No. The Commission believes that it needs to build on the existing framework. The new rules have been in place only for a few months. Market participants are still busy coping with the changes entailed by UCITS III. The Commission believes, though, that the new UCITS framework can be made more effective and can lead to missed opportunities. It has a clear short-term and medium-term strategy to remedy this. But one should remember that the ideas behind the UCITS framework are thirty years old. The Commission believes it is also time to launch a debate on the sustainability of this original vision in the long term. Avoid regulatory fatigue, make the best of what we have, and think ahead: the Commission believes this to be the most appropriate agenda.
Asset management has been recently been the subject of extensive discussion. What is new in the Green paper?
True, some of the ideas of the Green paper have already been discussed last year within the asset management expert group. However, there was no discussion of solutions and no sense of how to move forward. The Commission believes that the Green Paper brings the debate to the next stage and offers a realistic appraisal of problems and possible solutions.
How have the consumer's interests been taken into account?
Consumer protection is at the very heart of the UCITS framework. In preparing the Green Paper the Commission considered consumers’ views. It discussed its proposed priorities with consumer representatives in the FINUSE network and shareholders representatives, as well as with retail fund promoters.
The UCITS Directive establishes several levels of investor protection. These include investment limits, safekeeping of investors’ assets and risk management controls. Are the right protections in place? Can consumers have confidence in the investment fund sector? The Commission believes it needs to explore this further. Moreover, one of the core objectives of the Green Paper is to revisit industry practices, notably in the field of distribution. This is clearly in the interest of consumers.
Does the Commission intend to regulate hedge funds?
The Commission’s view is that there is currently no compelling case for EU legislation on hedge funds. It believes this is not needed to support the development of the industry cross-border. There is no clear evidence of cross-border retail investor risk. There is no demand from market participants for EU coordination to remove barriers to market access.
Nevertheless, the Commission believes some hedge funds issues deserve further attention: gradual market opening towards retail investors in certain countries, exposure of the investment banking sector and impact on the functioning of financial instruments markets.
The Green Paper invites responses from all stakeholders on these issues. It also envisages the creation of an industry working group on alternative investment strategies. The group will give further consideration to the existence of legal, regulatory or administrative barriers hindering the efficient organisation of the business on a cross-border basis. It will also reflect on likely trends in terms of product development and offers to investors.
All sorts of complex high-risk products are being sold as UCITS. Does the Commission intend to address this issue?
The Commission is aware that more complex and sophisticated products are coming on stream under the UCITS umbrella. The work undertaken by the Committee of European Securities Regulators (CESR) and the Commission on the clarification of definitions on eligible assets is therefore very important. It will bring some certainty as to whether certain innovative products such as derivatives on hedge fund indices are eligible for UCITS.
In addition, the Commission has identified the way UCITS are distributed and promoted to retail investors as an area for further clarification. It needs to be ensured that investors understand the main risks of the products they are going to invest in. Clarifying the obligations of fund distributors as regards duties of care and information they owe their clients is an important measure for achieving this aim. It will help to maintain the high level of investor protection associated with UCITS.
If the working groups proposed in the Green paper are established, what will be their composition?
The first priority will be to gather technical expertise. The Commission will seek to bring together in those groups individuals with the relevant experience and skills. It must also get a broad perspective from across the sector and the EU. The conclusions of these groups are likely to provide both qualitative and quantitative evidence which will assist the Commission in future policy developments in these areas.
Does the Commission envisage turning the UCITS-Directive into a "true" Lamfalussy-Directive?
Some stakeholders advocate the recasting of the UCITS Directive along the lines of the Lamfalussy approach. This, however, will not be a cosmetic exercise. This would invite choices on the principles to be retained at framework level and on the scope and content of decisions to be determined through comitology. Thus, the Commission will seize the occasion to restructure the Directive following the Lamfalussy approach only if a consensus emerges on the need for legislative changes to its substance.
How will the Commission meet its objective of better regulation in the UCITS area?
Where legislative actions may come under consideration, they will be subjected to:
- extensive ex-ante consultation: including public consultations (e.g. in the asset management working group report and on this Green Paper) and regular/ad hoc meetings with national authorities, industry associations and other market participants. The Commission will hold an open hearing on the Green Paper in Brussels on October 13th. Registration for this event will be available online in the coming weeks.
- regulatory impact assessment and cost-benefit analysis: the Commission will not only ensure that any EU level intervention is targeted towards a specific market/regulatory failure, but also ensure that Community action is the most efficient way to deal with the problem. In this respect the Commission is launching two studies on the cost structure of the investment fund industry and on the current trends and risks affecting the asset management sector. Commission services will also continue internal research on the various topics highlighted in the Green Paper requiring particular
