Derivative-linked Ucits to stay ‘non-complex’
Retail investors will not be required to seek financial advice before buying funds that make use of derivatives, such as absolute return funds, following an agreement in the European Parliament last week.
Some parliamentarians had been pressing for derivative-linked Ucits funds to be classified as “complex” as part of the second Markets in Financial Instruments Directive (Mifid II), the wide-ranging reforms of European securities markets that were finalised on Wednesday.
All Ucits are currently classified as “non-complex” so they can be sold to retail investors on an execution-only basis. A change to reclassify derivative-linked Ucits funds as “complex” would have meant retail investors would have needed to be provided with advice as to their suitability before purchase. However, the parliament effectively rejected this option, which would have had a significant impact on the £36bn UK absolute return fund sector.
“There does not appear to be any change in the premise that all Ucits (other that structured Ucits) will be deemed as non-complex,” said Monica Gogna, a partner at Pinsent Masons, the law firm.
The Mifid II directive also specifies that investment groups must act in the “best interests” of clients at all times, that disclosure of product risk and returns must not be misleading, and that clients must be informed whether any advice being provided is independent or not. It also called for all “toxic” products to be withdrawn without defining what these might be.
The final text is not expected to be circulated before the end of this week at the earliest but some parliamentarians are promising to continue to fight for change.
Sven Giegold, a German Green MEP and member of the committee on economic and monetary affairs, said: “The Mifid II deal is better than the current situation. Europe will have to come back to the issue of Newcits [hedge fund strategies in a mutual-fund wrapper] in future reforms of the Ucits regulatory framework.”