After years of jostling, wriggling and member states generally doing everything possible to ensure that the benefits of UCITS III never really got off the drawing board, the European marketplace could finally be thrown open to real cross-border competition if the latest working paper from the European Union (EU)achieves its goal.
The development of a set of Directives resulting in UCITS (Undertakings for Collective Investment in Transferable Securities) was intended to allow funds authorised in one member state to operate freely throughout the EU.
Like most European Directives however, they fell subject to individual states' determination to make life difficult for one another, but the latest proposed UCITS IV Directive hopes to change all that.
Scheduled to come into being mid-2009, it aims to further facilitate registration and marketing of funds across the EU.
The biggest barrier to a true European fund 'passport' has been the ability of member states to make excessive demands on fund management companies to prove their products were UCITS compliant – creating paperwork and red tape in the very best traditions of European cooperation.
For fund groups looking to sell into more than one member state, this process rapidly becomes extremely time consuming, and the dream of a single European market for investment funds soon evaporates.
However, one of the key proposals in the new Directive is to strip regulators of the ability to scrutinise funds that are deemed UCITS compliant and are registered with their local regulator.
The home country’s regulator now has to notify its counterparts in other member states electronically of the fund's eligibility, with then entire process taking no more than a month. No doubt the domicile arms race between Ireland and Luxembourg will see this time dramatically reduced.
Another boost to the cross border funds industry is the proposed reduction in the amount of material that needs translating into local languages, limiting it to key investor information only.
There are also provisions to simplify cross border fund mergers and allow the creation of master and feeder funds. All this could see major consolidation within the European fund industry with the number of funds duplicated across domiciles reduced dramatically. This could mean a large increase in competition for the UK’s relatively insulated fund market.
Fund ranges from French, Dutch and Spanish providers registered in Luxembourg or Ireland could become the norm for the British investor in the near future. This can only be a good thing for investors, as increased competition and economies of scale could lead to reduced fees in the often cosy UK fund marketplace.
Increased access to European markets could be beneficial to the UK fund industry as Mona Patel head of communications at the IMA said: "UCITS IV is a great success story for both the industry and investors particularly in the light of increasing global competition. The package will improve investor protection, and reduce costs and bureaucracy to the benefit of the industry and investors alike."
There are still one or two obstacles to this pan-European fund utopia becoming reality. Although the registration process is being simplified and speeded up, the marketing restrictions in each member state still differ wildly and require multiple versions of fund literature to be produced, although this may be tackled by yet another European directive in the form of MiFID.
Perhaps the biggest barrier is the discriminatory tax treatment of foreign funds prevalent across Europe. HM Treasury is currently in the process of reviewing the UK tax regime, although the odds on being further complicated rather than simplified are disturbingly high, and this is where the good news stops.
UCITS IV is a step in the right direction, and hopes are high that a more open market will be the result, but on a continent still deeply divided along lines of self-interest, in the end tax harmonisation might be a bridge too far in the quest for a truly free funds market for Europe.