Brüssel will Garantien für Fondsinvestoren verbessern[en][fr] 

Last December, US authorities arrested Bernard Madoff, a former chairman of the Nasdaq stock exchange, after he was accused of carrying out the biggest financial fraud in history, worth some $50 billion. 

Madoff is charged with having run a hedge fund and hiding heavy losses for many years until it collapsed. The scandal hit global financial markets just after having been shaken by the worst turmoil for eighty years. 

The scandal hit Europe too, with many banks revealing that they had been exposed to the Madoff fund. In particular, so-called UCITS (Undertakings for Collective Investment in Transferable Securities) funds were affected, as they are the most popular retail investment funds in Europe.

The scandal sparked another row in Europe, where French Economics Minister Christine Lagarde complained, in a letter to EU Internal Market Commissioner Charlie McCreevy last January, of the different level of protection for UCITS investors across EU countries. Luxembourg was the main target of her accusations (EurActiv 21/01/09).

Ahead of a meeting of EU economy ministers scheduled for ten days' time in Brussels, Internal Market Commissioner Charlie McCreevy underlined that the Commission "intends to clarify and strengthen provisions of the UCITS (Undertakings for Collective Investment in Transferable Securities) regime, particularly as regards the liability of depositaries," he said in a statement yesterday (28 May).

Mentioning internal debates within the Committee of European Securities Regulators (CESR), the Commission said that in Europe there is an "unlevel playing field" in the application of rules to protect UCITS investors. A CESR official confirmed to EurActiv that the committee had internally expressed this view, which was partially outlined in a previous statement in February.

"This means that some EU investors in UCITS funds are better protected than others," concludes a Commission note published yesterday.

The move represents an initial victory for French Economics Minister Christine Lagarde, who in the wake of the Madoff scandal bluntly denounced the unfair risks endured by EU investors who put their money in Luxembourg rather than in France.

She referred in particular to the looser rules applied in the Grand Duchy on liabilities of sub-custodians of funds. The accusation followed the line that, even if depositaries have to follow strict rules to protect investors, in some countries it is possible to move funds to sub-depositaries, which can rely on lighter regulation. 

This is exactly what happened to some EU investors involved in the Madoff-led financial meltdown. They lost their money because it was invested in a Madoff-controlled sub-custodian with lower liabilities.

According to the Commission's draft plan, "depositories should be credit-institutions based, authorised and supervised in the EU," as has already been proposed for alternative investment funds like hedge funds (EurActiv 30/04/09). This would increase the protection of investors.

The process of reviewing current rules will start "before the end of June" with a consultation of all relevant stakeholders. In several occasions, the Commission has made clear that tighter rules on depositaries will not be included in the current review of general UCITS rules, which have just reached their final legislative stage after lengthy negotiations.

Last July, the EU executive presented proposals for a review of the original UCITS Directive, dating back to 1985. The Parliament gave its green light in mid-January (EurActiv 14/01/09).