While the provisional deadline for the implementation of Ucits IV is 1 July, EU countries have until 2012 to adopt the regulation.
The principle for a country that adopts Ucits IV is that for every fund launched in that country, a Key Investor Information Document (KIID) must be produced that will replace the Simplified Prospectus. However, each country has the possibility to grant a so-called grandfather period, which allows for the use of the simplified prospectus until 2012. Consequently, take-up is expected to be staggered. Luxembourg is the first country that has adopted the directive into national law back in December 2010.
This looming deadline has prompted asset managers to put plans in place for the new requirements. Despite the grandfathering period, the countdown has already begun, prompting funds to get organised within a relatively short space of time. Asset managers in particular must face up to the challenges of producing and distributing the KIID if they are to use the new format to communicate more effectively with their investors.
The objective of the simplified prospectus—the predecessor of the KIID—was to communicate key information to investors, enabling them to make informed choices and to allow for comparisons among investment funds. Having been widely regarded by the industry to have failed in this objective, the simplified prospectus has been replaced by the KIID, which will offer on a very short document (2 or maximum 3 pager) standardisation, uniformity and transparency through common processes, materials and presentation.
Challenges to face
However, a number of logistical details that must be ironed out before the KIID can be implemented. For one, not all countries plan to implement Ucits IV at the same time. This gives rise to the possibility that until the KIID is adopted by the industry as a whole, fund managers would need to produce the simplified prospectus and the KIID simultaneously, leading to additional complexity during this period of time. Given this context, it is perhaps unsurprising that, in a recent survey of European asset managers conducted by KNEIP, 70% of respondents believed that the move to producing the KIID will lead to enhanced costs.
Additionally, a drawback to the KIID’s efficiency is the mass of documents that must be produced and maintained on an annual basis. Every year on January 1, asset managers have 35 days to update their KIIDs. During the year, it is necessary to constantly keep the document up to date. Information updates include performance data for the previous 12 months, variations of the charges to the funds and other changes to investment strategy that have taken place. The KIID must also be amended if the Synthetic Risk Reward Indicator (SRRI) changes for four consecutive months in a row.
The directive allows for KIID production to be grouped into one representative share class or to combine several share classes into one document. While grouping carries the risk of deviation in terms of risk assessment or performance calculations, not grouping will increase the cost of production. According to our survey, the industry is divided on the strategy to adopt; 40% of fund managers are planning to create a KIID for each share class while another 40% were undecided. Only 13% planned to group share classes wherever possible, while 8% were considering combining the two strategies.
The survey also showed that adequate distribution and onerous document production were cited as primary concerns for 75% of asset managers. Of those that specified distribution as a concern, 35% were also worried about getting the latest version of the KIID to the end investor. Additionally, 60% of respondents were worried about producing KIIDs within the allotted time frame.
Benefits to the end investor
The distribution of the KIID is the final link in the chain of informing the end investor. Affirming receipt of the KIID by distributors and then by the end investor is critical, as not doing so potentially undermines the most basic tenant of the KIID directive, which is to ensure that the end investor always has up-to-date information.
Outsourcing
Translation and production of the KIID is an additional cost and concern for the asset management industry, with questions around quality, quantity, timeliness and workflow. Ucits IV requires yearly production every January, timely delivery and confirmation of receipt, compliance with prospectus and translation coherence. Consequently, a third of fund managers surveyed were considering outsourcing the KIID with almost 90% citing translations as the number one area, followed by production (75%).
Conclusion
The introduction of the KIID is a major milestone. The need of the hour is to set up a standard for creating, translating and disseminating KIIDs swiftly and cost effectively while still meeting the rigorous requirements of the Ucits IV directive.
The KIID is expected to answer market needs as it offers standardisation, uniformity and transparency through common processes, materials, and presentation. Although the KIID is a pre-contractual legal document, it could also be used as a marketing tool. In any case, the asset management community needs to make a series of key decisions now if it is to realise its full potential.
