12/07/2011 Author: Will Wainewright

Ucits goes fourth

The introduction of the fourth iteration of the Ucits legislation, Ucits IV, at the start of the month may have caught some by surprise, but for others, the new regulations will open up fresh distribution opportunities 

The introduction of Ucits IV on 1 July was met with varying levels of readiness across the industry. National financial markets, including France and Italy, reportedly failed to update their processes in time and missed the deadline. Some firms, like BNP Paribas, were well prepared and ready to capitalise on the move, unveiling their Ucits IV-compliant master-feeder solution four days before the ruling went live. Others, depending largely on size and nature, have struggled to keep up.

The aim of the latest draft is, at least, fairly clear. “The whole idea of Ucits IV is to produce more efficient ways of organising cross-border distribution of products,” says Killian Buckley, a member at consultancy firm Kinetic. Certainly, the introduction of a master-feeder structure and a framework for mergers should both provide possible advantages. Many managers, however, will scoff at the measures to improve co-operation between different national regulators – protectionism in the Ucits space remains a common gripe and some question whether all countries will have the capacity to authorise funds within the new ten-day limit.

As the final Ucits instalment planned before the crisis, IV has a large focus on efficiency, but the changes that caused funds the most work before the deadline affected governance. “Ucits IV is largely about corporate governance. In our case, we had to make very little change as requirements were already in place,” says Merrill Lynch’s Miriam Muller, head of the investment bank’s $2.3bn Ucits platform. The affected areas of corporate governance include conflict of interest and complaints handling procedures, along with processes for managing counterparty risk.

One reason the direct effect of Ucits IV was limited for some was that one of the headline changes, the replacement of the Simplified Prospectus by the Key Investor Information Document (Kiid), does not take effect for existing funds until July 2012. However, Ucits launched from now on will have to produce clear, two-sided guides on all aspects of the fund, including a risk indicator.

However, ML Capital, which operates the Montlake Ucits platform, has decided to start now. “We could wait until next year but have made the decision not to do that,” says COO Richard Day. “We are in the process of launching three funds this month and we’ve decided we’re going to go straight into the new regime. As a new platform we are looking to expand our business very rapidly, so I didn’t want to have to find myself having to go back and redo things in 12 months’ time.”

Day believes that the Kiid process will bring costs down in terms of passporting into other countries. “Now you only have to have a two-page document translated so there are cost efficiencies which should in turn benefit investors in lower total expense ratios.” However, some believe that Kiid will lead to costs being generally higher. Noel Fessey, managing director of Schroder Investment Management Luxembourg, thinks the implementation project for Kiid will be twice as expensive as that for the simplified prospectus.

While Ucits funds grapple with the implications of IV, some providers have made the most of it. BNP Paribas’s new master-feeder vehicle has generated strong interest, according to Margaret Harwood-Jones, the company’s head of client segments (asset managers and alternative investments). “We adapted our solution so we can provide the services at both levels in an efficient and highly automated way,” she tells HFMWeek. “We aim to provide a cost structure to clients that is the most efficient in the market.” Ucits IV was certainly a buzz topic in Monaco at the recent Fund Forum event, with providers commenting that regulatory development means change, which in turn means opportunity.

And the pace of change shows no sign of letting up. Ucits V is presently at a consultation stage, meaning many managers and providers have adopted a ‘wait and see’ approach, but with a draft version scheduled for the end of the year, another new Ucits layer is just around the corner. “Ucits V is likely to be a little less efficiency-geared than IV,” says Kinetic’s Buckley. “With the focus on depositories, it will be more about investor protection.” Muller adds: “Ucits V confers a high level of responsibility to the depository and we are watching this point with interest to see how the market responds.”

As the shape taken by Ucits V unfolds, the main test for funds already working on IV and innumerable other regulatory burdens will be whether they can keep up with the changes.