Understanding UCITS

The terminology used in the financial world can be confusing and you may have seen securities funds variously referred to as "open-ended funds", "collective investment schemes" or as "undertaking for collective investments" (UCITS). To put it simply, open-ended funds and UCITS are forms of collective investment schemes, in which investors pool their money with other investors in order to invest in a variety of assets and securities. However, not all investment funds are UCITS. In the following, we deal with UCITS, a type of fund that was developed for private investors and can be marketed even outside of the EU.

European directives

The acronym "UCITS" refers to a series of European Union directives that established a uniform regulatory regime for the creation, management and marketing of collective investment vehicles in the countries of the EU. It stands for Undertakings for Collective Investment in Transferable Securities. UCITS typically invest in securities listed on public stock exchanges and regulated markets. The UCITS directives have brought European investors a wide offering of funds together with a high-level of investor protection. Investors can invest in any UCITS fund that has been registered for sale in their country. Before the first UCITS directive most investors were largely limited to funds offered by fund companies based in their country of residence. The UCITS directives have thus greatly broadened the choice of funds available to investors in the EU. Investors also have the option of investing in other non-UCITS compliant funds if necessary, although before doing so, they should find out exactly legal and tax consequences of such an investment would entail in their home country. 

UCITS IV

The latest version of the UCITS directive, UCITS IV, was agreed by the EU in 2009 and takes effect as of July 1, 2011. The changes it will bring are mostly technical or affecting fund management companies, but they also include new provisions for providing information to investors in a straightforward and easy-to-understand format, known as a Key Investor Information Document. The KIID normally consists of two pages. 

Other provisions of the UCITS IV Directive are intended to benefit investors indirectly. For instance, the directive seeks to make it easier to merge together funds established in different EU countries. The directive also allows master-feeder structures, in which a number of ‘feeder’ funds, perhaps set up in different countries or aimed at different types of investor, invest all their assets in a single ‘master’ fund, to be established as UCITS. These changes are supposed to help produce larger funds that would benefit from economies of scale.  

In addition, UCITS IV aims to make it easier for a fund management company based in one EU country to run funds established elsewhere in the EU, which also could produce cost savings if there is no longer a need to set up a management company in each country. These various changes, if popular with fund managers, could result in costs charged to funds’ assets (and ultimately paid by investors) being lower or being borne by a larger investor base.

Luxembourg’s legislation and regulation

Luxembourg was the first EU country to pass the UCITS legislation into national law in 1988, which helped it develop into a major centre for investment funds. Its reputation as an early adopter of new legislation has continued with UCITS IV, which was brought into force by a Luxembourg law of December 17, 2010 – again making the grand duchy the first EU country to do so. The legislation also includes changes to the law governing funds that are not covered by the UCITS directives.

Luxembourg also benefits from a well-respected regulator, the Commission de Surveillance du Secteur Financier (Financial Sector Supervisory Commission, or CSSF for short). The CSSF is responsible for granting approval to fund companies, financial service providers and investment funds. In addition to general requirements for fund companies, the CSSF also monitors the investor protection regulations and the activities of the custodian bank.

UCITS funds and tax

Investment funds in Luxembourg pay an annual subscription tax that ranges from 0.01 to 0.05 per cent of their net assets (certain types of fund, mainly for financial institutions, are exempt from this tax). The law of December 17, 2010 implementing the UCITS IV directive in Luxembourg also included changes in the taxation of funds, most importantly abolishing the subscription tax on exchange-traded funds.

Luxembourg’s fund industry

Luxembourg has been a major fund centre for more than 20 years. In fact, measured in terms of the value of fund assets, it is the biggest centre for funds in Europe, and second only to the US worldwide. The steady increase in the number of funds and the value of their assets has led to the development of a comprehensive fund services sector. Fund management companies, law firms, accountants and auditors, fund administrators and custodians have contributed to the creation of a strong financial services infrastructure.

This comprehensive professional infrastructure, together with Luxembourg’s exceptional experience with marketing throughout and outside of Europe, its multinational population and its multilingualism, has helped cement its reputation as an international centre for investment funds. Luxembourg funds are sold to investors in more than 65 countries all over the world. The country also benefits from a large number of highly qualified specialists who can act as independent members on the boards of fund companies. Their role includes looking after the interests of investors as well as ensuring the proper management of funds.

The fund sector is represented by the Association of the Luxembourg Fund Industry (ALFI). ALFI's goals include promoting fund investment in society and raising Luxembourg's profile as a location for funds and fund companies. ALFI cooperates with the government and supervisory authorities to draw up and refine legislation and regulations for the fund sector. It is involved in the training of industry staff to ensure professionalism and to develop specialist expertise. Moreover, ALFI encourages its members to adhere to a high ethical standard in their activities and treat their investors appropriately, and also supports efforts to curb money laundering.

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