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Anticipated Fund Manager Re-Alignments with UCITS IV Implementation

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With the coming into effect of UCITS IV (Undertakings for Collective Investment in Transferable Securities) in July 2011, one thing is for sure – fund managers in the European Union have had to evolve with the fast changing regulatory environment. And if past respect for UCITS funds in other parts of the world such as Asia is anything to go by, it is only a matter of time before the standards outlined in the new directive become de facto best practice in markets outside the European Union.

Some changes defined in UCITS IV such as passporting and master-feeder structures are optional while others like the KIID (key investor information document) are mandatory. Therefore, collective investment schemes have had to weigh the cost and benefits of implementing mandatory provisions versus including optional provisions to define their compliance road map.

While the process for complying with new regulation (UCITS IV or otherwise) is never identical between two institutions in the same industry, there are always certain trends that one can anticipate will take root. Overall, the goal of any organizational changes that fund managers embark on under the UCITS IV dispensation will likely be geared toward not just ensuring more efficient reporting but to also take advantage of the new synergies and opportunities UCITS IV is bound to present.

The following are just some of the things you can expect from asset management firms as they prime their data warehouse for the new reporting requirements.

Standardization of Products and Cross-Border Product Distribution

One of UCITS IV’s key objectives is advancing the standardization of asset management and collective investment scheme regulation in the European Union – a proposition that is believed to have largely failed under its predecessor. As the new directive falls into place, asset managers will look at consolidating and streamlining their product offering to create larger portfolios that can benefit more from economies of scale. They will also be keen to reassess internal processes and their data warehouse to identify the optimum operating model.

For instance, asset managers could opt to convert several ordinary UCITS funds in their product offering into feeders for a master fund. By doing that, the fund manager will be delegating management of the feeder’s portfolio to the master. Separate funds in different EU jurisdictions could be amalgamated into a single international UCITS and thus making recurring tasks such as issuing KIIDs that much easier to do. It will mean that much less data and reports for large fund managers to worry about extracting from the enterprise risk data warehouse for purposes of regulatory reporting.

While making these changes though, asset managers will have to cautiously tread the potentially detrimental tax minefield (including the possibility of double taxation) that comes with portfolio consolidation and cross border funds. After all, UCITS IV does not alter or override the tax laws of each member country in the European Union.

Naturally, investors will be more attracted toward buying into funds that do not come with punitive taxation or other costs. To avoid confusion, inadvertent misrepresentation and errors, fund managers must ascertain that the enterprise data warehouse captures all relevant taxation angles to ensure final regulatory reports and investor documents are reliable.

Delegation of Activities and Functions to Third Parties

The new regulatory regime will be an opportunity for asset managers to re-evaluate their processes, activities and functions in the context of their relationship with outsourced service providers. Whereas process efficiency and cost saving will play a part in determining which processes go out and which ones remain in house, the biggest factor will be in-country regulation. Some EU countries have laws that determine what processes an asset manager can off load to a third party and which functions must remain in house.

What is clear though is that no EU country will permit an asset management firm to outsource so much of its processes and functions to the extent that it becomes little more than a mailing address. For instance, having a risk data warehouse and subsequent reports overseen by an entity other than the fund manager is not something some country regulators are likely to easily cede to.

Flexibility in Domicile Country

Through the management passporting provision in UCITS IV, asset management firms domiciled in one EU country can oversee a UCITS fund in a different EU country. As fund managers move to comply with the new directive, now may be the perfect time for fund managers to assess whether their current domicile country makes best business, tax and reporting sense. In fact, low taxes have been one of the major reasons that Malta, Luxembourg and Ireland seem to be attracting substantial interest from fund managers as preferred countries of domicile.

In addition, the new regulation by extension makes it easier for a fund manager to outsource certain functions and activities to a service provider in a different EU country. However, such cross border outsourcing will still be subject to country-specific restrictions.

Non-EU Asset Managers To Tap into UCITS IV Benefits

The UCITS brand has gained significant traction outside the Europe Union and especially in both the mature and emerging markets of Asia. That is why US-based asset managers are expected to set their sights on Europe as they seek to harness the advantages presented by not just cross-border distribution of UCITS portfolios within the European Union but to also use their management of a UCITS fund as a trusted entry point to the fast growing Asian markets.

But US-based asset managers are unlikely to be the only ones looking for a foothold in an integrated European Union asset management market. The increasingly influential Asian and South American-based fund managers intent on spreading their wings into EU markets will want to develop UCITS IV-compliant vehicles to target the European market and use this to build their brand among European investors. The brand recognition will then act as a bridge for European investors that are keen to invest in well regulated but non-UCITS funds in Asia and South America.

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