EUROPE: European Commission Report on Investment Funds Framework

Wednesday July 5 2006

The European Commission has published three industry reports that analyse the main challenges facing different segments of the EU investment fund industry, focusing respectively on retail investment funds (UCITS), hedge funds and private equity. The reports were prepared by the expert groups on investment fund market efficiency and alternative investments, and are a follow-up action to the Green Paper on the enhancement of the EU framework for investment funds and long-term savings vehicles. As such, they constitute an important input to the forthcoming White Paper on strengthening the single market framework for investment funds, scheduled for publication in November 2006. The reports will be debated at an open hearing in Brussels.

The report on investment fund market efficiency acknowledges that the rapidly changing investment environment is placing strain on the UCITS framework. The report notes that the demand for investment products has rapidly evolved in response to structural trends, such as the ageing of the population. At the same time, retail investors tend to have a more sophisticated understanding of the investment products on offer. Finally, uneven disclosures and conduct of business protections put the fund industry on an unequal footing compared to other financial services.

The report concludes that UCITS must respond quickly to these pressures if they are to remain competitive and attractive to investors. Should this not be the case, other investment products will rapidly fill the gap. To this end the report identifies the following urgently needed improvements:

*Reduce the administrative delay in getting UCITS funds into the market (to be achieved through improved cross-border notification rules and improvements to the simplified prospectus) ;

*Enable the rapid and efficient merger of funds ;

*Allow the centralized (pooled) management of assets owned by different funds ;

*Breathe life into the management company passport; and

*Provide more freedom for depositaries.

The report calls on the EU to deliver these improvements within three years.

The Commission also welcomes any written reactions to the reports, which can be e-mailed to: markt-consult-july-2006expertgroups@ec.europa.eu.

Responses must be received by 20th September.

The expert group reports and press release are available at the above link.