27th September 2010
The UK's Investment Management Association for one is worried about the "usability and fairness" of a key aspect of the proposal to investors themselves.
Its concerns centre on the Key Investor Information (KII) which Ucits managers will be required to produce for all investors from the middle of next year.
KII summarises a fund's objective, investment strategy and fee structure and replaces the simpler, current Ucits fund prospectus produced by managers.
It has been produced by the EU's Committee of European Securities Regulators (CESR) as part of its shakeup of industry under its 'Ucits IV' deliberations .
Research jointly conducted by the IMA and Association of British Insurers has already revealed that using CESR's recommended risk ratings for funds, a staggering half of UK-authorised funds would have the same rating.
This would not allow investors to distinguish between different funds and portfolios, undermining one of CESR's key objectives.
The IMA says: "Although it is not a requirement to use CESR's recommended ratings, UK-domiciled funds would not be comparable to offshore funds if the UK were to use different definitions.
"Therefore UK funds will have little choice but to use a system of categorisation that groups a large number of funds under one risk rating."
The IMA also says that the CESR's stipulation that a merged fund must publish the track record of the "receiving" fund is unsatisfactory, since it allows mergers to be structured so that the best track record is preserved.
The IMA recommends that for policing purposes, CESR give weight to factors such as the size and nature of the previous funds, rather than how the merger has been structured.
The Association also says there is far too much ‘small print' in the KII document as the CESR requires it to fit onto two sides of A4.
"This will inevitably have to display the required information in ‘small print.' Consequently, graphs and numbers will stand out unnecessarily. This ‘small print' format will make it even less likely that investors will read important information about the fund," says the IMA.
Julie Patterson, Director of Authorised Funds & Tax at the IMA, said: "We support a harmonised document for ordinary investors and agree this should be the benchmark for disclosure for all retail investment products.
"However, we call upon CESR to address three key concerns: the uninformative risk rating; the retention of performance history for merged funds; and the KII's ‘small print' format. Changes are needed in these areas to ensure the KII gives the best possible information to investors."
Among institutions, James Bowers, head of product at Henderson says large fund houses with multiple umbrellas have the most to be concerned about with the new proposals.
He says: "The Key Investor Information Documents will mean complex set up projects and maintenance of new processes, for instance in preparing multiple documents for multiple funds in multiple languages. There are also issues that certain non-European jurisdictions will not accept the new format."
Meanwhile, the European Fund and Asset Management Association (Efama) and consultancy KPMG have jointly warned that Ucits IV could cause confusion at the level of taxation across states. The directive would allow cross border mergers but certain EU members currently tax such mergers at the investor level resulting in taxation on realised gains.
Another potential tax problem highlighted by Efama and KPMG relates to Ucits funds being established in one member state but managed in another, meaning the fund could be liable for tax in the country where the management company is based.
In such situations, the report by KPMG and Efama recommends the fund should only be taxable in the country where it is established or registered, even if the management company is based elsewhere.
CESR is likely to provide feedback from all consultations to the European Commission before the end of the year.