Draft rules signal shake-up in investment
Wednesday 03 May 1995
The Treasury yesterday signalled a fundamental shake-up of the British investment industry with the publication of draft regulations for a corporate version of unit trusts.
The Government hopes the introduction into the UK in early 1996 of open- ended investment companies (OEICs) - unit trusts adapted to meet European standards - will reverse the recent heavy flow of mutual funds to other European financial centres.
Announcing the plans to Parliament, Anthony Nelson, Treasury minister, said: "We aim for the UK fund management industry to win business back from other European savings centres and establish a new era in domestic savings."
The new corporate structure - to be established under European Community Act regulations - is expected to prove extemely popular with domestic investors because of its flexibility and pricing structure. Industry analysts predict OEICs will spell the end of the traditional unit trusts savings vehicle.
Philip Warland, director-general of the Association of Unit Trusts and Investment Funds, said: "Within two years, the majority of unit trusts will be converted."
OEICs will either be created as new funds are established or by unit trust-holders agreeing to switch funds. The November Budget provided for the conversion of unit trusts to OEICs without charge to capital gains tax and the Treasury yesterday said that OEICs will have the same tax treatment as authorised unit trusts. They will be eligible for inclusion in personal equity plans.
But some fund managers question whether OEICs will be able to attract funds back to the UK, especially since the dividends from UK OEICs will be taxable. Luxembourg and Dublin have built up thriving mutual fund industries on the back of OEICs at the expense of London. "It may stem the flood, but it is unlikely to reverse the trend," one fund manager said.
Unlike unit trusts , OEICs will be bought and sold at a single price, eliminating the bid/offer spread which adds to investors' charges. This can be as high as 13 per cent and has been a big deterrent to overseas investors.
Under the Treasury rules, OEICs will be set up as companies with variable capital. Like unit trusts they will be open-ended because the size of the share capital will vary as investors buy and sell. This contrasts with closed-end investment trusts which cannot raise money by creating new units. OEICs may or may not have a Stock Exchange listing.
The Treasury envisages that an OEIC will offer investors flexibility through a greater variety of investments within the same fund. The company will act as an umbrella for different sub-funds without the need to set up separate trusts each time. OEICs will be able to offer many different classes of share which might cater for different charging structures and different currencies.
The proposed board of an OEIC would have a minimum of three members: a "designated corporate director" (equivalent to a unit trust fund manager) and two others members to be elected by rotation. One of these will be "a depositary" - equivalent to the unit trust trustee.
One key issue to be resolved is whether the depositary should be fully independent of the designated corporate director.
The Treasury is inviting comments by 1 September. More detailed draft product regulations will be issued by the Securities and Investments Board, the chief City regulator responsible for investor protection, in the summer.
'Open Ended Investment Companies - a second consultation document' is available from Mrs Janet Robbins , HM Treasury, London.
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