New levels of protection for investors were introduced in UCITS III, such as limits on investment, safeguards for assets and risk management controls. The provisions were negotiated with FINUSE a panel of experts set up in 2004 to focus on the needs of consumers. The green paper invites comments on whether more protection is needed.
Hedge funds and private equity funds are not within the traditional type of UCITS. They often carry more risk, are member state specific and are not currently regulated at EU level. The Commission does not currently propose EU legislation but will set up an industry working group to study issues raised by these fairly new but increasingly popular investment products.
Increasingly, some complicated and high-risk products are being sold as UCITS. The Commission is therefore anxious to construct a definition of which products should fall within the scope of the directive and which should not. It is working on this with the Committee of European Securites Regulators (CESR) and in March 2005, CESR published its advice on those assets which are eligible to fall within the UCITS framework.
Divergences have emerged among the member states as to how certain provisions of UCITS III should be interpreted and implemented. The July 2005 green paper, therefore, sets out a timetable for action to clarify the directive and harmonise implementation in the following ways:
- simplify procedures for funds to obtain the passport to operate throughout the EU;
- promote existing Commission guidelines on derivatives and simplified prospectuses;
- clarify the types of financial instruments into which funds may be put: these should primarily be liquid financial instruments.
However, the green paper acknowledges that, in the long term, the existing framework will not be able to cope with the rapid changes being seen in the financial market. Further study and work will be needed on issues such as consolidation of funds, fund pooling, the splitting of responsibility for supervision between member states and the need for new kinds of protection for investors.
On 13 October, the Commission held an open hearing on the green paper review. In his keynote speech, Commissioner McCreevy emphasised the growing importance of investment funds for the EU economy, particularly in the area of pensions. He identified the first priority as being the finalising of the UCITS passport, allowing cross-border marketing and validity. He identifed the problem that regulation could not always keep up with new products and stressed the need for the industry to provide reliable information to consumers. As to new legislation, he was not convinced, preferring Commission action to be confined to removing regulatory obstacles rather than imposing 'heavy-handed legislative intervention'. In conclusion, he said that "the next 12 months will be about assessing the case for change: for exploring and eliminating options."