BACK OFFICE VIEW: Consequences of Ucits IV

Laurent Denayer, Ernst & Young, Luxembourg: 'The degree of complexity in the business process as well as the technology required, combined with more pressure on costs, will certainly operate a natural selection amongst the service provider'.

laurent-denayer.jpgUcits IV is expected to drive consolidation of a fragmented European investment fund industry, both at fund and service provider level. It is expected that this consolidation will increase the industry’s competitiveness by increasing economies of scale and lowering costs. Ucits IV will foster cross-border efficiencies while enhancing comparability, transparency and investor protection. Asset management groups will consider developing a holistic strategy that optimises tax, regulatory, and operational efficiencies of their entire operations.

With the exception of the depositary function, Ucits IV permits service providers to establish in the domiciles that offer the most advantageous conditions. This may lead to concentration and consolidation in the most attractive jurisdictions.

The choice of domicile for service providers will depend on factors such as the flexibility and the reputation of the regulatory environment, the fiscal environment, the accessibility of the authorities, the expertise and cost competitiveness of locally based service providers, the ability to outsource both within the domicile and cross-border and the qualifications and knowledge of workforce (including language skills).

Establishing service providers in different countries than the domicile of the Ucits or the management company can create several challenges. Service providers will have to understand and comply with the specific rules attached to the domiciliation of the Ucits and the management companies.

For example, the Ucits home will drive rules regarding issuance and redemption, investment policies and limits, valuation of assets and accounting, rules on NAV calculations and NAV errors, disclosure and reporting requirements (prospectus, KII, financial reports), distribution agreements, merging, restructuring, winding-up, liquidation, content of the unitholder register, exercise of unitholders’ voting and other rights and the audit. In addition, the Ucits home member state authority must approve the choice of the management company (where relevant), the fund rules or instruments of incorporation, and the choice of custodian.

Regarding the domiciliation of the management companies, if they decide to delegate services, rules governing risk management procedures, management companies’ reporting and compliance with prudential rules and supervision would need to be followed.

Direct and indirect tax consequences will also need to be correctly assessed.

All these rules will not be harmonised at European level. Service providers will have to structure themselves to understand the consequences of the domiciliation of the Ucits and the management company and monitor any change that can impact this situation.

The degree of complexity in the business process as well as the technology required, combined with more pressure on costs, will certainly operate a natural selection amongst the service providers. More outsourcing, more offshoring and more alliances are expected to emerge. Tax consequences would also need to be carefully assessed.

In a recent survey by Ernst & Young, 49% of the investment fund participants said that business model alignment will be the primary focus for improving operating models. This must be compared to 37% that identified cost efficiency.

For large asset managers, selecting the right service provider will be key to optimising their operating model. They will choose pan-European service providers with the technical and intellectual infrastructure to support flexibility in managing fund ranges (including mergers and master-feeders) and management companies. New ranges of services will appear: multi-jurisdiction compliance and risk management services, investment fund documentation, operational due-diligence and internal fund range structuring consultancy services. Service providers will be key to adapting to changes in distribution channels.

Luxembourg has consistently demonstrated that it scores highly on the cross-border distribution. Luxembourg has as a multilingual centre of expertise, with an educated workforce, lawyers, accountants, administrators and regulators that can cope with cross-border fund-servicing issues. It has created a supporting environment that will take years to replicate. We therefore believe that Luxembourg will prove to be an attractive domicile for services providers for both Luxembourg-domiciled Ucits and non-domiciled Ucits.

Having a pan-European view of the rules related to the domicile of Ucits and management company will represent a challenge. Luxembourg service providers have developed an expertise in dealing with cross-border issues and are particularly well placed to play a central role in Ucits IV.

• Laurent Denayer is financial services risk management leader and strategy and risk management leader for Ucits IV services at Ernst & Young, Luxembourg

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