Ucits III has been hailed as a global success, despite a number of setbacks. The arrival of Ucits IV means the European funds industry can now look forward to getting a much improved funds passport.
Simon Vernon, head of fund regulatory strategy at Schroders, says the current procedure “is neither simplified nor a prospectus”. The expectations are that the Key Investor Information Document (KIID) of Ucits IV will finally iron out most of the problems.
The new system aims to provide an investor with simple, understandable pre-sale information on the costs, risks and performance of each Ucits fund. The format consists of a maximum of two pages per fund, or three for a structured fund.
“The replacement of the simplified prospectus by the KIID will be a huge improvement for the investor in terms of transparency,” says Reynaud. However, he notes that KIID will “generate a huge workload for fund promoters”.
Another benefit of Ucits IV is that the new regime will enable fund houses to exploit economies of scale and streamline the product range, says Vernon. In theory,
fund houses will be able to set up master-feeder hubs serving fund ranges throughout Europe. This should be the catalyst for a merger of funds on a cross-border basis: such a merger would cut the costs of replicating trading, back office and other functions, thereby increasing fund size and reducing fund TERs.
The master-feeder structure is also likely to open up the onshore market to offshore funds. For instance, offshore funds domiciled in Dublin or Luxembourg structured under a master-feeder system should be able to access onshore markets directly. The problem with this scenario is the fiscal question. The tax treatment of merged cross-border funds will remain difficult because certain jurisdictions will retain tax barriers.
Reynaud says: “Cross-border mergers are possible under Ucits IV, but will be highly restricted by the different fiscal treatments of the event, which remain the responsibility of each country.”
Uncertainty clouds the tax issue. Lehmann says: “Ucits IV will certainly help in shaping a more pan-European asset management industry, though it remains to be seen how some of the new instruments will work and whether they will be accepted in practice.”
De Proft adds: “In the case of cross-border fund mergers, it is our recommendation that fund mergers are carried out in a tax-neutral manner at the fund and investor levels across the EU, to avoid taxing investors on unrealised gains as occurs in certain member states.”