UK's Financial Services Authority Proposes New Approach To Collective Investment Scheme Rules

The Financial Services Authority has today published proposals for reforming the regulation of Collective Investments Schemes, such as unit trusts and OEICs. Under its proposed new regime, retail investors will have access to a wider range of investment opportunities and product features, together with better information about the progress of their investments, while schemes available only to professional investors will benefit from a reduction in regulation.

Michael Folger, Director of Conduct of Business Standards for the FSA commented: "Our current 'one size fits all' approach to fund regulation does not take sufficient account of the fact that investors have differing degrees of experience and expertise. Our proposals recognise changing consumer needs and market developments. They should give the industry more operational flexibility, whilst safeguarding investors' interests".

The key proposals are:

• A new category of non-retail schemes, restricted to investment by institutional and expert investors only, will be introduced. These will be subject to lighter product regulation than retail schemes, reflecting the fact that the investors in them can be expected to have greater expertise and experience than the majority of retail investors. The rules governing them will, however, be robust enough to distinguish them from unregulated schemes. Investors in such schemes will not have access to private customer protections.
• The current eight distinct categories of retail scheme will be rationalised into two broad types. These will comprise a "UCITS" type, which has Directive-imposed requirements on the spread and quality of assets in the fund and a "non-UCITS" type which will be able to invest in a wider range of assets including property, an asset class currently outside the UCITS Directive. The former may be passported in the EU, meaning that it may be offered to investors in states other than the home state of the provider.
• In the area of charges, the rules for unit trusts will be aligned with those for OIECs and performance fees will be allowed for both products, bringing the UK in line with most other EU Member States. There will be a requirement for up-front disclosure to investors of examples of how such fees would operate.
• Investors will receive better information over and above that which is required to be sent to them as a result of specific events in their fund. Operators will have to send short-form reports to customers in place of long-form reports and accounts, which will better meet the needs of non-professional customers. The full prospectus will also be more user-friendly than existing prospectuses, consistently with the FSA's recently-proposed Key Facts document for packaged products.
• The requirement that CISs be open for redemption at all times is to be limited in some non-UCITS schemes, notably those where, for example, the investments are relatively illiquid (e.g. property). The FSA proposes to permit redemption days to be up to six months apart.

By removing, wherever possible, prescriptive material from the current rules, the FSA estimates that it will reduce the 500-page CIS Sourcebook by some 40%. The main consequence of the proposed changes would be to shift the balance in the way authorised CISs are governed to put more weight on the fund documentation and somewhat less on the regulator's rules. The FSA estimates that the total cost to firms of updating documentation to be around £10 million, a cost more than offset by the savings to be expected from streamlining annual and six-monthly reporting requirements. Firms will be offered an extended transitional period to February 2007. As this is the date when the rules implementing the UCITS product directive come in to force, many existing funds will be able to consolidate the costs of both sets of changes.

The consultation period on the proposals runs until 31 October 2003. The FSA plans to make final rules in early 2004, at which point they will be available for use by existing UK schemes. They will apply to all UK schemes from February 2007.

Background

1. Consultation paper 185 , The CIS Sourcebook - a new approach, is available on the FSA website, www.fsa.gov.uk.
2. UCITS are collective investment schemes, which are undertakings for investment in transferable securities qualifying for passporting rights within the EEA under Directive 85/611/EEC.
3. The UCITS Directive was amended by two Directives that came into force on 13 February 2002. Rules implementing the amending directive relating to extended investment powers (2001/108/EC) were published with a Policy Statement - Feedback on CP135 on 1 November 2002. Draft rules to implement the amending directive relating to providing a passport for managers of collective investment schemes (2001/107/EC) were published in CP163 - The UCITS Management Directive - in December 2002. The FSA is currently considering responses to CP163.
4. Collective investment schemes set up in the UK, which are for marketing to the public must be authorised by the FSA within a detailed set of rules as to their constitution and operation.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.
6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.