Issue: June 2012 / August 2012
A global framework for regulatory harmonisation has been introduced. Tanya King explains why it’s to be welcomed.
Particularly in this environment of ongoing economic and market turbulence, governments the world over have become increasingly keen to foster peace of mind by enhancing investor protection. In SA, this role is the responsibility of the Financial Services Board (FSB) as the regulator of collective investment schemes.
King . . . local relevance
Gaining global recognition as the legal framework for these schemes is the UCITS label as provided by European Union (EU) directives. It covers ‘Undertakings for Collective Investment in Transferable Securities’.
This label was launched in 1985 to harmonise regulations governing collective investment schemes sold principally in EU countries. The intention was to create a single regulatory ‘wrapper’ that:
Over the years, EU regulations have been stepped up and are today amongst the most stringent. The process continues. Two years ago UCITS III was replaced by UCITS IV. This new directive is now being implemented by EU member states. It’s intended to provide greater transparency and more information on collective investment schemes’ costs and performance.
UCITS has become a widely respected framework, accepted and recognised by regulators around the world. But don’t confuse UCTIS compliance with FSB approval, as if they were the same things under different names.
Equivalence is not claimed. The FSB applies a strictly SA focus in line with local regulations. UCITS scrutiny is rigorous, but these regulators work in highly developed markets and the underlying components in international product structures can also be quite sophisticated. That’s why UCITS regulators lay such heavy stress on transparency and disclosure.
UCITS-compliant funds approved by the FSB have been successfully marketed here for several years. They continue to be sold to SA retail and institutional investors. The longstanding requirement has always been that offshore funds can be marketed in SA as long as they’re approved by the FSB and comply with local regulations.
Over the past year, however, there has been much debate in SA on whether a new approach should be taken to UCITS and whether the directives from the EU should be modified. One concern is that the granting of ‘expanded powers’ under the UCITS banner will enable, among other things, the use of derivatives in some fund structures.
UCITS-compliant products with an expanded-powers wrapper are also permitted to invest in non-investment grade securities. Compared to local funds, the risk profile is rather different and more liberal, particularly in the case of fixed-income funds.
The FSB and the Association for Collective Investments have conducted a UCITS review to address areas of concern. Following the review, UCITS-compliant funds approved by the FSB may continue to be marketed in SA.
However, products that use an ‘expanded investment powers’ wrapper must be approved by the FSB. They must also disclose information on risk and compliance. And they must meet a longstanding stipulation to provide, in their marketing material for investors, additional information making clear all differences in regulation and requirements governing investment limits and exposure to derivatives.
The FSB will not merely rubber-stamp these funds and grant them automatic approval for sale in SA. Neither will it approve product structures containing an over-the-counter derivative instrument. The FSB insists that derivatives may only be used for purposes of reducing investment risk.
Schemes already approved by the FSB, that now wish to make use of the expanded powers outlined in UCITS regulations, must submit to the FSB all information relating to control systems and methods of risk management.
The FSB will consider these submissions case by case. It will basically assess whether these products are appropriate for marketing to SA investors in line with local SA regulations.
Local trustees should also note that the UCITS dispensation allows for more than one jurisdictional layer. In such cases, the FSB will adopt a look-through approach and scrutinise the ultimate jurisdictions at the lowest level.
More than 30 countries have welcomed UCITS funds. Besides the EU, the UCITS label is now fully accepted in such jurisdictions as Hong Kong, Taiwan and Singapore. They’re emerging but sophisticated markets, much like our own.
International acceptance underlines the core issue that the UCITS label is a globally-accepted framework for collective investment schemes.