On 18 March 2016, UCITS 5 came into force, concluding almost a decade of regulatory changes to the framework. We recently sat down with two heads of product development – Cora Gibbons from Baring Asset Management and Mike Champion of Schroders Investment Management – to discuss the state of the UCITS framework.
UCITS has been under constant regulatory change for almost a decade. How do you think this has impacted the attractiveness of the UCITS product, in particular for investors outside the EU?
CORA GIBBONS: It is unlikely that these changes were evident to investors. For distributors and manufacturers alike, increased reporting, disclosures, and amendments have and will continue to be quite burdensome. I don’t think the attractiveness of UCITS as a product has been impacted for investors outside the EU. Looking to the regulators outside of the EU however, while some changes may have been positively received, the rate and volume of those changes has been quite overwhelming.
MIKE CHAMPION: I agree. Most regulatory changes affecting UCITS will not really have registered with investors. UCITS continue to be popular with clients outside the EU, but the popularity of individual products is driven by the investment proposition and performance, rather than regulatory structure. The UCITS badge provides no guarantee of success in registering a fund for sale outside the EU, particularly if it uses derivatives extensively.
Which changes have been beneficial and which have been detrimental?
CORA GIBBONS: From a product and client solution perspective, the increased flexibility under UCITS 3 was a beneficial development, enabling managers to have a broader investment remit and the potential to generate superior returns as a result. Conversely, the anticipated efficiencies under UCITS 4 did not materialise.
Beyond direct regulatory changes, UCITS funds have faced a number of indirect regulatory challenges (such as RDR, EMIR, FATCA etc.) How has increased regulatory focus affected the UCITS brand?
CORA GIBBONS: Local regulations pose challenges to UCITS, given their vast distribution. Issues arise when there are conflicting requirements and practices across the countries in which the funds are registered for sale. Conflicts also exist between regulations, such as the central clearing under EMIR versus new capital rules. While the UCITS brand is not negatively impacted, this requires considerable resources across the industry, working and lobbying to find solutions.
MIKE CHAMPION: These other changes have not really had much impact on the relative attractions of UCITS. There is certainly a degree of regulatory fatigue in the industry given the amount of bandwidth required to understand and implement the seemingly constant wave of new regulations.
If you found a magic lamp and a genie granted you three wishes for UCITS, what would you wish for?
- Evolve UCITS to a truly global regime, sellable globally (including US), no barriers in Asia, no hurdles/costs in Europe
- No gold plating
- More retail-oriented, basic legal documents (e.g. maximum prospectus length, longer and more useful KIIDs, etc.)
MIKE CHAMPION: I would be pretty disappointed if having found a magic lamp I was just limited to wishes on UCITS! From my perspective the UCITS structure is in pretty good shape – you can always wish for a bit more flexibility here or there but these areas are relatively minor rather than fundamental. A break from regulatory change would be my top wish.
The preceding is an excerpt from “UCITS: State of The Framework” – click here for the full interview.