Collective investment fund regulation (UCITS Directive)

Internal Market Commissioner Charlie McCreevy presented a green paper on investment funds on 14 July 2005. The document did not propose a legislative overhaul of the management of investment funds but did see scope for improvement. On 16 November 2006 the Commission issued a white paper on enhancing the single market framework for investment funds.

Consumer protection

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 
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

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.

Eligible assets

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.

Green paper

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.

Review hearing

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.”


Launching the green paper in July 2005, Charlie McCreevy commented that the proposals, "should add billions to the value of investments". At the October open hearing, he said that UCITS were a 'ready-made solution for occupational pension schemes.'

Unlike the Commission, the German government  feels that there is a pressing need for EU regulation of hedge funds after hedge fund managers played a significant role in the failure of the bid by Deutsche Börse for the London stock exchange.

Some industry commentators have voiced frustration at the slow pace of reform, stressing the need for removing barriers to cross-border business as quickly as possible. Stefan Bischel of the European Fund and Asset Management Association said that specific action, rather than assessments and reports, was needed.

Some commentators at the October hearing, from the European Parliament and the UK Financial Services Authority felt that there was a  problem of too little competition in the sector and that an EU-level competition enquiry was merited.

The UK Investment Management Association welcomed the green paper, described the proposals as "the best possible option for both investors and managers".


The UCITS review green paper of July 2005 launched a thorough review of the current directive on undertakings for collective investment in transferable securities (UCITS) and put forward for comment a number of concrete measures to improve efficiency. It did not, however, advocate new legislative measures.

Investment funds are all those moneys put by ordinary householders into investment portfolios – amounting, throughout Europe, to €5 trillion. The most common types of product, accounting for 70% of investments, are known as UCITS (undertakings for collective investment in transferable securities).

The UCITS directives, the first of which was in 1985, aim to regulate the management of these investments (asset management) and protect investors through investment limits, disclosure requirements and independent oversight procedures. They also allow UCITS to operate under a passport system, so that they can be offered for sale throughout the EU once they have been authorised in one member state.

The UCITS scheme was last updated (to UCITS III) by directive 
which came into force in February 2004. The Commission is not proposing to further legislate but wishes to improve on the use of the UCITS III scheme. The aim is to boost their use across borders, thus increasing the size of the funds to which UCITS contribute and so maximising investment potential in the EU as a whole.


  • The Commission held an open hearing on the review on 13 October 2005.
  • The green paper consultations closed on 15 November 2005.
  • On 16 November 2006 the Commission issued a white paper on enhancing the single market framework for investment funds.
  • On 19 March 2007, the Commission took measures to include new financial instruments in the current scheme and to make it easier for investors to take advantage of funds in other member states.
  • The Commission opens a hearing on amendments to the UCITS directive on 22 March 2007.
  • The Commission is to present a proposal to amend the UCITS directive in autumn 2007.

Further Reading