FSA proposes to widen the range of unit trusts and OEICS

The main FSA proposals are to:

• extend the range of investments of UK funds that can be marketed in Europe by allowing a broader mix of assets within the funds including deposits, derivatives and fund of funds. Previously schemes to be marketed in Europe were restricted to shares and bonds;

• enable Limited Issue Funds to be set up, which allow authorised funds to cap the number of units that can be issued (under the existing rules funds have to remain open to investors). One advantage of limiting the size of the fund is that it will be easier for the fund to offer some protection of returns;

• permit use of the terms "guaranteed" or "capital protected" in connection with funds where a third party is providing protection against falls in fund value.

Details

The expansion of investment choice is made possible through recent amendments to the European Directive on UCITS (Undertakings for Collective Investment in Transferable Securities). The amendments will permit greater scope for innovation in the asset mix contained within the funds, effectively allowing for the development of mixed investment funds for the first time. The amendments will also facilitate the operation of tracker funds that copy an index by allowing them to hold up to 20% in one stock (previously 10%).

Limited Issue Funds

The FSA is also proposing rule changes to allow funds to limit the issue of units. This will enable scheme operators to cap the number of units in issue and so enable funds to be managed more efficiently, particularly in less liquid markets (such as smaller companies and some emerging markets). The ability to limit the number of units in issue should also allow funds to compete better with other products (such as life assurance bonds and offshore products).

Guaranteed Funds

Enabling firms to set up limited issue funds allows for the introduction of guaranteed and capital protected funds. The FSA has not previously allowed funds to use the words guaranteed or capital protected (or similar) in their names. So, although there are some funds offering a measure of protection against unit price falls, their size is insignificant compared with the amounts invested in other guaranteed products.

The FSAs proposals mean that funds will be able to label themselves as "guaranteed" if the capital value is unconditionally guaranteed for all investors by a regulated third party. The FSA is also proposing to allow funds to call themselves "capital protected" where no guarantee exists but where the fund is adopting investment policies to provide protection.

Disclosure

Effective disclosure to investors of how firms intend to take advantage of the wider powers is a key part of the FSA's proposals. The prospectus for each fund (and in some cases the key features documents) must include details of investment policies and any guarantees.

Notes for editors

1. European negotiations on changes to the UCITS (Undertaking for Collective Investment in Transferable Securities) Directive resulted in two amending Directives, the product and the management directives adopted by the EU on 21 January 2002. Implementation of the product directive is being consulted on now. The implementation of the management directive will be consulted on later in 2002.

2. UCITS are collective investment schemes which are undertakings for investment in transferable securities qualifying for EEA passporting rights under Directive 85/611/EEC.

3. The FSA is seeking comments on the proposals in CP 135 New Collective Investment Scheme Products by 31 July 2002. This is available from the FSA website at www.fsa.gov.uk

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.