UK Fund Managers Worry About Tax Treatment Of Wider Funds Regime

by Carla Johnson, Investors Offshore.com, London

17 November 2003

Although the UK's Investment Management Association (IMA) has welcomed the Financial Services Authority’s (FSA’s) proposals to broaden the range of funds that can be authorised for domestic distribution, the Association is worried that this expanded authorisation will be of no help if the tax regime is not also improved at the same time.

In a release this week, the IMA says:

“The FSA has covered to our satisfaction almost all the issues on IMA’s ‘wish list’. IMA is particularly encouraged by the way in which the FSA has listened to the industry and pre-consulted.

"When the new ground-rules come into effect next year, all investors, from the risk-averse retail investor to the more sophisticated individual and institutional investor, will be better catered for with a wider range of UK authorised funds. The proposals will mean that the UK becomes a more attractive domicile for funds. This is, of course, subject to the important proviso that a more workable tax regime will follow to complement the FSA reforms.”

The Inland Revenue has yet to comment on how it will tax the returns from a wider range of investment funds. Key features of the FSA's proposals are as follows:

A new category of non-retail schemes, restricted to investment by institutional and expert investors only, will be introduced. These will be subject to lighter product regulation than retail schemes, reflecting the fact that the investors in them can be expected to have greater expertise and experience than the majority of retail investors. The rules governing them will, however, be robust enough to distinguish them from unregulated schemes. Investors in such schemes will not have access to private customer protections.

The current eight distinct categories of retail scheme will be rationalised into two broad types. These will comprise a "UCITS" type, which has Directive-imposed requirements on the spread and quality of assets in the fund and a "non-UCITS" type which will be able to invest in a wider range of assets including property, an asset class currently outside the UCITS Directive. The former may be passported in the EU, meaning that it may be offered to investors in states other than the home state of the provider.

In the area of charges, the rules for unit trusts will be aligned with those for OIECs and performance fees will be allowed for both products, bringing the UK in line with most other EU Member States. There will be a requirement for up-front disclosure to investors of examples of how such fees would operate.

Investors will receive better information over and above that which is required to be sent to them as a result of specific events in their fund. Operators will have to send short-form reports to customers in place of long-form reports and accounts, which will better meet the needs of non-professional customers. The full prospectus will also be more user-friendly than existing prospectuses, consistently with the FSA's recently-proposed Key Facts document for packaged products.

The requirement that CISs be open for redemption at all times is to be limited in some non-UCITS schemes, notably those where, for example, the investments are relatively illiquid (e.g. property). The FSA proposes to permit redemption days to be up to six months apart.

The FSA plans to make final rules in early 2004, at which point they will be available for use by existing UK schemes. They will apply to all UK schemes from February 2007.

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