Some of the main challenges can be summarised as follows:
1. A high volume of documentation will need to be processed, particularly for UCITS funds issuing KIIDs at share class level.
2. Re-writing investment policies and risks in plain language could be interesting for those hedge funds that have been used to couching complex strategies in dense industry jargon.
3. The requirement that KIIDs are updated and published within 35 business days of year end will subject firms to the kind of deadline pressures more familiar to magazines.
4. The aggressive implementation deadline (less than one year now for new structures, or two years for existing ones).
5. The lack of capacity and experience of suppliers in this market able to support industry efforts, particularly as there will be an estimated
100,000 to 150,000 KIID documents being published at once, and hedge funds will be competing for slim resources against the long only UCITS funds industry.
6. There is still room for interpretation and/or a need for clarification of Synthetic Risk and Reward Indicators and charges, and the hedge fund industry in particular will be feeling its way in the dark on this one.
Some parts of the asset management industry are already moving to meet the challenge. In Germany, the Bundesverband Investment und Asset Management, the national managed funds association, has introduced KIID templates for both UCITS and non-UCITS funds which are intended to help reduce the overall implementation burden on the membership.
On the operations front, a fully harmonised and standardised KIID could help with the tagging of legal prospectus information in machine readable code. The automation of prospectus content will in turn facilitate information about the most important fund particulars to distributors, fund service providers, fund research houses, ratings agencies, auditors and others interested in such data. Indeed, ISO has approved a business justification for the development of a global ISO 20022 fund prospectus message and has formed a working group to focus on this.
“From a European perspective at least, the content of the KIID should be represented in full in the XML data elements of the new message,” says Rudolf Siebel, head of regulatory affairs and fund standards at the BVI in Germany, and a deputy member of the board of directors at EFAMA. “We hope for the input of interested industry prospectus data and content specialists to achieve this goal in 2011.”
The proliferation of share classes is a particular headache facing asset managers in this respect. There are a number of reasons why this is happening, amongst them the FSA’s Retail Distribution review. This will mean the burden of maintaining the number of KIIDs is likely to become a major concern, particularly for hedge funds – and managers of absolute return funds – seeking some degree of retail distribution in Europe. There are already fears being expressed within the industry that the quest for a simplified prospectus regime will just inject further layers of complexity. One option would be for there to be a two speed approach to this issue, with different KIIDs issued for institutional and retail share classes. This would certainly help those hedge funds seeking distribution in the high net worth sector and upwards, with no real ambitions in the pure retail space.
The representative document option
However, some commentators argue that a single document could be sufficient to cover all share classes, provided that it is not too complicated or extensive (managers are limited to two sides of A4, three for structured funds). In addition, it could be possible to use a single share class as the representative share for the fund, base the KIID on this, and have it apply across all the classes issued. This would certainly cut down on the paperwork and the time spent processing documents.
“From what we hear in the field, the representative share class option does not seem to be the preferred option for most practitioners, as it raises too much legal uncertainty,” says Bernard Lambeau, general manager of Bowne International in Luxembourg. “UCITS would have to justify why a representative share class represents other classes, which could prove difficult to do as, by nature, there are material differences between share classes for the same fund.”
Some fund managers are already pooling their resources in an attempt to meet the expected backlog before it occurs. One such effort, KIIHub (www.kiihub.com) was initiated by three firms seeking to avoid the documentary problems they could see evolving.
Much of the challenge boils down to language. Typically, fund firms have left their legal departments and legal advisors to draft documentation for prospectuses, but are finding these are not necessarily the best people to work on a simplified prospectus or KIID offering. In addition, producing, archiving and issuing the volume of KIIDs needed – as well as accessing the fund data to produce SRRIs and performance charts – represents a considerable challenge. Add to that the drag from translating KIIDs into various languages, and you can see the costs in terms of time and money mounting considerably. Translations add further complications: that nice two page document in English may suddenly expand when translated into German. There are also rumours circulating amongst fund managers that some European regulators are planning to add supplementary, jurisdiction-specific requirements which will bring the industry almost back to where it is with the simplified prospectus regime. If this information can fit into the pre-determined KIID documentary dimensions, all the better, but it holds out the prospect of having to produce country-specific templates for each jurisdiction that intends to introduce supplementary requirements.
Luxembourg-based KNEIP carried out a survey of European fund managers and administrators on this issue last month, and found that 70% of respondents believe the KIID will cost more than the current cost of the simplified prospectus. Altogether, 75% of respondents are concerned about adequate distribution, with 35% worried about how they are going to get their KIIDs to the end of the distribution network. Sixty per cent of respondents are worried about producing KIIDs within the allotted timeframe. Despite all this, 70% think the new regime will bring increased comparability of products and ease of understanding for investors.
Bear in mind that not all countries will be implementing UCITS IV at the same time. This gives rise to the possibility that until they do, fund managers will be faced with the prospect of having to produce both the simplified prospectus and the KIID at the same time, essentially duplicating costs. Certainly no participants in the KIID survey see costs coming down in the near term.
“We are at the starting blocks of the UCITS IV regulation,” says Eric Roux, managing director for fund reporting at KNEIP. “Waiting to see what the market does may not be the best strategy given the nuances and requirements of the new directive. This strategy may in fact leave managers struggling behind in a bid to catch up. Unarguably, UCITS IV is a step in the right direction, although the devil lies in the details, making sure all the ‘t’s are crossed and the ‘i’s are dotted by next year.”
