Question 1

How does the regulatory framework impact the (UCITS) brand?

When AIFMD was introduced on 22nd July 2013 it aggregated all non-UCITS funds under one regulatory framework. This was done to protect the UCITS brand and ensure a degree of clarity when distributing UCITS funds globally. When one looks at the distribution of funds across Europe and internationally, UCITS funds are well known. In Hong Kong alone some 1,700 UCITS funds are distributed.

In China, the UCITS V Directive has been translated into Chinese. Speaking in London, Karen Bowie, Senior Adviser, Product Regulation at the Investment Association, confirmed that a number of Chinese asset managers were interested in the UK, leading the Investment Association to translate its UK regulatory guide for UK UCITS and other UK-authorised funds into Chinese.

“The UCITS brand has been a phenomenal success. According to EFAMA statistics there are now EUR7.89tn in UCITS assets,” said Bowie. “I think in 20 years’ time we could well be talking about AIFMD as a success story in the same way that we talk about UCITS today.”

Most importantly, in light of AIFMD, the alternative UCITS segment is the fastest growing segment today in the UCITS space and it’s not hard to understand why the brand has been so successful.

“Firstly, UCITS funds provide flexibility and affordability to fund sponsors to provide multiple services across multiple client segments with multiple value propositions. Secondly, UCITS V is set to further enhance investor protection and this is helping the UCITS brand to offer an unrivalled framework for asset managers to distribute products across Europe,” said Antonio Napolitano, Head of Strategic Product & Marketing, Pioneer Investments in Milan.

The introduction of the KIID under UCITS IV was viewed as an important development during the SGSS European roadshow, confirming that the UCITS brand intended to remain a retail-focused offering. All new provisions stemming from UCITS IV and UCITS V reaffirm that there is a strong intention to monitor and provide comprehensive oversight and that transparency has been conceived with retail investors in mind at all times.

This is where regulation can enhance a brand and allow it expand. With each iteration of the UCITS Directive, one has been able to do more; i.e. the Management Company passport, Master Feeder structures, KIID document etc.

But one has to be careful that there isn’t too much regulation. The challenge in Europe is to stop constantly updating something that is recognized as a global brand with the potential prospect of UCITS VI and so on.

“For the first time in 30 years UCITS is becoming stricter as it seeks to adapt to AIFMD to protect retail investors in the same way as professional investors but I don’t think it will impact the brand. I think it will allow it to further develop,” commented Caroline Clemetson, who heads up the Banking and Finance Group at Schellenberg Wittmer in Geneva.

In the opinion of Dominik Rutishauser, Executive Director, GAM (Zurich), a global asset management firm, UCITS has become too flexible with the brand in terms of how one can structure products. In his view, this has gone too far, allowing fund managers to create complex alternative funds in the UCITS format that might not be suitable for retail investors.

“I think the fund industry needs to be careful with this. UCITS V is focused more on the parties involved: the depositary, the Management Company, the asset manager. But I expect UCITS VI will be stricter on the product. Certain investment techniques or instruments will not be allowed that are currently allowed today. After all, we have AIFMD so there is plenty of room to create alternative funds under that regime rather than UCITS,” opined Rutishauser.

Some would argue that UCITS V substantially enhances the brand because of the increased liability on depositaries but not everyone is entirely convinced by this. According to David Painter, Head of Trustee and Depositary Services at SGSS, the balance sheet strength of depositaries is more important. When was the last time a depositary was charged with criminal negligence? asked Painter. He pointed out that the additional costs that come with UCITS V, in part due to the increased liability depositaries face in segregating assets across the custody chain, smaller asset managers might be negatively impacted.

“Large fund managers have the benefits of scale with respect to the compliance and operational
costs and are better able to afford it but I worry about the rest of the market. Notwithstanding
the additional regulatory burden, one large fund management house I spoke to in the early days
of AIFMD and UCITS V adopted a very positive approach to embracing the challenge. They saw
it as an opportunity to demonstrate both thought leadership and capability to implement complex
regulatory changes, which smaller competitors find difficult to match without additional external
support,” recounted Painter.

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