Under current MiFID rules, all UCITS funds are considered as "non-complex" products, meaning the buyer's knowledge of financial products does not have to be assessed.
Under proposed changes to the Market in Financial Instruments Directive (MiFID II), distributors must assess the buyer’s knowledge before selling so-called “complex” UCITS funds” to retail investors. Complex funds are permitted to adopt more elaborate investment strategies than traditional UCITS funds and, says the European Commission, may therefore be difficult for investors to understand. Distributors with “execution-only” sales teams would be particularly affected by the change.
The MiFID II proposal raises questions over the direction of the global UCITS brand, which is marketed to retail investors as a single shell for simple funds. Total assets of UCITS funds stood at €5,425 billion in November 2011, according to the latest available figures from the European Fund Asset Management Association (EFAMA).
Separate labelling of UCITS funds may also help protect investors and manage expectations, it is claimed. Under the new rules, “complex” UCITS funds would require asset managers to vet potential customers and ensure that clients and funds are more appropriately matched and less chance of risk-adverse investors experiencing unexpected losses. The so-called “non-complex” UCITS would remain a trusted source for savers and investors seeking a core portfolio of low-risk investment vehicles.
Those against the MiFID II proposal are concerned that labelling UCITS funds along their investment policies goes against the principle under which they were created in 1985 – a uniform highly-regulated product which offers investors a high level of protection while simultaneously restricting investment policies which are more difficult to understand. For example, the use of hedging techniques is allowed only to a limited extent.
The argument over whether some types of UCITS funds should be reclassified will intensify as regulators finalise their plans. Introducing a “complex” classification for structured funds may help the UCITS product to expand into Asia at a time when a possible rival regime is planned there, say supporters. It would also gold-plate investor protection by ensuring fund managers match their products with appropriate investors. Conversely, such a split may create confusion among investors who understand and trust the UCITS brand as a single umbrella for lower-risk investment vehicles.
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