The problem with mixing up the UCITS and MiFID directives

Tue Nov 20, 2012

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What is the difference between UCITS and the MiFID Directives?

The primary difference is that the former directive looks at how the investment wrapper is built while MiFID, or Markets in Financial Instruments Directive, looks at who asset managers can sell to.

The directives look at very different issues and their differences are important. But as regulation becomes intrusive and the scope of financial regulation grows and deepens there is a danger that the distinction between two could become blurred.

A prime example of this is the proposals to divide UCITS-compliant funds into complex and non-complex - which comes under the scope of the MiFID Directive.

At the moment all UCITS-compliant funds are defined as non-complex which means that they can be bought on an execution-only basis.

The argument for the division is based on the assets that are eligible within the UCITS framework. Some in the industry have argued that retail investors should not be able to access certain UCITS-compliant funds on an execution-only basis because the complex financial instruments used make them risky.

But the problem is that drawing a distinct line between complex and non-complex could result in regulators taking a blunt instrument to the fundamentals of the UCITS framework.

Also, the scope could impact the perceived safeness of the long-only asset management world as many use derivatives for their plain vanilla investment portfolios.

The point of regulation is supposed to protect the end investor. However, intrusive and opaque regulation may limit choice and understanding to the end investor - thus resulting in an alphabet soup that is hard to swallow.