18 October 2012

JAC Response to EC Consultation Document on UCITS

There is a need to review the scope of the assets and exposures that are deemed eligible for UCITS. Not necessarily to impose limits or change the eligibility of assets under the current regime, but to ensure that adequate controls in relation to exposure and consequently risk are identified and dealt with, and uniformity is imposed on the approval of such products and monitoring of risk.

The current Eligible Assets regime is appropriate for UCITS, but due to its complexity specifically in the area of risk management, use of derivatives (including embedded derivatives) and leverage, would benefit from some clarification.

Investors do not currently associate the UCITS brand with specific investment strategies. Rather, the UCITS framework is perceived to provide a standardised investor protection framework at the product level, including requirements as to liquidity, information and reporting, governance and risk diversification.

It is important to distinguish between the expectations of different types of investor. A significant proportion of investors in UCITS, for example insurance companies, pensions schemes and other institutional investors (many of which have a mandated minimum exposure to UCITS) well understand the extent of product-level regulation under UCITS and the range of strategies available. On the other hand, there are individual retail investors who may not have any expectations as to the strategies available under a product regulated by UCITS but may assume that the UCITS wrapper offers a sufficient level of investor protection. For investors in this latter category, there is perhaps a question as to whether the product-level regulation under UCITS delivers such protection. In this regard, the JAC notes that UCITS have stood up well in the face of the financial crisis.

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