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EU executive adopts overhaul of mutual funds

European Union regulators launched plans on Wednesday to overhaul the bloc’s €6 trillion ($9.5 trillion) retail mutual funds sector in a bid to cut red tape and drive down investment fees for consumers.

The long-delayed reform of the undertakings for collective investment in transferable securities (UCITS) updates what is already regarded as a global gold standard for funds regulation. Funds compliant with UCITS can be sold cross-border to consumers anywhere in the 27 countries of the European Union in return for strong protections. UCITS sell 40% of their units or shares in Asia and South America without local regulation.

EU countries and the European Parliament have the final say on a reform which Europe’s internal market commissioner, Charlie McCreevy, had hoped to put forward earlier but it had got bogged down in a battle between the bloc’s member states. France, Britain and Germany want big funds with pools of money in different states to be able to manage them centrally and thereby save on administration costs. But regulators in Ireland and Luxembourg, where many UCITS are registered, say this would fragment supervision.

Instead, the European Commission -- the EU’s executive arm -- adopted the draft reform without the management ‘passport’ National securities market watchdogs will study how to deal with the regulatory worries over the passport and report to McCreevy by November.

Funds say even without the passport, there would still be many benefits for the industry and consumers:
*it will become cheaper and quicker for a fund to notify another EU state that it wants to offer its products there. The current system is cumbersome, creating an estimated €45 million in extra administrative costs;
*mergers of funds dotted around Europe to achieve economies of scale will become easier and save on costs. The average UCITS in 2007 was €199 million under management compared with €1.1 trillion for a US fund;
*pooling of assets such as through so-called master feeder structures will be allowed whereby feeder funds own units of a master fund which is the exclusive manager.

The Commission estimates this would allow the fund industry to save €6 billion with the savings shared with investors in the form of lower investment costs;
disclosures to consumers will be cut to two pages instead of the 60 or more currently in some cases. (Reuters)