UCITS – Questions & answers

Already back in the 1980’s the EU was making directives for open ended funds or investments which were applicable in the whole EU. But then the national directives were still overruling the EU directives. Still the main aim of UCITS in 1985 was to establish rules for public investment offerings that would be applicable in each member state.

So the first UCITS directive was essentially a way to harmonize the different rules and regulations that were applicable in each member state of the EU. Now, decades later, we are still talking about UCITS but the UCITS directives have been amended on a regular basis.

Today UCITS 6 is in order. Here we will try to shed a light upon some questions concerning the Undertakings for Collective Investment in Transferable Securities or UCITS.

Why are there so many amendments to UCITS?

The world is changing of course but more importantly the EU has changed over time and the same goes for the financial products offered.

In the early years UCITS directives were made to make it as simple and easy for providers of financial products to do business in the whole of the EU without being held back by national directives. Today UCITS is more and more aimed at protecting individual investors.

So one could say that UCITS first opened up markets to financial institutions and now that this is accomplished the customer has taken central stage with new directives added to existing ones. Of course the late financial crisis has also had a huge impact on regulations under UCITS.

What is the difference between UCITS and AIFMD?

The Alternative Investment Fund Managers Directive of 2011 aims to regulate alternative investments in the EU. It is a European financial law for investments in real estate funds, hedge funds, private equity and all sorts of alternative investments.

The aim is that all single EU member states make the AIFMD as law within their own state boundaries. Not all members have done that. As a provider of alternative investments one is obligated to ask a license according AIFMD for all investments by financial institutions.

Some years ago one could choose between a UCITS license or AIFMD license. Now it is decided that for retail investment funds (aimed at individual investors) a UCITS license is required whereas for institutional investments an AIFMD license is required.

What are the benefits of UCITS for individual investors?

OK, so the big question remains. What are the benefits of a UCITS investment for you as an individual investor?

First and foremost a UCITS license means that the investment you are making is regulated by EU directives. So the investment must comply with the rules and regulations in order to protect the investor (which does not mean that your investment will not turn out wrong of course).

Another big plus is that a UCITS investment receives the best possible tax treatment within the EU. Maybe the biggest asset of a UCITS investment is the set of rules that are active upon the management of the fund. The underlying assets of a fund must be held at an independent bank for instance.

Another advantage is that the same set of rules apply throughout the EU which makes it a cost effective way for providers of financial products such as ETF’s to comply to rules and regulations without having to worry about the rules and regulations of each member state. This keeps costs down and you as an (ETF) investor benefits from that.

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