonized funds and financial instruments to institutional and sophisticated investors in other Member States:

The Commission services, working with CESR and national authorities will study the types of marketing and sales restrictions that should be repealed in favour of reliance on the investment firm exercising responsibility for the sale of products on a client-by-client basis. As part of this process, the Commission will undertake a systematic inventory and analysis of national barriers to “private placement” of financial instruments with institutional investors and other eligible counterparties. The Commission will report to Council and Parliament on the steps that need to be taken to give full effect to a common private placement regime in autumn 2007.