European Commission

Reply to the European Commission’s Call for Evidence on EU regulatory framework for financial services

A. Rules affecting the ability of the economy to finance itself and grow

Issue 3 - Investor and consumer protection

  • The introduction of the fully harmonised UCITS KIID (Commission Regulation [EU] No 583/2010) has had a positive impact on investor protection especially due to its standardised format, which enables investors to compare UCITS funds regardless of their origin. The document is specifically designed to give information on the main aspects of a UCITS fund. The PRIIPs regulation on the other hand is not specifically adapted to funds. For example it does not contain any information on past performance. Past performance, when appropriate compared to the performance of an index, gives the investor important information on how well the manager has performed and also illustrates the volatility of the fund. Past performance is no guarantee for the future, but it is an important piece of information to evaluate the management. For consumers it would be beneficial to keep the fund specific UCITS KIID instead of the more insurance specific PRIIPs KIID. It would also be valuable to require a UCITS KIID rather than a PRIIPs KIID for AIF:s marketed to retail clients. This would give retail investors the possibility to compare all retail funds whether they are UCITS or AIF:s.  

Issue 4 - Proportionality / preserving diversity in the EU financial sector

  • The proposed regulation on Money Market Funds (MMF) imposes a number of burdensome rules on the management of MMFs (COM[2013] 615/2). The objective is to address certain issues regarding MMFs which “may trigger massive and sudden redemption requests potentially causing broader macroeconomic consequences”.  The problem described is MMFs “mainly used by corporations seeking to invest their excess cash for a short time frame”, which in stressed situations may not always “maintain the promise to redeem immediately and to preserve the principal value of a unit”. A specific concern is MMFs with a constant net asset value (CNAV) used as an alternative to a bank deposit. However, the scope of the regulation is very wide. It also includes UCITS holding short-term assets which do not have a CNAV, are marketed to retail investors and not marketed as an alternative to a bank deposit but rather as any other UCITS with proper risk information. A wide application to all funds investing in short-term assets would, due to the associated costs, drive the market to more long-term assets often with higher risk. In the end this will lead to a less range of suitable retail products and less liquidity in the money market.
  • Some of the requirements in the UCITS Directive are subject to a principle of proportionality meaning that they should apply in a proportionate way in view of the nature, scale and complexity of the management company’s business (see for example Articles 10, 11, 12, 39 and 44 of Directive 2010/43/EU). This is positive and important not least for the growth and starting up of new business as a management company. However, the principle of proportionality has proven difficult to execute in practise and rarely provides any relief for the fund management companies. Therefore, and for level-playing-field reasons, it needs to be specified under which circumstances and conditions certain requirements may be disapplied.

B. Unnecessary regulatory burdens

Issue 5 - Excessive compliance costs and complexity

  • The Solvency II rules are aimed at Insurance Companies but the underlying product providers such as fund managers will have to apply the reporting requirements and bear the associated costs. The lack of standardisation on how to handle the requirements will make reporting more costly than necessary. To reduce the administrative burden the reporting requirements should be made clear and standardised, for example by introducing templates.
  • A number of regulations on anti-money laundering and terrorist financing leads to excessive work without the corresponding benefit. Many retail customers buying funds often go through controls three times due to anti-money laundering regulation; one time at the bank, a second time at the insurance mediator and a third time at the fund company. Since client relations are often established on distance management companies also have to do an enhanced customer due diligence.

    Identification of politically exposed persons has to be done by every company which on the whole is very costly. It would be cost efficient to keep an official  list of politically exposed persons in every Member State.
  • Management companies must ensure that they obtain best execution of orders (Article 25 of Directive 2010/43/EU). The brokers used to execute the orders are themselves subject to best execution requirements (MiFID). To reduce the administrative burden of the management company there should be a presumption that the managements company has fulfilled its obligations when using an investment firm subject to MiFID requirements.
  • The recently revised Transparency Directive (2004/109/EC) requires notification of derivatives which do not confer a right to a physical settlement (of shares) but only of cash (Article 13.1 [b]). The objective is to prevent market abuse through secret acquisition of stocks by means of such instruments (Recital 9). The requirement gives rise to major administrative costs for UCITS management companies although the risk for such abuse or secret acquisition is negligible through the regulation of the UCITS Directive. A UCITS management company is prevented from acquiring shares which would enable it to exercise significant influence over a company (Article 56 of Directive 2009/65/EU). Certain funds may even according to their fund rules only acquire cash settled derivatives and are therefore prohibited from acquiring shares. The management company must nevertheless daily calculate voting rights on a so called delta-adjusted basis for cash settled derivates. Even though notifications will rarely take place – since the lowest threshold is not reached – the calculation must be done on a daily basis and systems and routines adapted. The requirement is not proportionate and not adapted to UCITS management companies.

Issue 6 - Reporting and disclosure obligations

  • There is a specific obligation on UCITS to report information on derivatives to the supervising authority. However, a corresponding obligation exists in EMIR. The double reporting obligation does not seem to add any value.

Issue 9 - Barriers to entry

  • The UCITS passport per se is very positive to the market and to investors. The UCITS IV Directive addressed some of the issues hindering the function of the passport. However, there are still obstacles due to specific national regulation which makes cross-border marketing very costly. For example national legal requirements on supplementary information documents, additional information in the prospectus and addendum to the notification form. One regulator requires preapproving of all marketing material and information as well as translation of the website. The process is therefore often both burdensome and slow. Specific national marketing rules may in practice prevent all marketing of foreign funds. There is need for more harmonisation in this area.
  • MiFID II is in general a full harmonisation directive, but there is a possibility for a Member State to introduce additional regulation in the investor protection area due to the specific market situation in that State. This possiblity may be used by certain Member States – even though they have no specific market situation, but the same investor protection issues as in every Member State – to introduce gold-plating and restrictions that will have a negative effect on the possibility to market UCITS cross-border. For example will gold-plating regarding inducement create the need to set up new fund unit classes to be able to market the fund cross-border. This will become a barrier for the effective use of the UCITS passport. More harmonisation is therefore needed based on studies to find appropriate measures before taking action and which give end-clients the same protection in all Member States.
  • Fees to the Supervisory Authorities vary between Member States and may – if excessive – give rise to both barriers to entry the market and an unlevel-playing-field. One recent example is the fee for authorisation of Alternative Investment Fund Managers (AIFMs, Directive 2011/61/EU) which in Sweden is appr. 27 000 euros while other authorities charge appr. 5 000 euros. Another example is notifications fees for cross-border marketing of funds which vary.
  • Tax issues are often a barrier to using some of the measures and possibilities that EU regulation aims to promote. One example is the facilitation of fund mergers introduced in the UCITS IV Directive (2009/65/EU). Such reforms need to be supported by agreement on tax issues on EU level. 
The Swedish Investment Fund Association

Helene Wall

General Counsel

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