[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 15.11.2006

SEC(2006) 1451

COMMISSION STAFF WORKING DOCUMENT Accompanying the WHITE PAPER

WHITE PAPER ON ENHANCING THE SINGLE MARKET FRAMEWORK FOR INVESTMENT FUNDS IMPACT ASSESSMENT {COM(2006) 686 final}{SEC(2006) 1452}

This report commits only the Commission's services involved in its preparation and does not prejudge the final form of any decision to be taken by the Commission.

Lead DG: Internal Market and Services

Other involved services: Competition, Economic and financial affairs, Enterprise and industry, Health and Consumer Protection, Taxation and Customs Union, Secretariat General

WP reference: 006/MARKT/004

TABLE OF CONTENTS

1. Introduction 4

1.1. Procedural issues and consultation of interested parties 4

2. Context 8

2.1. The 1985 Directive and the amendments in 2001 9

2.2. The investment fund industry in the EU 10

3. Problems and drivers 15

3.1. Problem description 16

3.1.1. Inefficiencies at manufacturing level 16

3.1.2. Inefficiencies in fund distribution 18

3.2. Drivers 19

4. Objectives 20

5. Assessing and comparing policy options 23

5.1. Assessing and comparing individual measures 23

5.2. Combining the measures into a package 29

6. Monitoring and evaluation 31

ANNEX 1: Summary Table of Actions 32

ANNEX 2: The Lamfalussy process 33

ANNEX 3: List of acronyms 35

ANNEX 4: References 36

ANNEX 5: Fiches for individual issues 37

Executive Summary

This impact assessment report summarises the process that led to the decision by the Commission to present a White Paper on Investment Funds. The decision making was heavily based on extensive consultation of stakeholders, review of existing literature and data as well as the exploitation of studies that had explicitly been launched to this aim.

This in-depth analysis mainly confirmed the evaluation of the situation that had been presented in the Green Paper in July 2005. The current legislative framework does not allow stakeholders to efficiently and effectively exploit the Single Market freedoms granted by the UCITS Directive. In some areas additional Single Market freedoms need to be granted to ensure that the industry can get organised across borders in the most efficient way. Furthermore, the non-harmonised part of the fund industry is currently deprived of a pan-European basis for its business.

While problems had been identified in various issues covered by the Directive it was confirmed that there was no clear case for abandon the current product approach at this stage. Though, addressing some of the most pressing problems would nevertheless require amendments to the Directive in the very near future. This concerns the notification procedure, fund mergers, asset pooling, the management company passport, and the simplified prospectus. The respective amendments should also have a positive effect on future law-making and supervision as the amendments introduce more efficient procedures through the implementation of the Lamfalussy process in these areas and clear guidance for regulators and supervisors.

In other areas the impact assessment came to the conclusion that no legislative change would be required at this stage. In some cases the Commission will further monitor the situation and might propose action at EU level at a later stage if needed. This concerns the protection of investors' rights in the distribution process, the delineation between UCITS funds and non-harmonised funds, and the establishment of a pan-European private placement regime.

Finally, the impact assessment came to the conclusion that there is no need for immediate action at European level as regards the authorisation procedure for funds, the fund order processing, and the introduction of a depositary passport.

INTRODUCTION

Procedural issues and consultation of interested parties

- Chronology

The preparatory process for the proposal started with the preparation of the Green Paper in July 2005. The Commission then organised a series of inputs to support the Commission's thought process. Inputs ranged from bilateral informal meetings with stakeholders to studies, expert groups, hearings and workshops. Many of these events brought together different players in order to immediately confront the proposals from one side of the market with those of the others. As most of these exercises have been open and have been documented on the Commission's website it was a very transparent process. This has been highlighted and acknowledged frequently by stakeholders.

Table 1 Chronology of the preparatory process

Date | Item |

2004 |

May | FSAP Expert Group on Asset Management Report |

2005 |

14th July | Green Paper on the enhancement of the framework for investment funds |

Sept. | White Paper Roadmap |

13th Oct. | Open Hearing on the Green Paper |

21st Oct. | Start of "Potential Cost Savings" study |

15th Nov. | End of the Green Paper's consultation period |

21st Dec. | Start of "Current trends" study |

2006 |

31st Jan. | Establishment of two Expert Groups |

8th March | 1st meeting of the Inter-service Impact Assessment Steering Group |

15th May | 1st Workshop on the Simplified Prospectus |

19th May | 2nd meeting of the Steering Group |

4th July | Final reports of the Expert Groups published |

11th July | 2nd Workshop on the Simplified Prospectus |

18th July | 3rd meeting of the Steering Group |

19th July | Open Hearing on the Expert Groups' reports |

Aug./Sept. | Final report studies |

8th Sept. | 4th meeting of the Steering Group |

Sept. | Draft impact assessment report |

- Consultations

The five-year Financial Services Action Plan (FSAP) launched in 1999 very much concentrated on the completion of the single market for wholesale services. Towards the end of the FSAP period, it was clear that other areas would need close attention after 2004. In preparation of the strategy for the post-FSAP, the Commission set up four groups of experts of which one was dedicated to asset management. This group's report, published in 2004[1], identified a list of issues requiring action. These were:

- simplification of the notification procedure

- facilitation of cross-border fund mergers

- recognition of pooling structures and techniques

- an effective single passport for management companies

- greater freedom of choice of depositaries

- facilitation of the operation and administration of funds

- rapid reaction to tax discrimination

- greater transparency in fund distribution

- development of indicators to monitor competition and integration

- improve corporate governance and enhance investor education

Reponses to the open consultation that followed broadly supported the report's main conclusions. There was a widespread consensus that there was considerable room for improvement in the EU legislative framework regulating asset management along the lines pointed out by the experts. Nevertheless, respondents diverged in the relative order of priority for tackling them.

Subsequent discussions with Member States, CESR members and market participants confirmed the need to make the corresponding legislation function better. The Commission Green Paper on investment funds[2] of July 2005 identified concrete steps in this direction. The Green Paper proposed a series of actions in the short term and launched a debate on the need for a more wholesale reform of the investment funds legislative framework in the medium to long-term.

Views expressed during the Open Hearing on the Green Paper (October 2005) and during the open consultation (mid-July to mid-November 2005) widely agreed with the Green Paper's approach for the short term, that is, improving the implementation of the provisions of the existing framework. The simplification of the notification procedure and streamlining the simplified prospectus were considered as top priorities. There was also a willingness to look beyond current legislative provisions towards proposals such as expanding the range of single market freedoms available to fund managers. There was a large degree of support among respondents for examining some of these options - management company passport, master-feeder pooling structures, and cross-border fund mergers[3]. There was a wide spread of opinions on whether the current product-based approach represented a sustainable approach for regulating investment funds in the long term. Responses revealed some, though not unanimous, support for an eventual move towards principle-based regulation, counter-balanced by concerns that a fundamental overhaul of existing single market rules could give rise to unintended consequences and disruption, as well as postpone urgently needed changes.

The European Parliament has also contributed to the debate with an own-initiative report adopted in April 2006[4]. The report main conclusions are that:

- there is no need for a complete make-over of UCITS Directive; [5]

- it is however necessary to make the UCITS Directive evolve in line with changes in the market through a combination of better implementation of existing Directive and targeted adjustments or additions to the existing Directive;

- any legislative adjustments to the Directive should integrate the possibility for adoption of detailed implementing legislation via comitology (Lamfalussy procedure).

Two workshops on the simplified prospectus took place 15th May and 11th July 2006. The main conclusions were that the simplified prospectus should:

- be addressed to retail investors

- be a short document in the form of "fact sheet"; a maximum length should be imposed

- provide key information to the retail investor, enabling it to make an informed investment decision

- be available in the national language(s)

Furthermore, once filed with the home state regulator, no further additions should be required by the host state regulator. The fund promoter should be responsible for all product related disclosures and the distributor for any other disclosures. There was agreement on the need for thorough consumer testing of a revised Simplified Prospectus.

- Expertise

- Studies: In order to complement internal research and the public consultation with empirical data, two studies were launched in 2005.

- The "Current trends in the European Asset Management industry" study aimed at providing historical series of asset management related data relevant to understand the functioning of the industry and how it has been evolving over the years. It also conducted an analysis of the trends having an impact on the integration of markets and on the risk-features in European asset management. The study has been conducted by ZEW/OEE and Oxera.

- The "Potential cost savings in a fully integrated European investment fund market" study aimed to present a detailed comparative description of the main sources of cost in the EU investment fund value-chain. The consultant (CRA) was also mandated to identify and quantify potential sources of cost savings that could be achieved by enhanced market integration.

- Expert Groups:

- Independent expert group on the review of the FSAP (Asset management) in 2004[6]

- Two expert groups to further explore the need and form of possible measures with regard to market efficiency and alternative investments (namely private equity and hedge funds). These groups consisting of industry experts have been established in February 2006 and produced final reports in July 2006.

The latter reports have been published on the Commission website[7]. The general public was invited to discuss the reports at the occasion of an open hearing which took place 19th July[8] in Brussels or in writing during the following two months.

The hearing showed that the industry's views on efficiency issues are very much in line with the views the Committee on Economic and Monetary Affairs of the European Parliament has expressed in its report on asset management in March 2006.[9]

1. Committee of European Securities Regulators (CESR):

CESR has accompanied and supported the Commission's efforts to improve the legislative framework for undertakings for collective investment in transferable securities (UCITS) with various consultations and advice on different subjects as well as with fruitful discussions and contributions. Concretely, during the last months CESR has provided the Commission with advice on UCITS eligible assets and adopted guidelines on the transitional provisions of the new UCITS III regime and the notification procedure. The work on eligible assets has been generally welcomed by market players. It will be translated into implementing measures, hopefully to be adopted in January 2007. The notification guidelines, however, are restricted by the Directive itself and are thus not capable of solving the problems resulting from its drafting.

2. IA Steering Group

A steering group was established in February 2006. It advised the service responsible on both the substance, but especially structuring of this report. Colleagues from Directorates General Competition, Economic and Financial Affairs, Enterprise and Industry, Health and Consumer Protection, Internal Market and Services, Taxation and Customs Union, and the Secretariat General participated in the discussions. The Group met four times ahead of the finalisation of this report.

3. Financial Services Consumer Group + FIN-USE

The Green Paper and the Commission's preparatory work have been presented in the first meeting of the Financial Services Consumer Group on 20th June 2006.[10] Members of the group have been invited to provide the Commission with their views. The White Paper and this report will also be presented to the group in its next meeting in December 2006.

Commission services have also actively sought the input of FIN-USE, the Forum of user experts in the area of financial services. Two meetings have taken place (December 2005 and June 2006) in order to present to experts the developments in the asset management area and encourage their contribution to the expert groups' reports' debate.

- How external input from consultations, expert groups and studies has been used

The industry group on market efficiency has issued advice on how to tackle the bottle-necks that are holding back the efficient reorganisation of the business. These issues included:

- A no holds barred rethink of the UCITS notification procedure

- Ways to remove legal, tax and other obstacles to cross-border fund mergers

- Removing regulatory resistance and legal barriers to different types of pooling

- Allowing fund managers to manage funds domiciled in other jurisdictions

- Pragmatic steps to increase access to competitive custodian services

These recommendations have been carefully analysed - in the light of other stakeholder reactions received at the open hearing and written contributions on the report.

The reports on alternative investments (i.e. hedge funds and private equity) – including the feed-back received -, and the study reports have also been carefully considered in the preparation of this report and helped substantiating the analysis. References to the various sources can be found in the following and especially in the detailed analyses of the individual issues.

One major aim in launching the studies has been to gather as much independent expertise and "hard" evidence as possible. Unfortunately, the data gathered was not sufficient in terms of quantity and quality to allow for quantification of the costs and benefits of different options. This, however, was due to the fact that comparable and detailed data does not exist.

Nevertheless, both studies contributed to the Commission's understanding of the structure, problems and trends of the industry and helped shaping both this report and the White Paper.

Context

This impact assessment is not discussing action in a new area but changing or replacing an existing Directive. Therefore, this section provides some background information on both the "legislative history" and the economic development of the industry in the EU. Some most the problems, which are discussed in more detail in the next section, will already be put in context here.

The 1985 Directive and the amendments in 2001

On 20th December 1985, the Council adopted the Directive on the coordination of laws, regulations and administrative provisions relating to Undertakings for Collective Investment in Transferable Securities (UCITS) 85/611/EEC. The Directive had two main objectives:

4. To foster gains for all market participants through greater integration: The Directive set the basis for the free marketing of investment funds in the Community. To this aim, it introduced the UCITS passport, allowing an UCITS authorised by a Member State to be marketed in another Member State on the basis of a simple notification. The creation of a market without internal borders for investment funds should then bring benefits for all market players. It should enlarge the choice available for investors, create new opportunities for fund promoters, and enhance competition, which would in turn push down costs and fees, leading to higher net returns for the end investor.

5. To ensure an adequate level of investor protection: The investor protection provisions built into the Directive were motivated by the existence of one of the most frequent market failures in financial services: information asymmetry. Though, there are of course also other risks to be taken into account like, e.g., fraud or loss of assets. The protection of investors was to be ensured by three reinforcing pillars: a set of investment rules aiming to make UCITS a transparent, diversified and liquid vehicle (e.g. by determining the assets in which an UCITS could invest or by imposing portfolio diversification rules); disclosure requirements ensuring regular information to investors; and an independent depositary, which would be in charge of the custody of the assets and of the oversight of the fund and its management company.

Like other pieces of financial services legislation, the UCITS Directive has gradually been superseded. In 2001, two amending directives[11] were adopted in order to modernise UCITS law. These Directives were an important step to enhance the flexibility of the UCITS framework. They broadened the range of UCITS’ eligible assets and introduced the concept of a management company passport. However, this greater flexibility was coupled with new provisions aiming to maintain the level of investor protection. Low capital requirements and the need to introduce adequate risk management controls were imposed on the management company. The simplified prospectus was created as a marketing tool that would provide the fund key information to investors and that would allow for a comparison between funds.

It is important to note that the Directive does not cover all types of collective investment schemes (CIS). CIS might remain outside UCITS for very different reasons. For instance, the funds might make use of investment possibilities that are prohibited for UCITS or might not comply with UCITS rules regarding redeemability, valuation, etc.

Furthermore, despite the introduction of some "Lamfalussy" elements with the 2001 amendments, the UCITS Directive as a whole is not a so-called Lamfalussy Directive. In particular, it does not take the form of principle-based legislation where key concepts and obligations in the framework directive are given more concrete and detailed expression through implementing legislation (adopted via comitology procedures). For details on the Lamfalussy approach to legislation see Annex.

The investment fund industry in the EU

Some 20 years after the adoption of the Directive, the UCITS model is in many respects a success. The European market for investment funds has become larger and deeper over the last years. The number of funds has continuously increased. At the end of 2005, there were more than 29,000 UCITS. Assets under management (AuM) have also rapidly expanded; they reached the bar of € 5 trillion at the same date[12]. UCITS funds represent about 80% of all harmonised and non-harmonised investment funds in the EU.[13]

Figure 1: Net Assets of European Investment Funds (EUR billion)

[pic]

Source: European Commission (2006), based on ZEW/OEE database, data from EFAMA on all EU-15 countries, Czech Republic, Hungary, Poland, and Slovakia

UCITS funds are not only being sold within the EU.[14] The UCITS regulatory concept has become a de facto international gold standard. As such, UCITS authorisation has often been sufficient to allow EU fund managers easier access to third-country markets, not only in Europe (i.a. Switzerland and Norway) but also in Asia and Latin America (i.a. Chile, Peru, Hong Kong, Taiwan). The absence of major financial scandals involving UCITS and the perception of UCITS as a well regulated product, have contributed to this success.

The fund industry as part of today’s economy

In 2005, the total EU investment fund assets corresponded to 59% of the Community GDP (50% in 2004; 49% in 2000; 21% in 1995)[15]. Apart from Luxembourg and Ireland, this ratio was above the EU average in France and Austria. In the other Member States it fell between about 20% and 40% percent, with the exception of Greece (16%) and Denmark (51%) as well as Poland, Slovakia, Czech Republic and Hungary, where it did not exceed 10%.

Saving in investment funds is one of the many options for households to allocate their assets. Although banking deposits and insurance reserves dominate household savings in most European countries, funds play an important role today. Their average share in the EU household assets amounts to nearly 13%, varying from 4,4% in the United Kingdom to 23% in Sweden.

For the last ten years, investment funds on average have been growing faster than the banking sector and the capital market as a whole. The strong growth might partly be due to the increasing need to provide own funds for retirement.

Figure 2: Household asset allocation in the EU in 2004 (in % of total)

[pic]

Source: EFAMA Fact Book 2005

Cross-border business

Within the European Union, funds marketed on a cross-border basis play an increasingly important role in this industry. The UCITS passport paved the way for extensive cross-border marketing of funds. Nearly 5,000 UCITS (or 17% of the total) are widely sold cross-border, an increase of 50% over the past three years. This trend is expected to continue, as net sales of cross-border funds have outpaced sales of domestic funds over the past few years.[16] This is in large part explained by the fact that the passport is extensively being used for so-called round-trip funds; that is funds domiciled in one Member State and sold only back into one Member State which is the country of the sponsoring institution/fund parent. It is, however, felt that growth of cross-border business is considerably hindered by some of the requirements of the Directive and the way it is implemented by Member States.

Data on fund sales in the EU suggest a high level of cross-border distribution. Sales of funds domiciled in Luxembourg (236 bn euro) and Dublin (45 bn euro) accounted for about two thirds of total sales in the EU in 2005. Given the fact that almost all Luxembourg and Dublin domiciled funds are sold abroad, the combined volume (281 bn euro) can be considered as a good proxy for the volume of cross-border sales in the EU.

The growth of cross-border funds has important implications for market organisation and performance. Managers can serve an EU-wide investor base with a single fund per asset class/investment strategy, potentially creating opportunities for important scale and efficiency benefits. Moreover, distributors can provide research and recommendation for funds used across Europe. Increased presence of non-domestic products should translate into price competition, thereby driving total expenses towards the lowest levels observed in the EU. These two mechanisms should heighten competition, drive down costs and improve net returns to investors, provided that they are allowed to work properly.

In contrast to the impressive cross-border business in products, i.e. funds, cross-border delivery of services and the degree of cross border consolidation of investment funds is rather low. While there were, for example, about 650 domestic mergers on average per annum in the period 2002-2005, it was less than 30 cross-border mergers.[17]

Market structure

In the EU, measured by assets under management concentration of asset management companies tends to be lower in the biggest fund markets and higher in smaller markets. In 2004 the market share of top five asset managers was below 30% in Ireland and the UK, while in smaller Member States, such as Greece, Belgium or Czech Republic, it accounted for more than 80%.

The assets-weighted average market share of five largest asset managers in the EU amounted to about 50%. The number of relatively small national markets in Europe partly explains why the average concentration ratio is higher as compared to the US (ca 40%).

The scarcity of true pan-European funds disables conclusive comparisons of concentration levels between the EU (as one entity) and the US (just below 40%), based on CR-5 indicator, the combined market share of the five biggest asset managers.

Figure 3: Market share of top-5 asset managers (2004)

[pic]

Source: EFAMA

Note: For the EU home and foreign domiciled funds, with exception of Ireland, United Kingdom, France, Spain, Netherlands, Austria, Poland, Finland, for which only home domiciled funds; EU assets av. – average weighted by assets (cumulated assets of top-5 managers in all the countries by total assets in the EU), EU country av. – simple average (by number of countries).

While assets of the fund industry in the EU and the US have been growing at a similar pace over the last decade, the number of funds in Europe has been increasing much faster: the number of UCITS in Europe doubled, while the number of the US funds grew just by a half.[18]

The graphs below show that in 2004 the total number of funds in Europe was more than three times higher than in the US. At the same time, total assets of UCITS accounted for only 70% of assets of the US mutual funds. As a result, the average European fund was five times smaller than its American counterpart. These figures have not changed much. From 2004 to the first quarter of 2006 the number of funds in the EU was between 3,3 and 3,7 times higher than in the US. The total net assets (TNA) in the EU was at about 66% to 68% of the US TNA; the relative size of EU funds even declined further from 19,9% to 18,7% of the US fund.

Figure 4: Comparison of average investment fund size in the EU and US (end 2005) [pic]

Source: EFAMA, ICI and ECB

Distribution of UCITS funds

Distribution of funds is usually outsourced – although most often within the same group. In most Member States distribution is dominated by a few local banks and/or insurance companies. Independent entities are of relevance only in a few countries (UK, DE, IT).

Box 1: Financial institutions involved in funds distribution

Banks traditionally dominated distribution of funds in most EU countries. Banks have traditionally offered customers only in-house products, i.e. funds managed by firms from the same capital group or linked (so called "captive" distribution).

Insurance companies are another traditional distributor of funds, particularly prominent in the UK, Sweden and Germany. Funds are imbedded in a (unit-linked) life insurance contract. Distribution via insurance companies benefits from widespread networks and often from favourable fiscal treatment.

Independent Financial Advisors (IFA) are not tied to a particular product provider. They act on behalf of the investor advising him on the most suitable product from across the whole market. IFA are particularly popular in the UK. In the other EU countries, with the exception of Italy and Germany, their market share is negligible.

In recent years new trends in fund distribution have emerged. Some of them are the industry’s response to encountered obstacles and deficiencies of the Single Market as described below, others respond to evolving consumer demand or technological progress:

Open architecture. Banks have started to open their distribution networks to third party funds. This allows them to attract clients by an enlarged offer. However, the move towards open architecture is slow. In 2004 third-party distribution accounted for only 15% of all distribution channels in Europe, compared to 81% share of captive distribution. In addition, in most cases distributors do not offer all available funds but only a set of funds from pre-selected fund promoters, so-called guided architecture.

Figure 5: Investment fund distribution channels (in % of total assets)

[pic]

Source: McKinsey (2005)

Although from a low level, open or guided architecture is picking up in most Member States. It is estimated that 18-20% of new sales are done via open architecture. Open architecture can be seen as a way to take a hold in previously "closed" European markets. Indeed, measured as percentage of retail inflows in 2004, the share of third-party products in some countries could contribute to increasing competition at national level. Therefore, open/guided architecture and cross-border sales seem to aid one another.

Table 2: Share of third-party products in retail inflows in 2004, (in %, estimate)

By country: | By channel: |

UK: | 75 | Financial advisors: | 79 |

DE: | 36 | Direct/other: | 53 |

BENELUX: | 23 | Private banks: | 35 |

FR: | 12 | Retail banks: | 10 |

IT: | 12 | Insurance companies: | 9 |

ES: | 7 |

Scandinavia: | 6 |

Source: McKinsey (2006)

The extent to which different channels make use of third-party funds differs widely, ranging from 10% or less in the case of retail banks and insurance companies to almost 80% for financial advisors.

Funds of funds have emerged as a way to circumvent rigid distribution structures and to avoid the costs of setting up local distribution systems. The diversification they offer seems to be appreciated by investors, who often are not aware of the double layer of fees that they are incurring[19]. According to EFAMA data, funds of funds are particularly popular in the United Kingdom, Austria, Germany and Belgium.[20]

Internet is another channel that allows selling investment products without having to develop costly local distribution networks. It is increasingly used to directly purchase fund units. However, to date the internet has an important market share in the distribution of funds only in some Nordic countries.[21]

PROBLEMS AND DRIVERS

The previous section has outlined the phenomenal success UCITS have witnessed over the past decade, with funds increasingly being sold on a cross-border basis and outside of the EU. Investors and regulators alike took confidence in the protections that are built into the Directive.

However, it became clear as well that the fund industry and investors are still facing problems in the dynamic context in which they have to operate. The industry is now at a crossroads: cross-border competition is becoming keener, product innovation is accelerating and new non-UCITS savings products are increasingly attracting investors. At the same time, retail investors may decide to rely increasingly on private savings in order to secure a proper standard of living at retirement. In recent years, more and more concerns have been raised that the current regulatory framework would still be appropriate to allow industry and investors to face these challenges in an efficient and effective way. This is well-documented in the consultation on the 2005 Green Paper and the feedback statement of February 2006 summarising these comments.

Problem description

On the part of investors, major concerns relate to the lack of transparency in fund distribution regarding costs and risks of particular investment funds. Investors also challenge the restricted choice of funds they are frequently offered by distributors at relatively high costs. These high costs are often attributed to the low level of competition in some parts of the market. Furthermore, investors' possibilities to diversify their portfolio are limited.

The industry is concerned regarding the long delays and high costs of authorisation and notification procedures which leave them at a competitive disadvantage vis-à-vis competing products. As time to market is a crucial factor, delays might result in missed opportunities. Furthermore, the fragmentation of the industry or certain parts of the value chain deters the industry from fully exploiting economies of scale and specialisation gains and leaves them with unnecessarily high costs, sub-optimal efficiency levels. But it can also lead to additional operational risks. Taken together this might affect the competitiveness of the industry as a whole vis-à-vis competing products and/or similar products from third countries adversely.

The remainder of this section discusses these problems and the underlying drivers. The annex "Fiches" provides a more detailed analysis for each of the issues as part of a "mini impact assessment".

Problems can broadly be attributed to two stages of the value chain: manufacturing and distribution.

Inefficiencies at manufacturing level

- Cumbersome, time-consuming and expensive authorisation and notification

The consultation process initiated by the Commission over the last year and a half and numerous other reports and analyses revealed shortcomings at different stages of the value chain. These already start with the first step in the life of a fund, namely its registration with the competent authority of the home country. On average, this authorisation takes excessively long in many Member States and often much longer than that for competing products (the Prospectus Directive[22], for example, requires authorisation within twenty days).

Related to this is the unsatisfactory functioning of the product passport: Notification for marketing in other Member States is much more cumbersome, time-consuming and expensive than a simple notification could be expected to be and, more importantly, more than for other competing products. Significant differences across Member States hinder fair competition and might lead to (unintended) discrimination. Overall, the competitiveness of the European fund industry might be put at risk.

- Problems in using the management company passport effectively, inefficiencies due to lack of depositary passport

Problems exist as well at the level of the management of the fund. A management company passport is defined as the possibility a) for a UCITS to appoint a management company in another Member State or b) for a management company to establish a UCITS in another Member State. However, since its introduction in 2001 there are problems in the application of the respective provisions of the Directive, mainly due to the inconsistencies of the text and regulators concerns regarding split supervision. As a result, fund promoters have to establish fully equipped management companies in the domiciles of each of their funds. This leads to a duplication of resources and prevents them from reaping efficiency and specialisation gains. Ultimately investors have to face higher costs.

There are claims that the fact that there is no similar passporting mechanism for the depositary results in unnecessarily high costs and inefficiencies. Free choice of a depositary across Member States would add to commercial flexibility and could help to reduce costs and increase efficiency.

- Proliferation of funds of small size

The European fund market is characterised by a high number of funds of small size. 54% of all funds manage less than € 50 million in assets. The average size of an UCITS is a fifth of that of its American counterpart. This impedes the exploitation of economies of scale. As a result, costs borne by European investors are excessively high. Foregone efficiency gains are estimated at € 2 to 6 bn. Fund proliferation is set to continue. Fund launches remain the preferred strategy for asset managers to innovate, raise new assets and respond to new investors' needs or preferences. This also increases the complexity of fund ranges; making it more difficult for investors and advisors/distributors to pick-up the best product.

The efficiency of the (cross-border) business of the fund industry is hampered by the difficulty or even impossibility to merge funds (cross-border) or to pool the assets of funds. Although fund mergers happen relatively frequently at domestic level, they often face very challenging hurdles that might even prove prohibitive in some cases. Cross-border mergers are the very rare exception. Only about 112 such mergers took place over the last four years (compared to 2,600 domestic mergers). One important reason for this is the absence of a common EU framework which leads to the coexistence of different national approaches and rules, rendering cross-border mergers expensive, complex and time consuming when at all possible. Another major barrier is that cross-border mergers are often considered as a taxable event what considerably undermines the scope for cost savings aimed by mergers.

Like mergers, fund pooling has been widely used in some EU jurisdictions but limited to funds in the same domicile. However, to better exploit potential scale economies pooling on a cross-border basis would be necessary. Regulators and some stakeholders perceive uncertainties related to supervision of pooled structures obstacles to cross-border pooling in the UCITS framework can be of a legal, regulatory, technical and fiscal nature. One commingling technique, entity pooling, is even explicitly ruled out by the diversification requirements of the Directive. For the other, virtual pooling, there remain considerable obstacles of different kind. Barriers to pooling restrict access to certain (efficient) business models. Scale effects that would allow reducing costs can not be exploited.

- Unnecessarily high costs, delays and operational risks in fund order processing due to fragmented systems

The lack of standardised fund order processing systems is a drag on the industry's efficiency . The current fragmentation imposed by different national systems implies that those costs, delays and operational risks step up in the case of the processing of orders of funds domiciled abroad. Developments in the industry add to the problem. Volume growth of fund transactions is requiring more efficient fund processing.[23] The growing cross-border business and changes at the distribution level translate into a growing number of actors and interlinkages that renders fund order processing more complex.[24]

- Inability to exploit the opportunities offered by financial innovation

The Directive lays down rules on organisation and governance of the investment fund, risk management controls, and prescriptive provision governing fund investment policy. This is what it has been called 'product regulation' approach. However, unceasing innovation in portfolio management techniques is constantly generating new investment possibilities.

There is some concern that, if the Directive does not keep pace with market developments, there is a risk that asset managers will simply package investment propositions in more flexible regulatory formats (e.g. certificates). Furthermore, investors may decide to move to innovative investment products that might respond more closely to their needs. Those products are often subject to less strict regulatory provisions. This may pose a problem from the investor protection point of view.

Inefficiencies in fund distribution

Investors are more and more interested in savings/investment products beside their savings account and show interest in investments with a higher risk/return profile. In order to allow them choosing the most suitable products they have to be provided with appropriate information about the costs and risks of products in order to minimise the risk of “bad surprises”; be that insufficient returns, e.g. at retirement, or even the loss of capital. This need for transparent, understandable and comparable information is reinforced by the high rate of innovation in the industry, which confronts investors with ever more complex products.

Disclosure of information takes place in two ways. Firstly, there is information provided by the fund manager "on paper". Secondly, there is - in most cases - disclosure via the distributor. The latter is strongly linked to the advice function of the distributor.

- Simplified Prospectus does not help investors much in their investment decision

Written disclosure by fund managers is partly regulated via the Simplified Prospectus and other transparency requirements in the Directive. The Simplified Prospectus, however, never lived up to the expectations that had been put into it. In most cases it does not provide information that is easily understood by the "average retail investor" and does not lend itself to comparison with other products, especially across borders. At the same time the production of the Simplified Prospectus is relatively costly and time-consuming for the industry as requirements often exceed those of the Directive and are not the same across Member States.

- Total costs of buying a fund are often not transparent to retail investors

Distributors have to comply with strict requirements regarding their duty of care in advising and servicing retail investors. Any conflicts of interest and inducements have to be properly managed or disclosed. Intermediaries have to discharge the necessary duties of care to the retail client. This aspect is closely linked to MiFID, the Markets in Financial Instruments Directive 2004/39/EC. However, the way the intermediary is remunerated is often not made transparent to the investor. It is therefore difficult to judge whether the intermediary is really working in the best interest of its client or biased in his advice by other factors like retrocession fees it receives from the fund.[25] This and the perceived low level of competition in distribution might be the reasons why distribution costs are significantly higher in Europe than in US.

Since the adoption of the Directive the number of investors in UCITS funds has multiplied and the role of investment funds in household portfolios has increased considerably. Distribution channels for funds are also changing. Open or guided architecture is gaining in importance which should lead to more competition but at the same time bears some risks in terms of cost transparency, etc. Despite these tendencies toward open/guided distribution European investors are often captive clients of large banks. They are not always getting access to competitive third party funds. Or they are only getting access to third party funds at a high price.

- Extending the UCITS concept to non-harmonised investment funds

There are categories of investment fund which remain outside the scope of the UCITS Directive but which are expanding quickly. They offer greater investment and risk diversification opportunities and, thus, they are attracting a broader base of investors. Non-harmonised investment funds are gradually governed by domestic regulations. Some, such as real estate funds and fund of hedge funds are already available to the retail investor in many Member States, or in the process of becoming mainstream retail investment products. Others, such as hedge funds and private equity, are generally reserved to sophisticated investors. Being outside the UCITS framework, they do not benefit from any mechanism to support their marketing on a pan-European basis. As a result, the industry is missing important business opportunities in other markets. For investors, particularly professional ones, these products could provide interesting investment/diversification possibilities.

Drivers

When analysing the drivers behind these inefficiencies and shortcomings three sources can be identified: some problems seem to result from outdated or prescriptive provisions of the existing UCITS Directive that create a (too) rigid framework for one of the most highly regulated financial services products; others seem to be due to the absence of enabling mechanisms that could help the industry to respond to new challenges that were not present or not seen when the Directive had been adopted. Finally, there seem to be problems that are not caused by legislation or the lack thereof but are rather “homemade”, resulting from non-standardised, incompatible systems in the industry. The table below illustrates a classification of the problems outline in the previous section according to these drivers.

Table 3: Problems and drivers regarding AM efficiency

Primary source/driver: Problem area: | Directive outdated or prescriptive | Directive incomplete | Problems internal to the industry |

Authorisation | X |

Notification | X |

Management company passport | X |

Depositary passport | X |

Fund mergers | X |

Pooling | X | X |

Fund order processing | X |

Simplified Prospectus | X |

Cost transparency | X | (X) |

Exclusions from scope of the Directive | X |

Pan-European framework for investment products | (X) |

Objectives

Overall objectives

The objective is to ensure that all players, asset managers, intermediaries and investors, can exercise their respective single market freedoms. Market players should be in the position to fully benefit from the single market freedoms established by the UCITS Directive and possibly from additional single market freedoms supportive to the functioning of the Single Market for investment funds and the efficiency of the industry. These single market freedoms do not only concern the freedom of the industry to do business but also the freedom and right of investors to participate in these markets in a fair and transparent way. But also fund providers outside the UCITS framework should be able to work efficiently on a cross-border basis. Investors with sufficient sophistication should be able to benefit from the investment possibilities offered by products registered in other Member States.

Specific objectives

The before-mentioned objectives of the existing UCITS Directive are still valid. Therefore, the objectives of this proposal coincide with those:

i) The pan-European legal framework for harmonised funds should promote an efficient and innovative fund industry that is attuned to the needs of its traditional retail investor base, reaping all the commercial opportunities in a fully integrated European market and that is able to compete globally.

ii) It should provide an appropriate protection of investors that takes into account market developments and changes in investors' needs and preferences, interactions with competing products as well as country-specific differences.

The specific objectives of individual measures are described in detail in the fiches in the annex. The following table summarises the problems as described above and the related objectives.

One objective that is not to be attributed to any specific area is the improvement of supervisory cooperation as it would be a conditio sine qua non for efficient solutions to many of the problems mentioned above. The existence of different approaches or cultures among Member States often leads to divergent interpretation and implementation of Directive provisions. The development of common approaches should help to strengthen supervisory cooperation and increase trust among regulators to the benefit of a frictionless protection of investor interests.

Table 4: Problems and objectives

Problem area | Specific problem | Specific objectives in detail | Operational objectives |

Inefficiencies at the manufacturing level | Cumbersome and costly authorisation: - Lengthy procedures before getting new products to market | - Cost savings in terms of time money and opportunities; - Easier market access; - Promotion of competition; - Creation of a more level playing field between UCITS funds promoters in different MS; -Improved competitiveness of UCITS | - Authorisation that is as cheap, easy and fast as possible without compromising effective supervision and investor protection |

Cumbersome and costly notification: - - Lengthy procedures before getting new products to other MS markets | - Eliminate barriers to integration of the European fund market; -Efficiency gains - Increased competition among UCITS - Improved competitiveness of UCITS | - Notification as cheap, easy and fast as possible without compromising effective supervision and investor protection |

Pooling: - Legal and tax barriers resulting from diverging national tax and regulatory regimes deprive AM of an effective instrument to reduce costs and benefit from economies of scale without reducing investors' choice | - Eliminate barriers to integration of the European fund market - Encourage cost savings at different levels of the value chain which are passed on to investors | - Allow AM to make a broader use of commingling techniques while ensuring investor protection and effective supervision |

Mergers: - Legal and tax barriers resulting from diverging national tax and regulatory regimes deprive AM of an effective instrument to reduce costs and benefit from economies of scale without reducing investors' choice | - Eliminate barriers to integration of the European fund market - Encourage cost savings at different levels of the value chain which are then passed on to investors | - Facilitate for cross-border mergers while ensuring investor protection and effective supervision |

Management Company Passport: - Unclear legal situation due to perceived ambiguities - Incompleteness of the Directive (contractual funds excluded); - Potential benefits of the passport are significantly diminished without the ability for all UCITS types to designate a management company in another MS | - Ensure that related internal market rights can be exercised effectively - Eliminate barriers to integration of the European fund market - Encourage cost savings at different levels of the value chain which are then passed on to investors | - Improve the functioning of the management company passport while ensuring investor protection and effective supervision |

Depositary functions: UCTIS requirement that MC and depositary need to be in the same MS hinders effective performance of fund administration and depositary functions. | - Ensure that efficient depositary functions are not hampered by an inappropriate regulatory framework | - Greater flexibility in the choice of the depositary |

Fund order processing: High operating costs and operational risks in the transactions because of fragmented infrastructure for processing fund orders | - Enhance efficiency of fund administration Reduce operating costs and operational risks | - Reduce the fragmentation of the fund order processing infrastructure |

Inefficiencies in fund distribution | Simplified Prospectus: Complex and ineffective disclosure tool for investors | - Improve competition and transparency in distribution; - Reduce risks and improve information and choice for investors without hindering financial innovation; - More cost-effective disclosure procedures; ensure compliance of national rules and procedures with internal market principles | - Improve transparency of products by making the simplified prospectus work - Promote competition in distribution - More cost-effective disclosure |

Duty of care in selection/sale of funds: | - Provide an effective regulatory framework inductive to more competition in order to ensure that the operation of distribution channels does not undermine interests of investors and that adequate investor protection is ensured; - Ensure transparency of costs and conflicts of interest. | - Improve transparency in distribution - Ensure investor protection vis-à-vis interests of distributors - Promote competition in distribution - Ensure that conflicts of interest and inducements are properly managed or disclosed and that intermediaries discharge the necessary duties of care |

Limitations of the product approach | Modernisation of investment rules Some investment rules might be outdated Investment decisions might be skewed by a piecemeal regulatory framework. Risk that asset managers and investors switch to non-regulated products | - UCITS funds to remain attractive, safe, robust and competitive in the face of growing competitive pressure from other products - Avoid further fragmentation of investment markets | - Clarify the definition of eligible assets |

Private placement regime: Lack of a pan-European private placement regime addressed to sophisticated investors hinders the development of pan-European markets for non-harmonised products | - Eliminate barriers to cross border fundraising and investment into non-harmonised funds | - Ensure that non-harmonised funds can efficiently be distributed cross-border while ensuring appropriate protection of different investor classes |

ASSESSING AND COMPARING POLICY OPTIONS

The description of the problems and objectives has made clear that this is a multi-dimensional task: It does not have the same urgency and importance in all its aspects. It seems therefore impossible to address all dimensions with a single measure. Yet, due to the existing interdependencies and the fact that most of the issues are related to the UCITS Directive it does seem appropriate either to deal with the issues fully independently. This impact assessment therefore focuses rather on best package instead of going into the very details of each item.

This "packaging process" will be described in the next two sections. The first one describes how the measures to address a certain problem/achieve certain objectives have been evaluated. In order to keep this report at an acceptable length only a summary is provide. The detailed analyses can be found in the Annex "Fiches". The second section evaluates the best way and timing to implement the measures from a more general point of view to ensure overall consistency and efficiency.

Assessing and comparing individual measures

Following the description of the problems and the definition of objectives a number of options which could help to address the problems and to achieve the objectives have been identified. These options and their likely impacts are presented shortly in Table 5 below. In addition, the table gives an indication of the extent to which the respective option would have an impact on efficiency, market integration and investor protection. Together with Table 4 it provides a very condensed summary of the impact assessments that have been prepared for the individual issues outlined in section 4.[26]

The next paragraphs summarise the reasoning behind the selection of preferred options (marked in bold) shortly for each issue. As the option "do nothing" would have the effect that the current problems would continue to exist or might even aggravate in all cases this option is not described in further detail.

Notification : i) The introduction of a service passport would replace the product approach by a service focused approach, i.e. authorisation of the manager and not of the product. Therefore, the need for notification would disappear. Although this would most likely considerably improve efficiency in bringing UCITS products to foreign markets and thereby contribute to market integration, it would put the "UCITS brand" at risk and could have unintended negative impacts on investor protection. The possible negative impacts of this option seem to outweigh the positive ones. ii) Amending the Directive with deadlines for the notification procedure and a switch to regulator-to-regulator notification would contribute to a downward harmonisation in terms of costs and duration of the procedure. It would improve the efficiency and foster market integration. It would also have positive impact on investors as investor protection would remain ensured while choice would increase and costs potentially decline. iii) It seems that with the adoption of guidelines CESR has reached the limits permitted by the Directive. For this reason, it is unlikely that further work could lead to substantial improvements.

Authorisation : i) An amendment of the Directive could introduce deadlines for national authorities. This would shorten the time to market for new domestic funds. ii) The reasoning concerning the option to introduce a services passport is similar as for the case of notification. However, in contrast to the case of notification national authorities should prima facie have an incentive to get domestic funds registered fast. Recent experience seems to confirm that they are working in this direction. For these reasons it seems best to do nothing , not to interfere at European level, but to leave the issue with Member States in accordance with the principle of subsidiarity.

Mergers : i) An amendment of the Directive could enable cross-border fund mergers. This would help to improve both efficiency and market integration as economies of scale could be exploited and pan-European strategies be developed. Investors should benefit from this through cost savings and eventually improved competition in and competitiveness of the industry. ii) The promotion of convergence of national regimes does not promise any major improvements as this road was already open to Member States in the past but no significant progress has been made. Therefore option i) is preferred. Options i) and ii) could be accompanied by iii) a Tax Directive that would ensure that cross-border fund mergers are treated in a tax neutral way. This would considerably increase the effectiveness of the previous options but given the unanimity requirement in Council this seems not achievable in the short- to mid-term, if at all. Or by iv) an interpretative communication that would emphasise the application of case law in a systematic manner in order to avoid tax discrimination between domestic and cross-border fund mergers. Here it is difficult to see to what extent this could result in a significant improvement of the situation but given the low chances to get a tax directive adopted this seems to be the best solution for the moment.

Asset Pooling : i) An amendment to the Directive would be needed to allow managers to make use entity pooling techniques. This would provide the industry with some flexibility in their cross-border business models and help market integration. Investors should benefit from cost savings. ii) As some pooling techniques carry some uncertainties and potential regulatory problems allowed entity pooling structures could be restricted to the so called master-feeders . This would reduce the positive benefits to the industry but also the associated uncertainties regarding investor protection. iii) An amendment to the Directive to allow virtual pooling, on the other hand, would increase the potential efficiency gains. However, particular attention should be given to the design of provisions aiming at alleviating supervisory concerns. iv) CESR guidelines could reduce regulators' reluctance to authorise (cross-border) virtual pooling structures. Its impact would depend very much on the compliance of Member States with such guidelines. Because of their greater positive impact on efficiency and integration, options i) and iii) are preferred. It has, however, to be ensured that the inherent risks are sufficiently dealt with so that investor protection is guaranteed.

Management company passport : i) An amendment to the Directive to fine-tune existing provisions and to eliminate potential inconsistencies in the rules could make the passport a much more effective tool as it is at the moment. Positive impacts could be expected in all three respects: efficiency, market integration and savings for investors. It is therefore the preferred option. ii) CESR guidelines could help to significantly improve supervisory cooperation in order to reduce frictions and delays. It would not, however, solve all the identified problems (e.g. ambiguous Directive drafting). Besides, their effectiveness risks to be limited given their non-binding nature. iii) Instead of acting now, the situation could be further analysed to avoid changes that disturb the industry without producing significant benefits. However, this risks delaying an urgently needed solution.

Table 5: Summary of impact assessment for individual problem areas

Assessment of impact on: |

Available options | Efficiency | Market integration | Investors | Feasibility |

Notification |

Service Passport replacing notification | ++ | ++ | -- | Doubtful |

Amend UCITS Directive: deadlines for procedures; regulator-to-regulator notification | ++ | ++ | ++ | Yes |

Monitoring and support of CESR work towards more efficient and harmonised procedures | + | + | + | Yes |

Do nothing | - | - | - |

Authorisation |

Amend UCITS Directive: deadlines for procedures | + | ? | + | Yes |

Service Passport replacing product authorisation | ++ | ? | -- | Doubtful |

Do nothing | + | ? | + |

Fund mergers |

Amend Directive: enable fund mergers | ++ | ++ | ++ | Yes |

Soft law: support convergence of national approaches | ? | ? | + | Yes |

Do nothing | - | - | - |

Taxation Directive: ensure that mergers are not treated as taxable events | ++ | ++ | + | Doubtful |

Interpret. Communication: application of national rules to cross-border mergers | + | + | + | Yes |

Do nothing | - | - | - |

Entity pooling |

Amend Directive to allow entity pooling | ++ | ++ | ++ | Yes |

Amend Directive to allow master-feeders | + | ++ | ++ | Yes |

Do nothing | - | - | + |

Virtual pooling |

Amend Directive to allow virtual pooling | ++ | ++ | ++ | Yes |

CESR guidelines on virtual pooling in order to reduce barriers | ? | ? | + | Yes |

Do nothing | - | - | + |

Management Company Passport |

Amend Directive to make passport work: fine-tuning of existing provisions/elimination of potential inconsistencies in the rules | ++ | ++ | ++ | Yes |

CESR guidelines to give effect to Art. 6c cooperation provisions | ? | ? | + | Yes |

Two-step approach: analyse situation + act on the basis of results | + | + | ++ | Yes |

Do nothing | - | - | + |

Depositary Passport |

Amend Directive to enable full passport for depositary services | + | + | + | Doubtful |

Amend Directive to enable custody passport only | + | + | + | Yes |

Greater cross-border flexibility for depositary business models | ++ | ++ | ≈ | Yes |

Do nothing | - | - | + |

Fund order processing |

Amend Directive to harmonise fund order processing | ? | ? | + | Doubtful |

Soft-law: issue a recommendation to encourage greater harmonisation and automation of processes | ? | ? | ? | Yes |

Do nothing | - | - | ≈ |

Simplified Prospectus |

CESR guidelines on coherent and uniform implementation of the SP | +? | +? | +? | Yes |

Modify Recommendation to clarify certain elements of the Simplified Prospectus | +? | +? | +? | Yes |

Abolish the Simplified Prospectus | ++? | ? | -- | Doubtful |

Amend Directive: specify core principles, Lamfalussy approach for future adaptations | ++ | ++ | ++ | Yes |

Level 2 measure: clarification of definitions | +? | +? | +? | Yes |

Do nothing | - | - | - |

Duty of care |

MiFID: Monitor implementation and effectiveness | ≈? | ≈? | ≈? | Yes |

Vade-mecum or guidance on specific problems | ≈? | ≈? | ≈? | Yes |

Clarification of the interplay between UCITS and MiFID | ≈? | ≈? | ≈? | Yes |

Do nothing | ≈? | ≈? | - |

Non-harmonised funds |

Amend Directive to include non-harmonised funds that are suitable for retail investors | + | + | - | Doubtful |

Analyse if pan-European private placement regime is appropriate and if so implement it | +? | +? | +? | Yes |

Do nothing |

Investment rules |

Amend Directive to enlarge investment powers | + | + | ? | Doubtful |

Amend Directive to introduce Lamfalussy approach, then level 2 measures | + | + | + | Yes |

2-step approach: analyse use of investment powers; then develop appropriate measures | + | + | + | Yes |

Do nothing | -? | - | - |

Assessment: ++ = strongly positive; + = positive; -- = strongly negative, - = negative; ≈ = neutral; ? = uncertain; P referred option in bold

Depositary passport : i) An amendment to the Directive to enable a " full passport " for depositary services would include provisions aimed to harmonise the role and responsibilities of depositaries. This should trigger efficiency and specialisation gains, facilitate cross-border business, and increase investor confidence. But the scope for benefits does not seem to justify the important efforts that would be required. ii) A custody passport would still require important efforts while providing more or less the same benefits. iii) Allowing greater flexibility in the organisation of the depositary function would not require legislative change but some adjustment in the rules and practices of some Member States. That last option appears to be the most cost-effective.

Fund order processing : i) Amending the Directive to harmonise fund order processing could help the industry to overcome the difficulties in developing and agreeing on an efficient system. It would, however, risk distorting incentives and might hinder the development of economic solutions in the future should need arise. ii) A recommendation could be used to encourage greater harmonisation and automation of processes without interfering directly with legislation that would be inflexible to react on developments after adoption. But at the same time, a recommendation would be of uncertain use due to its non-binding nature. Therefore, it seems most appropriate to do nothing and let the industry continue its own work, the more so as recent initiatives show a certain chance of success.

Simplified Prospectus : i) CESR guidelines on coherent and uniform implementation could potentially achieve some benefits but are restricted by the provisions in the Directive. In addition, their impact depends very much on the compliance of Member States with the guidelines. ii) Modifying Recommendation to clarify certain elements of the Simplified Prospectus would face similar problems and restrictions. iii) Abolishing the Simplified Prospectus as a drastic solution would at first glance reduce the costs of the industry and reduce administrative burden. It would, however, not be unlikely that it be replaced by some other documents. iv) Amending the Directive to specify core principles and to introduce the Lamfalussy approach for future adaptations would allow for more harmonisation and flexibility at the same time. v) Clarification of definitions via a Level 2 measure would, like options i) and ii), carry a rather low likelihood of significant impacts. Therefore, a re-write of the rules governing the Simplified Prospectus seem to be the only option warranting sufficient net benefits for all market players to justify action. As the preferred option will only be "operational" with the usual delay of lawmaking at European level, a modification of the Recommendation might be used as a short-term solution which could then eventually be transformed into a level 3 measure under the amended Directive.

Duty of care : i) Monitoring the implementation and effectiveness of MiFiD with a specific focus on the impact on the distribution of UCITS would make sure that any problems could be addressed immediately and would further trust in the legal framework. ii) The issuance of further guidance material would be pre-mature at this stage. iii) The same holds for the issuance of a clarification of the interplay between the two Directives.

Non-harmonsied funds : i) Amending the directive to make (some) non-harmonised funds UCITS would require to either drop or soften some of the core principles of UCITS or to establish sub-categories with the risk of a fragmentation of the UCITS landscape. ii) In order to overcome the fragmentation of regulation on non-harmonised funds in the EU a pan- European private placement regime addressed to sophisticated investors might be the best solution, but the feasibility and appropriateness of such a regime would first need to be analysed further.

Investment rules : i) Through an amendment to the Directive UCITS could be allowed to invest in products which were not eligible investments up to now and adapt other rules like investment limits to provide asset managers with more flexibility in their investment strategies.. ii) With a Lamfalussation of the respective provisions could allow more flexible reactions in the future but level 2 work would be restricted to clarification and therefore still considerably restricted. iii) As it is not clear in how far the 2001 amendments have influenced the investment policies of UCITS it seems more appropriate to analyse and compare investment policies of harmonised and non-harmonised funds before taking action.

Combining the measures into a package

The analysis of the individual issues in the previous section resulted in a list of actions that appear suitable to solve or at least alleviate the respective problems to the extent possible. The preferred options for the individual problem areas differ widely in form, – from "do nothing" to legislative proposals –, and timing, – from immediate action to potential action at a later stage. In a next step, it has to be analysed what the way would be to implement these measures. This includes considerations in how far the measures are consistent with each other, if there are any synergies that can be exploited or conflicts to be avoided, or flanking measures to be taken to round up the package.

In principle there are three options:

- firstly, the individual measures could be implemented "as they come along", i.e. whenever a measure has been prepared it will be immediately implemented

- secondly, all measures could be implemented at the same time, i.e. as soon as all have been properly prepared

- thirdly, measures could be split up into sub-groups of measures as a compromise between reacting swiftly on the most pressing issues and minimising the number of changes to the provisions.

The advantages and disadvantages and more general considerations in this respect are discussed in the following.

6. Implementation of individual actions

The advantage of this would of course be that no time is wasted. No measured had to be halted until others have been prepared. However, given that many measures would be ready for implementation within a relatively short interval; this would produce a constant stream of legislative changes and accompanying actions like level 2 and level 3 work. This could lead to some confusion in the legislative process. But it would not allow making proper use of potential synergies between the measures. Because of the short intervals it would not have the benefit that the impacts of earlier measures could be taken into account in the preparation of others. This approach would put a heavy burden on the legislative system at EU and national level without providing particular benefits and also on the industry that has to comply with. It will also create incertitude. For the sake of better regulation this option is not analysed in further detail.

7. Implementation of all potential measures at the same time

This option would avoid the shortcomings of the first option. Legislators at EU and national level would be spared of frequent small amendments to the Directive and industry would not have to adapt to new rules "every day". In addition, option 2 would potentially allow maximising synergies between the different actions.

It would also be advantageous in terms of consistency of the overall approach. It could, for example, be envisaged not only to implement Lamfalussy-structures in those parts of the Directive on which the above measures are targeted but for the Directive as a whole. At the same time the product-based approach of the Directive could be replaced by a risk-based approach. As explained in the discussion of the investment rules, this would improve the flexibility of UCITS considerably.

The disadvantage of this option is that – as the analysis regarding investment rules and the treatment of non-harmonised funds showed – there are still a number of vital questions to be answered before such a complete overhaul of the Directive could safely be proposed. In other words, implementation "in one go" would either risk that quick and perhaps premature action in some areas. It would produce adverse outcomes that could not be seen yet, or mean that more urgent measures that could safely be implemented in relatively short time would have to be delayed until the more complex issues regarding investment rules etc. could be addressed with sufficient confidence.

8. Implementation of sub-packages

This last option would take the form of a White Paper that clearly indicates what measures are envisaged in the different areas and when they are to be implemented. This would help market players and regulators to plan ahead. Sub-packages would be designed that take the nature of measures, the urgency and the degree of understanding of the issue into account. Legislative measures to improve the efficiency of the industry, for example, are considered as priorities that should not be delayed. In contrast, the outcome of the analytical work proposed regarding issues like private placement and investment rules should not be cut short and results should not be anticipated.

Furthermore, this staged approach would not exclude further measures on the basis of the analyses. Of course, there might be a disadvantage in this compared to option 2 in that two major amendments to the Directive would take place within a few years. Compared to the risk to get it wrong now or the costs of delaying the more straightforward changes to the Directive by probably some years this option still seems to be preferable. A majority of market players also seems to prefer this option.

The publication of these intentions of the Commission would provide stakeholders with a certain level of legal certainty for the next years. It would set out a clear time table for flanking measures like monitoring work, compliance cost analysis and further studies of some issues on which current knowledge does not allow for immediate action. Furthermore, it would give a clear indication of how regulation could be developed further after 2008.

Considering the advantages and disadvantages of these three options, the staged approach of a white paper seems to be the most appropriate as it allows to combine the main benefits of options (1) and (2), namely swift action on the most pressing items without excessively frequent changes to the Directive.

MONITORING AND EVALUATION

While an exhaustive monitoring and evaluation programme can only be developed once detailed proposals have been developed, such a programme will most likely comprise the following elements:

- Monitoring of the implementation of MiFID and its impact on UCITS

- Study on investment policies of harmonised and non-harmonised fund, evaluating the use actually made of the enlarged investment powers introduced by the 2001 amendments and assessment of its impact and need for further action

- Review national conditions for authorisation and marketing of non-harmonised funds to the public (mass-market)

- Evaluation of the amended directive, four years after it entered into force

- Further analysis of the need for a switch to a principle/risk-based approach in the directive

ANNEX 1: Summary Table of Actions

PROBLEM AREA | PREFERRED OPTION | TYPE AND TIMING |

Authorisation | Do nothing | - |

Notification | Amend UCITS Directive: deadlines for procedures; regulator-to-regulator notification | Legislative change 2007 |

Fund mergers | Amend Directive: enable fund mergers Interpret. Communication: application of national rules to cross-border mergers | Legislative change 2007 |

Asset pooling | Amend Directive to allow entity pooling Amend Directive to allow virtual pooling | Legislative change 2007 |

Management company passport | Amend Directive to make passport work: fine-tuning of existing provisions/elimination of potential inconsistencies in the rules | Legislative change 2007 |

Depositary passport | Promote greater cross-border flexibility for depositary business models | Legislative change 2007 |

Fund order processing | Do nothing | - |

Simplified Prospectus | Amend Directive: specify core principles, Lamfalussy approach for future adaptations | Legislative change 2007 |

Duty of care | MiFID: Monitor implementation and effectiveness |

Non-harmonised funds | Analyse if pan-European private placement regime is appropriate and if so implement it | Report 2008 |

Investment rules | 2-step approach: analyse use of investment powers; then develop appropriate measures | Report 2008 |

ANNEX 2: The Lamfalussy process

The new regulatory structure of the so-called Lamfalussy process has been initiated by the Stockholm European Council Resolution of 23 March 2001 on “more effective securities market regulation”. The Lamfalussy process is based around the four-level regulatory approach recommended by the Committee of Wise Men on the Regulation of European Securities Markets, chaired by Baron Alexandre Lamfalussy[27].

The Lamfalussy process was designed to make Community legislation on securities markets more flexible, so that it can be agreed and adapted more quickly in response to innovation and technological change in financial markets; to allow the Institutions to benefit from the technical and regulatory expertise of European securities regulators and from better involvement of external stakeholders; and to focus more on even implementation and enforcement of Community law in the Member States.

One of the key innovations of the Lamfalussy process is the creation of two Committees to advise the Commission on Level 2 implementing measures – the European Securities Committee (ESC) representing the Member States and functioning as a so-called ‘regulatory committee’ under the Comitology arrangements[28] – and the Committee of European Securities Regulators (CESR) . The two Committees were set up by Decisions of the Commission on 6 June 2001[29]. The ESC acts in its capacity as a regulatory committee, assisting the Commission in the exercise of its delegated executive powers, within the terms defined in the Directives adopted at Level 1.

Transparency is another important feature of the process. The Lamfalussy process has established a rigorous mechanism whereby the Commission seeks, ex-ante , the views of market participants and end-users (companies, investors and consumers) by way of early, broad and systematic consultation, with particular regard to Level 1 proposals, but also at Level 2.

As the UCITS Directive has been adopted long before the Lamfalussy process has been put in place, it can not directly take advantage of these procedures. However, some of the structures have been successfully implemented with the 2001 amendments to the Directive.

- Table 6: The four-level regulatory approach under the Lamfalussy process [30]

[pic]

ANNEX 3: List of acronyms

AFG: | Association Française de la Gestion Financière |

ALFI: | Association of the Luxembourg Fund Industry |

AM: | Asset management |

AMF: | Autorité des Marchés Financiers |

AuM: | Assets under management |

bn: | billion |

CEIOPS: | Committee of European Insurance and Occupational Pensions Supervisors |

CESR: | Committee of European Securities Regulators |

CIS: | Collective investment schemes |

CPM: | Collective portfolio management |

EFAMA: | European Fund and Asset Management Association, formerly FEFSI |

FEFSI: | Fédération Européenne des Fonds et Sociétés d´Investissement |

ESC: | European Securities Committee |

EVCA: | European Private Equity and Venture Capital Association |

FEAM: | Forum of European Asset Managers |

FIN-USE: | Forum of user experts in the area of financial services |

FSA: | Financial Services Authority |

FSAP: | Financial Services Action Plan |

GDP: | Gross Domestic Product |

IA: | Impact Assessment |

ICI: | Investment Company Institute |

IFA: | Independent Financial Advisors |

IMA: | Investment Management Association |

IOSCO: | International Organization of Securities Commissions |

LDI: | Liability-driven investment |

MC: | Management company |

MiFID: | Markets in Financial Instruments Directive 2004/39/EC |

MS: | Member State |

REF: | Real estate funds |

TER: | Total expense ratio |

TNA: | Total net assets |

UCITS: | Undertakings for collective investment in transferable securities |

UCITS III: | Directive with 2001 amendments |

ANNEX 4:References

Reports

- European Commission (2004): Financial Services Action Plan: Progress and prospects, Asset Management Expert Group, Final Report, May 2004; http://ec.europa.eu/internal_market/finances/docs/actionplan/ stocktaking/report-assetmgnt_en.pdf

- European Commission (2005): Green Paper on enhancing the European framework for investment funds, COM(2005) 314 final, 12th July 2005; http://ec.europa.eu/internal_market/securities/docs/ucits/ greenpaper_en.pdf

- European Commission (2006a): Feedback Statement on the Green Paper consultation; http://europa.eu.int/comm/internal_market/securities/docs/ucits/greenpaper/feedback_statement_en.pdf

- European Commission (2006b): Financial Integration Monitor FIM 2006; http://ec.europa.eu/internal_market/finances/fim/index_en.htm

- European Commission (2006c): Report on Current trends in asset management, lot 2; prepared by Oxera Consulting

- European Commission (2006d): Report on Current trends in asset management, lot 1, prepared by ZEW/OEE

- European Funds and Asset Management Association (EFAMA) (2004): "FEFSI Fact Book 2004"

- EFAMA (2005): "EFAMA Fact Book 2005"

- European Parliament (2006): Report on asset management (2006/2037(INI)), March 2006 (also called the "Klinz' report")

- Funds Europe (2006): Funds Europe, August 2006; http://www.funds-europe.com/

- McKinsey&Company (2005): "Will the goose keep laying golden eggs?"

- McKinsey&Company (2006): "The Asset Management Industry in 2010"

- PriceWaterhouseCoopers (PwC) (2006): "Pan-European UCITS Distribution 2005"

Data sources

- FERI Fund Market Information: FERI FundFile; http://www.feri-fmi.com/FERIFMI/

- European Central Bank; http://www.ecb.eu/home/html/index.en.html

ANNEX 5: Fiches for individual issues

TABLE OF CONTENTS

1. PROBLEMS WITHIN THE UCITS FRAMEWORK 40

1.1. Manufacturing level 40

1.1.1. Authorisation 41

1.1.1.1. Problem description 41

1.1.1.2. Objectives 44

1.1.1.3. Description of options 44

1.1.1.4. Impact assessment 45

1.1.1.5. Comparison of options 45

1.1.2. Notification 47

1.1.2.1.Problem description 47

1.1.2.2. Objectives 51

1.1.2.3. Description of options 52

1.1.2.4. Impact assessment 53

1.1.2.5. Comparison of options 54

1.1.3. Fund mergers 56

1.1.3.1. Problem description 56

1.1.3.2. Objectives 57

1.1.3.3. Description of options 58

1.1.3.4. Impact assessment 58

1.1.3.5. Comparison of options 62

1.1.4. Asset pooling 64

1.1.4.1. Problem description 64

1.1.4.2. Objectives 65

1.1.4.3. Description of options 66

1.1.4.4. Impact assessment 66

1.1.4.5.Comparison of options 70

1.1.5. Management Company passport 73

1.1.5.1. Problem description 73

1.1.5.2. Objectives 77

1.1.5.3. Description of options 77

1.1.5.4. Impact assessment 77

1.1.5.5. Comparison of options 80

1.1.6. Depositary passport 81

1.1.6.1. Problem description 81

1.1.6.2. Objectives 83

1.1.6.3. Description of options 83

1.1.6.4. Impact assessment 83

1.1.6.5. Comparison of options 85

1.1.7. Fund order processing 87

1.1.7.1. Problem description 87

1.1.7.2. Objectives 88

1.1.7.3. Description of options 88

1.1.7.4. Impact assessment 88

1.1.7.5. Comparison of options 89

1.1.8. Investment policy restrictions 90

1.1.8.1. Problem description 90

1.1.8.2. Objectives 91

1.1.8.3. Options description 92

1.1.8.4. Impact assessment 92

1.1.8.5. Comparison of options 97

1.2. Distribution level 100

1.2.1. Simplified prospectus 100

1.2.1.1. Problem description 100

1.2.1.2. Objectives 101

1.2.1.3. Description of options 102

1.2.1.4. Impact assessment 104

1.2.1.5. Comparison of options 106

1.2.2. Competition and duty of care 110

1.2.2.1. Problem description 110

1.2.2.2. Objectives 110

1.2.2.3. Description of options 111

1.2.2.4. Impact assessment 111

1.2.2.5. Comparison of options 112

1.2.3. Distribution of non-UCITS 113

1.2.3.1. Problem description 113

1.2.3.2. Objectives pursued 114

1.2.3.3. Description of options 115

1.2.3.4. Impact assessment 115

1.2.3.5. Comparison of options 116

Note:

This document adds more detail to the impact analysis that has been presented in the Impact Assessment report. The sections follow the common reporting format: Problems – Objectives – Options – Impacts – Comparison of options. The analyses are primarily based on the sources mentioned in the introduction of the report. In addition to that various statistical data sources and reports by various organisations have been used. The kind cooperation of these organisations and companies helped a lot in "getting the facts right" and is therefore very much appreciated. Nonetheless, the assessments presented in this document are those of the Commission services.

PROBLEMS WITHIN THE UCITS FRAMEWORK

Manufacturing level

Despite the Directive's ambition to create a single market for UCITS, the European market remains rather fragmented. This fragmentation appears at different levels.

First, at the level of the fund offer. Member States' fund markets are often dominated by domestic products. The presence of foreign funds, although rapidly increasing over the last years is still modest. Only 17% of the funds on the market are cross-border[31]. Part of this domestic bias can be justified by investors' preferences, historical inertia and divergent taxation regulations[32]. Lengthy and cumbersome notification procedures add to the problem. As a result, parallel ranges of rather similar funds are developed in different Member States. This fund proliferation is exacerbated by the continue launch of funds responding to evolving investors' needs or new business opportunities. The European fund market is thus characterised by a high number of funds of small size[33]. 54% of all funds manage less than €50 million in assets[34]. Given the existing difficulties to put in place mechanisms for amalgamating assets (such as fund mergers or asset pooling) this situation is set to persist. Inability to exploit economies of scale translates into higher costs.

Second, at the level of some industry value-chain activities. The choice regarding the location of financial activities depends on a series of variables such as access to qualified man-force, regulatory and/or tax regimes, proximity of liquid and developed markets and the possibility to exploit economies of scale through concentration[35]. However, in the case of UCITS industry this choice is curtailed. The UCITS Directive requires that the depositary is based in the same country as the fund. Also the possibility for the management company to offer its services across borders is limited in practice to some secondary activities. This not only limits the capacity of the industry to achieve economies of scale and specialisation, but also leads to a duplication of resources that put up costs.

Third, at the level of the organisation of processes. The treatment of a subscription or redemption order implies a series of interactions between different actors and varied (often manual) steps. This process is generally organised differently between Member States; sometimes even within the same national market. The lack of automation and standardisation increases costs and delays and can exacerbate operational risks.

The consequences of these single market inefficiencies are not negligible. At the European level, the investor bears their whole burden in terms of lower net performances and higher risks. UCITS struggle to remain attractive vis-à-vis other investment products. Delays in the authorisation of new UCITS products aggravate the problem. On the global scene, the competitiveness of the European fund industry is severely damaged[36].

In order to overcome these drawbacks a series of solutions have been identified and largely discussed with all stakeholders over the last two and a half years. Those are detailed and analysed below.

Authorisation

Authorisation, that is permission from the competent authority in the home Member State, is at the core of the UCITS product passport. It confirms that the UCITS funds complies with UCTIS rules and can be marketed to public. In authorisation procedure different types of cost are incurred. When seeking approval by the regulator the fund manager/promoter is usually faced with direct costs to be paid to the regulator in the form of fees and indirect costs in the form of compliance costs (staff time or the use of external expertise). The regulator has to bear the costs incurred by the checking of the documents issued by the funds promoter; these costs can either be passed on to the fund manager and would then be (part of) the fees or be borne by the state. Finally, there are opportunity costs of the time taken for authorisation and notification.

It should be noted that authorisation costs do not only occur with the initial authorisation of a fund but, in most Member States, fees are due every year. Furthermore, there are additional costs every time changes are made to the fund[37] which needs to be authorised by the regulator and require further expense. What is probably even more important to funds promoters is the delay that the authorisation process incurs.

Problem description

Administrative delays in getting investment funds to the market

Obtaining authorisation in the country where the fund is domiciled can be a lengthy process. This situation penalizes UCITS with respect to other, competing products that provide less investor protection.

As the UCITS directive does not fix a maximum time for the authorisation procedure this time varies considerably between Member States (see Table 1) ranging from one to two weeks up to three to six months. The industry claims that the procedures are unnecessarily long and could easily be improved by the use of modern information technology and by allowing producers to refer to their "track records" instead of reproducing and double-checking all documents every time a new fund is produced by the same provider.

Lengthy authorisation procedures do not only produce (unnecessarily) high direct costs, they can also reduce or even destroy business opportunities if, as a result of delays in authorisation, products do not make it to the market in time or not at all. Especially for newly developed products there is a race to the market in order to benefit from the first mover advantage resulting from the early recognition of the product by distributors and investors.

Table 1: Time taken to get fund authorisation

Member state | Fund authorisation |

Belgium | 1-2 weeks |

France | 4 weeks on average |

Germany | 3 weeks |

Ireland | 6-8 weeks on average |

Italy | Consob reviews prospectus in 20 days, Bank of Italy review of fund rules 40 days |

Luxembourg | 2-8 weeks depending on the file |

Poland | 5-6 months |

Spain | Typically 1 month, but up to 2 months |

Sweden | 3 months, 6 months for complex fund |

UK | 6 weeks |

Source: CRA (2006) based on interviews with fund managers and regulators.

Industry claims that both uncertainty and long delays seriously handicap the fund industry when competing with other financial products offering similar features. While authorisation of a UCITS product often takes several months, the Prospectus Directive limits this process to 20 days. These differences might encourage providers to focus more on less regulated products which grant less investor protection. In the end, the claimed objective of authorities to ensure investor protection would be seriously undermined.

From a market prospective cumbersome and lengthy authorisation processes could have significant dynamic impacts: denied market opportunities for the industry result in less choice for investors. Both, industry and investors suffer higher costs directly through the authorisation and indirectly due to the restricted size of the market (foregone economies of scale). In the end, the competitiveness of the European funds industry might suffer.

It has to be noted that the CRA study signalled a positive trend in terms of greater speed of authorisation. Many fund managers stressed that their national regulator was improving in the speed of authorisation (Sweden, Poland, Germany) although many also stressed that there was still a long way to go. At the same time, a reduction in the time to market is not expected to reduce differences in the regulatory compliance cost for funds in different Member States. Instead, its main impact seems likely to come through additional dynamic competition between funds which are able to access markets more easily.

Cost of authorisation

According to CRA (2006) the overall costs of regulatory compliance of a fund are small. Since authorisation is a part of these total costs, it follows that the respective costs are also relatively small. However, as illustrated in Table 2, these costs vary considerably between Member States which might be an indication of saving potential in some Member States.

The financial cost of authorisation in terms of internal resources and use of external lawyers, often accounts for less than 0.25 basis points (bps) for the largest providers. Overall, regulatory costs have been found to be a small component of the total costs of investment funds with an average cost of between 1.3 and 2.3 bps depending on the type of fund under consideration.

Table 2: Cost of authorisation

Direct cost imposed by regulators |

Member State | Single fund | Umbrella fund | Frequency of payment |

Belgium | €0.075 per thousand assets under management plus €0.50 per thousand new subscriptions; for money market funds the cost is €0.05 per thousand net asset value with a minimum of €314. | Same | Annual |

France | €8 per million of assets under management | Same | Annual |

Germany | €1,500 | €1,500 per sub-fund | Annual but only €500 per sub-fund |

Ireland | €2,050 | €2,050 plus €550 per sub-fund up to a maximum of €4,800 | Annual |

Italy | €1,400 | Same | Annual |

Luxembourg | €2,650 | Same | Annual |

Poland | €4,000 | €4,500 for umbrella and €300 for subsequent additions of sub-funds | One-off |

Spain | 0.014% of estimated sales with range of €975-39,033 for fixed income and €1,626-65,055 for variable income | Same | Applied one-off or as long as the estimated sales increase |

Sweden | SEK 5,000 (€ 540) | Same | Annual |

UK | £1,200 (€1,735) | £2,400 (€3,470) | Annual fee varies according to the number of sub-funds and varies from £620 - 13,640 (€900 -19,720) |

Source: CRA(2006) based on interviews with, and data from, regulators. Where fees are noted as annual then annual payments are the same as the initial authorisation costs unless otherwise specified.

Objectives

The specific objectives here are:

- easier market access

- promotion of competition

- creation of a more level playing field between UCITS funds promoters in different Member States and

- improved competitiveness of UCITS vis-à-vis other investment products and providers from third countries

The operational objective is to make authorisation as cheap, easy and fast as possible without compromising effective supervision and investor protection. Cost savings should ideally be passed on to investors. Overall, this measure should lead to a downward harmonisation in terms of costs and time for authorisation.

Description of options

i. Do nothing

Current problems persist, leaving investors with relatively high costs and perhaps restricted choice. There is a risk that investors turn towards other, less regulated and more risky investment products. Industry would face (unnecessarily) high costs and slow access to market resulting in a competitive disadvantage vis-à-vis providers of non-UCITS and provider of investment funds from third countries.

ii. Amendment of the UCITS Directive

In an amendment of the Directive a maximum time span for authorisation by national authorities could be fixed. This requirement could follow the example of the Prospectus Directive: authorisation of new (umbrella) funds in 20 business days; notification of incomplete documents to the provider within 10 business days; approval of changes to the prospectus or to the fund rules/instrument, and of the addition of a new sub-fund within 10 days. In addition, the amendment of the Directive could clearly specify what additional requirements by national regulators were acceptable and what not.

iii. Introduction of a Service Passport

This option would replace the current product authorisation by a collective investment scheme service passport for the operator of the UCITS scheme. Once an operator has been authorised it could issue funds via a self-authorisation process. This option would eliminate any regulatory delay in the marketing process of new or altered funds. At the same time it would make the notification procedure obsolete. Therefore, it would represent the most radical solution in terms of reduced product-related compliance costs. Without product authorisation, investor protection would be ensured via the initial check of the service provider and in the distribution via MiFID rules.

Impact assessment

i. Do nothing

If no action is taken the current problems would persist. In the medium to long term there is a risk that both fund promoters and investors increasingly turn to non-UCITS. Contrary to regulators' aims, risks borne by retail investors would even increase, in some cases probably involuntarily. CESR seems to have exploited its potential to speed the authorisation process up to limits of existing directive. Therefore, there are considerable doubts whether further improvements could be expected from multilateral work at EU level in the near future. However, home Member States should have an interest to make the authorisation procedure as frictionless as possible. Only this way they can hope to attract new funds or at least that domestic asset managers keep notifying new funds at home. Recent experience seems to show that more and more Member States take this road and try to shorten the authorisation process. Therefore, "do nothing" at EU level might not result in a deterioration of the situation over time but to some improvement.

ii. Amendment of the UCITS Directive

Assuming that the proposed changes were properly and implemented in a relatively harmonised way, these amendments could lead to considerable reduction in the administrative burden on fund promoters of UCITS funds. Although no immediate cost reductions could be envisaged for investors, the potential increase in competition and improved competitiveness of UCITS products could create benefits for both collective investment schemes and investors. These combined effects should also provide investors with a better choice among domestic and cross-border state-of-the-art products.

On the downside, the reduction in the time available to re