UCITS Fund Distribution 2012 PwC Ireland pptx

www.pwc.ie /assetmanagement

UCITS Fund
Distribution
2012




PwC Ireland





September 2012




UCITS Fund Distribution 2012
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Table of Contents
Overview 4
Introduction 5
UCITS Global Footprint 9
Distribution channels 15
The KIID - Fund charges & SRRI 17
Regulatory impacts 21
Taxation of UCITS funds 24

Case Study - Ireland 26
Services 31
Contacts 32



UCITS Fund Distribution 2012
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Overview
This report aims to provide practical and useful information relating to the UCITS funds market. It is broken
into seven small sections. The first section aims to paint an overall picture of the UCITS funds industry’s place
in the worldwide investment community. The other sections discuss the key markets for UCITS funds and what
distributions channels are in use in these markets. There is also a discussion on the new KIID which all UCITS
must now produce and sections on the regulation affecting this industry and tax reporting details for UCITS
funds. Finally, there is a case study on Ireland which is one of the key UCITS funds domiciles.







“The UCITS product has gone
from strength to strength
since inception over 25 years
ago, it is a strong reputable
brand name recognised
throughout Europe, Asia
and beyond.”

“The UCITS funds industry
accounts for over 36,000
funds, with just under EUR
6 trillion in assets, with over
70,000 fund registrations in
over 75 countries
worldwide.”

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Introduction
Investment fund assets worldwide stand at EUR 20.8 trillion as of quarter one 2012, according to the European
Fund and Asset Management Association (EFAMA). Looking at the worldwide distribution of investment fund
assets as the end of quarter one, the US and Europe hold the largest share in the world.


Source: EFAMA International Statistical Release Q1 2012
Other countries include: Argentina, Chile, Costa Rica, India, New Zealand, Mexico, Pakistan, Philippines, Rep. of Korea, South Africa,
Taiwan and Trinidad and Tobago.

The tables on the next page provide an analysis of the top investment fund regions over the last five years. If we
compare the US with Europe we notice two interesting facts. The size of the U.S. mutual fund industry is nearly
twice the size of the European mutual fund industry. U.S. net assets are EUR 9.3 trillion whereas the European
combined net assets are EUR 5.9 trillion. If we look at the fund numbers there are over 35,000 European funds
compared to over 7,000 U.S. funds. The reason behind this gap is that on average U.S. domiciled funds are 6
times larger than European domiciled funds. Europe is home to a greater number of smaller funds. U.S.
domiciled funds being larger benefit from greater economies of scale. Europe has tried to rectify this situation
with the introduction of improved regulation in the form of UCITS IV which provides mechanisms for funds to
merge and create feeder structures. This regulation is discussed in more detail in the Regulatory Impacts

section.


UCITS Fund Distribution 2012
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Source: EFAMA International Statistical Release Q1 2012


Source: EFAMA International Statistical Release Q1 2012
Note: No figures for fund numbers are available for Australia.

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Mutual fund industries differ greatly from region to
region. This report focuses on Europe where the
majority of mutual funds are set up as
Undertakings for Collective Investment in
Transferable Securities (UCITS) which are
governed by European legislation. UCITS benefit
from an EU wide “passport” which means that once
they are authorised in one EU member state, they
can be sold in any other EU member state without
the need for additional authorisation. Due to the
necessity to comply with a common European
standard, UCITS are now regarded globally as very
well regulated funds, with robust risk management
procedures, a strong emphasis on investor

protection and coming from a stable environment.
As a result, the UCITS brand is recognised beyond
the EU and UCITS products are accepted for sale in
Asia, the Middle East and Latin America.
Not many other regions have the same robust
framework for distribution. Asia is a fragmented
market with different tax and regulation
requirements from country to country and no
coordinating entity such as the EU, each country
stands on its own. Asia could almost be viewed like
the fragmented Europe of 25 years ago, before the
harmonisation of UCITS occurred. There has been
some discussion of an Asian passport similar to
UCITS. Given the very fragmented and
compartmentalised state of mutual fund markets in
Asia, and the lack of a rulemaking body similar to
the European Union in the region, a pan-Asia fund
passport is not likely to become a reality in the
foreseeable future. Indeed, it seems likely that
bilateral or small group agreements are more likely
to happen if a passport of any kind develops at all.
Asian firms are beginning to create their own
UCITS and market these funds in their own
jurisdictions and elsewhere in Asia. Asian investors
are already significant buyers of European
domiciled funds. UCITS also provides a passport to
other jurisdictions in the Asian neighbourhood for
Asian asset managers just as it can for Europeans.
The two largest fund markets in Asia are China and
Japan and are two of the more closed markets in

Asia to UCITS funds. In China, funds may be
obtained only by and through financial institutions
that have been licensed as Qualified Domestic
Institutional Investors, the QDII scheme. Some
QDIIs would also obtain a Qualified Foreign
Institutional Investor license to enable them to
invest directly through Hong Kong. Individuals are
barred from either license; only qualified
institutions can invest directly in funds. Within the
institutions, however, there is a growing appetite
for diversification, although culturally the Chinese
tend to be cautious investors, fond of tangibles like
real estate. Chinese asset managers see UCITS as
the vehicle to distribute their own product into
Europe.
Japan has a large domestic fund market. There are
many legislation and regulatory hurdles to cross. A
fund selling into Japan must be similar to a
Japanese domestic investment trust with limits on
commodities and commodity derivatives. Umbrella
structures are not allowed. It would make more
sense to set up a domestic fund in Japan in the long
run. The Japanese asset management industry is
nonetheless quite mature and sophisticated, and
Japanese managers are among the few Asian
countries who have established a presence outside
of Asia.
Australia is the largest fund market in the Asia
Pacific region. It has one of the largest and fastest
growing fund management sectors in the world. Its

growth is underpinned by Australia’s government-
mandated retirement scheme (superannuation),
therefore similar to the U.S. it has a large domestic
market. Australia has one of the world’s highest
percentages of individuals with direct and indirect
exposures in the stock market. Approximately 6.7
million people (41 per cent of the adult Australian
population) own shares, (either directly or via
managed investment funds). The level of direct
ownership is estimated at 36 per cent of the adult
population. Australia is focused on
internationalising their funds industry. A recent
survey showed that approximately one-third of
investment managers operating in Australia already
source funds under management from overseas
clients. However, the five largest managers of
overseas assets accounted for 75 per cent of this
market. Foreign investment managers looking to
market their funds to persons in Australia need to
satisfy Australia’s financial services laws which may
require obtaining a license to provide services in
Australia.
The U.S. has a large domestic market of target
investors, the US region is nearly twice the size of
Europe. U.S. investors have thousands of U.S
based mutual funds to choose from. All mutual
funds marketed to U.S. retail investors must be
registered with the SEC and must abide by the rules
set forth under the Investment Company Act of
1940, commonly referred to as the "'40 Act."

Those who are not residents may still invest in U.S.
mutual funds and maintain accounts while in the
US or from their home country. A number of U.S.
asset managers have set up UCITS funds in Europe
in order to distribute to the European and Asian
markets. Canada’s mutual fund industry has similar
rules and guidelines as the U.S. and it also has a
large domestic market.

UCITS Fund Distribution 2012
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Brazil has upwards of $800 billion of invested assets
mainly tied up in the country’s domestic bond and
equity markets. New regulatory changes may cause a
shift of direction in Brazilian investment flows
towards the international markets. These new
changes pave the way for registered investment funds,
high net worth investors and, above all, pension funds
to invest abroad. One of the main changes is that local
pension funds are now permitted to allocate 10% of
their assets in offshore markets. Since pension funds
account for around half of all investment assets in
Brazil, it amounts to a potential outflow of $40 billion
to $50 billion. A large number of international asset
managers are establishing a presence in Brazil as few
domestic asset managers can genuinely claim to offer
expertise in international markets. Although for the
time being, high domestic interest rates continue to
make Brazil’s bond markets an attractive, low-risk

haven for local investors. However, Brazilian interest
rates must fall at some stage and institutional
investors are already starting to look for different
instruments and different markets. Offshore funds
cannot be sold in Brazil so asset managers are obliged
to use master-feeder structures – using locally
domiciled ‘international investment funds’ as their
feeders. Asset managers must also register locally and
are required to maintain a substantial presence in
Brazil. The market is highly regulated, with firms
obliged to provide data to the regulator on a daily
basis. Brazil may be a ‘slow burn’, but it offers
immense potential as a funds market on a three to
five year view.
As we can see mutual fund markets differ greatly
from market to market. Some are more open than
others and some have huge growth potential in the
coming years. The UCITS framework has had some
impact on most markets whether it is through
selling directly into a region/country or with asset
managers from a particular region/country setting
up UCITS funds themselves in order to access the
markets in which UCITS can sell into. Asset
managers from all the above mentioned countries
have set up UCITS in Europe. The UCITS product
has become a well established brand name
recognised throughout the asset management
industry worldwide.

UCITS Fund Distribution 2012
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UCITS Global Footprint
On a Global basis we can see that Europe is the most popular market for UCITS funds with over 62,000
registrations over 10 times more that the next highest investing region, the Asia Pacific. This is followed by the
Americas and then the Middle East/Africa. The main countries of distribution in Europe are; Germany,
Switzerland, Austria, the UK, the Netherlands, France, Spain, Italy, Sweden and Finland. The top countries for
distribution outside of Europe are; Singapore, Hong Kong, Chile, Macau, Taiwan, Bahrain, Peru, Korea and
South Africa. The tables on the following pages give a complete ranking for all the main regions mentioned
above.















Source: Lipper for Investment Managers (LIM), July 2012

UCITS Fund Distribution 2012
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Europe
Ranking
Country
Number of
registrations
1
Germany
5,769
2
Switzerland
4,848
3
Austria
4,664
4
UK
4,372
5
Netherlands
3,949
6
France
3,944
7
Spain
3,861

8
Italy
3,486
9
Sweden
2,998
10
Finland
2,518
11
Belgium
2,438
12
Denmark
1,739
13
Norway
1,654
14
Portugal
1,481
15
Greece
883
16
Liechtenstein
805
17
Czech Republic
570

18
Jersey
545
19
Slovakia
495
20
Poland
481
21
Estonia
444
22
Hungary
366
23
Latvia
360
24
Guernsey
296
25
Gibraltar
270
26
Lithuania
237
27
Other
232

28
Iceland
231
29
Cyprus
225
30
Malta
148
Other includes: Andorra, Bulgaria, Croatia, Greenland,
Isle of Man, Monaco, Romania, Slovenia and Ukraine.
Asia
Ranking
Country
Number of
registrations
1
Singapore
2,042
2
Hong Kong
1,157
3
Macau
862
4
Taiwan
845
5
Korea

317
6
Other
124
Other includes: Australia, Japan and New Zealand.
Americas
Ranking
Country
Number of
registrations
1
Chile
973
2
Peru
481
3
Trinidad & Tobago
52
4
Bermuda
20
5
Other
18
6
Cayman Islands
12
Other includes: Bahamas, British Virgin Islands,
Columbia, Mexico, Panama, Saint Martin and United States.

Middle East
Ranking
Country
Number of
registrations
1
Bahrain
576
2
Turkey
34
3
UAE
33
4
Other
8
Other includes: Jordan, Lebanon and Oman.
Africa
Ranking
Country
Number of
registrations
1
South Africa
215
2
Botswana
21
3

Other
11
Other includes: Egypt, Liberia, Mauritius, Morocco and
Swaziland.



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Number of new registrations/de-registrations per country
each year
The following table shows the number of new registrations / de-registrations for each country from 2006 up
until the end of 2011. It is important to note that registrations do not mean sales of UCITS. When a UCITS
wishes to market into a particular country it must register with the country’s local Regulator. This is a
requirement of the UCITS Directive. Therefore, the below statistics are in relation to the number of UCITS
which are registered for sale in each of the individual countries.
Europe

2006
2007
2008
2009
2010
2011
Andorra
0
3
0
0

9
-1
Austria
448
394
434
-23
365
210
Belgium
1
-65
335
35
224
259
Bulgaria
1
49
-10
30
-6
-3
Cyprus
-7
-1
18
-11
14
55

Czech Republic
50
292
29
51
-143
-96
Denmark
536
2
240
-148
315
440
Estonia
25
229
1
12
-6
180
Finland
433
202
133
324
32
297
France
694

399
324
113
9
37
Germany
743
561
406
132
387
192
Gibraltar
34
2
15
-13
-4
65
Greece
4
24
-16
-3
165
154
Guernsey
45
27
31

-38
2
-45
Hungary
8
75
151
-6
165
-39
Iceland
-2
-5
-10
-3
-9
28
Ireland
25
-9
-21
36
97
115
Isle of Man
-32
8
-6
-15
-16

-16
Italy
351
230
327
190
324
161
Jersey
39
30
53
-44
130
-49
Latvia
5
200
3
26
-6
106
Liechtenstein
36
-5
-26
-29
240
-24
Lithuania

26
144
-6
17
16
-2
Luxembourg
105
47
155
-78
96
96
Malta
-33
8
-30
-9
-3
7
Monaco
0
0
0
1
1
1
Netherlands
436
27

896
85
345
42
Norway
110
49
438
-81
-4
37
Poland
18
186
97
121
-76
-40
Portugal
188
298
32
495
174
-172
Slovakia
150
164
-69
364

-66
-63
Slovenia
5
3
-11
-2
-4
0
Spain
374
401
470
-136
464
196
Sweden
129
92
815
40
373
109
Switzerland
191
262
303
271
532
441

United Kingdom
278
204
949
20
350
492

UCITS Fund Distribution 2012
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Asia Pacific

2006
2007
2008
2009
2010
2011
Australia
-2
30
-1
-20
-2
13
Hong Kong
59
89
176

-221
15
16
Japan
10
25
3
-2
7
5
Korea
0
10
-13
-47
3
27
Macau
192
25
2
-67
327
49
New Zealand
-1
1
-2
-34
0

4
Singapore
400
515
596
-120
-236
61
South Korea
41
0
0
0
0
0
Taiwan
40
63
77
47
13
5
Middle East

2006
2007
2008
2009
2010
2011

Bahrain
589
46
-5
-102
-62
-150
Lebanon
-31
-111
-2
0
1
-13
Turkey
-2
6
9
-12
-35
0
United Arab Emirates
11
0
-2
0
-1
6
Americas

2006
2007
2008
2009
2010
2011
Bahamas
0
0
2
-1
-1
1
Bermuda
0
0
0
0
19
0
Canada
58
-3
-1
-15
-8
-1
Cayman Islands
6
0

0
14
1
-3
Chile
35
774
101
120
-175
-191
Mexico
0
2
1
6
-2
0
Panama
0
0
1
1
1
0
Peru
18
-53
560
1

-66
44
Trinidad & Tobago
54
-4
-8
-3
-1
-4
United States
3
0
3
-3
0
4
Africa

2006
2007
2008
2009
2010
2011
Egypt
0
1
0
0
0

0
Mauritius
-28
-5
-19
-5
1
0
Morocco
0
1
0
0
0
0
South Africa
25
19
10
108
-16
9
Source: Lipper for Investment Managers (LIM), PwC analysis



UCITS Fund Distribution 2012
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If we examine the trends in new registrations and de-registrations over the last six years we can see the most

significant markets in Europe for UCITS are Denmark, France, Germany, the Netherlands, Spain, Sweden,
Switzerland and the UK. This does not necessarily mean that they have had a huge of amount of new
registrations each year. In fact, the number of new registrations has dwindled somewhat for some of these
countries over the last year or two. Although, we have not seen many de-registrations which shows that there
are still a large number of UCITS continuing to sell into these countries but there are just not as many new
entries. Outside Europe, Hong Kong as we know already is a big market for UCITS most of these registrations
occurring pre 2006. Other big markets include Macau, Singapore, Bahrain, Chile and Peru, although Singapore,
Bahrain and Chile have experienced significant de-registrations in the last couple of years.
Other important markets in Europe include Austria, Belgium, Estonia, Finland, Greece, Italy, Latvia and
Portugal. It is worth noting that a number of these markets have become more significant only in the last year
or two these include, Estonia, Latvia and Greece. Portugal experienced significant de-registrations in 2011.
There were a number of new countries for 2011, these included; Botswana (23), Columbia (2), Croatia (1),
Greenland (10), Liberia (1), Swaziland (1) and Ukraine (1).
UCITS Growth Trends
The UCITS product has had huge success since its inception in 1985. Now over 25 years old, UCITS have gone
from strength to strength, with over 36,000 UCITS funds with approximately EUR 6 trillion in assets, as of the
end of Q1 2012, according to the European Fund and Asset Management Association (EFAMA).
If we examine the growth trends of UCITS funds in the tables below we can see that the UCITS funds industry
had a setback in 2008 as a result of the global financial crisis, where the number of assets decreased
dramatically. The impact on the number of UCITS funds was not felt until the following year. By 2010, the
UCITS funds industry had started to recover and increase numbers towards the pre-crisis levels of 2007/2008.
2011 saw UCITS impacted again with the intensification of the euro area sovereign debt crisis and the
worsening of the global economic outlook, which triggered a strong resurgence in risk aversion and a sharp fall
in the demand for long-term UCITS. Quarter one 2012 has seen a recovery for UCITS assets on the back of
increased investor confidence after the launch of the ECB’s longer-term liquidity operations, which helped
alleviate tensions on financial markets.

Source: EFAMA statistics

31,000
32,000
33,000
34,000
35,000
36,000
37,000
38,000
2006
2007
2008
2009
2010
2011
2012
(Q1)
Growth of UCITS by number of funds
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2006
2007

2008
2009
2010
2011
2012
(Q1)
Growth of UCITS funds by assets
EUR billion

UCITS Fund Distribution 2012
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UCITS Fund Industry Growth Analysis
Year
2006
2007
2008
2009
2010
2011
2012 (Q1)
Net Assets (€ trillion)
5,956
6,159
4,543
5,315
5,990
5,634
5,961
Year on Year % Growth

3%
-26%
17%
13%
-6%
6%
Total number of UCITS
33,347
36,156
37,330
36,011
36,490
36,147
36,106
Year on Year % growth

8%
3%
-4%
1%
-1%
-0.11%
Source: EFAMA statistics
UCITS growth trends 2011
2011 was a year of two halves for investment funds. UCITS continued to attract net new money during
the first half of the year. The second half was dominated by the intensification of the euro area sovereign
debt crisis and the worsening of the global economic outlook, which triggered a strong resurgence in risk
aversion and a sharp fall in the demand for long-term UCITS. Overall net assets of UCITS decreased by
6.2 percent after registering net outflows of EUR 88 billion during the year

2011 witnessed nine countries having recorded net inflows. Ireland led the way recording EUR 62 billion
in net new money in 2011, followed by the United Kingdom EUR 13 billion, Switzerland EUR 6 billion,
Sweden EUR 4 billion, Norway EUR 3 billion, Denmark EUR 2 billion, Romania EUR 0.2 billion and
Bulgaria EUR 6 million. All other countries recorded net outflows in 2011, with six countries experiencing
annual outflows in excess of EUR 5 billion (France EUR 91 billion, Italy EUR 30 billion, Luxembourg
EUR 24 billion, Spain EUR 8 billion, the Netherlands EUR 7 billion, and Austria EUR 6 billion).
Year-on-year total UCITS net assets have decreased by 6.2 percent. Despite most countries experiencing
a decline in net assets, some countries did manage to record growth in 2011. Ireland led the way with
growth of 8.0 percent, followed by Switzerland, which experienced growth of 1.9 percent.
UCITS growth trends Q1 2012
Total net assets of UCITS grew by 6% on quarter four of 2011.
12 reporting countries recorded positive net sales in the first quarter of 2012. Ireland led the way with net
sales of EUR 31 billion, followed by Luxembourg (EUR 29 billion) and France (EUR 24 billion).
Switzerland (EUR 8 billion), the United Kingdom (EUR 6 billion), Norway (EUR 2 billion), Poland (EUR
1 billion) and Denmark (EUR 1 billion) all registered net inflows in excess of EUR 1 billion during the
quarter.
Twenty-two countries recorded an increase in net assets of UCITS during the quarter. Ireland led the way
with net sales of EUR 31 billion, followed by Luxembourg (EUR 29 billion) and France (EUR 24 billion).
Switzerland (EUR 8 billion), the United Kingdom (EUR 6 billion), Norway (EUR 2 billion), Poland (EUR
1 billion) and Denmark (EUR 1 billion) all registered net inflows in excess of EUR 1 billion during the
quarter.



UCITS Fund Distribution 2012
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Distribution channels
Country
Retail Banks

Insurance
companies
/Wrappers
Private
Banks
FOF
Pensions/
Institutions
Fund
Super market/
Platform
IFA/
Brokers
Main Channels
Europe








1. Germany








The key forms of
distribution is mainly
through retail banks,
over 40% then
private banks and a
growing number of
IFA’s.
2. Switzerland







Mainly private banks
over 40% and to
lesser extent retail
banks. IFA’s and
Fund Platforms /
Supermarkets exist
but only account for
6.5% of assets
collected.
3. Austria








Banks particularly
private banks.

4. United
Kingdom







Local IFA’s and
Brokers dominate
the Market (55.6%).
Retail banks only
account for 2.3% of
the market.
5. Netherlands







Retail banking is the

dominant
distribution channel
(80%).
6. France







Banks (over 20%),
insurance (over
20%), private banks
(over 10%).
7. Spain







Retail banks (over
60%).

8. Italy








Dominant channels
are retail banking
(67%) and
insurance groups
(13%).
9. Sweden







The main channels
are the national
pension scheme -
PPM, IFA’s or
management
companies or retail
banks.
10 Finland



Banks and
insurance
companies are the
two main channels.

Asia








1. Singapore







The majority of
funds are distributed
through banks- retail
& private.
2. Hong Kong








Private banks are
the main distribution
channel followed by
insurance/retail
banks and then
financial advisors.
Source: PwC Research

UCITS Fund Distribution 2012
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European Distribution
Channels
The tables outline the distribution channels in the
key distribution countries in Europe and Asia for
UCITS funds. Banks are the largest channel by far
in Europe, with a total share of 75% of European
fund distribution (including retail and private
banks). There has been much debate over the years
on whether this dominant channel will be
eventually out ranked by fund supermarkets and
platforms. While there have been some success
stories in relation to supermarkets and platforms
they still remain few and far between. The main

distribution channels remain to be retail and
private banks, Independent Financial Advisors
(IFAs) and insurance wrappers.
Over the years, most distributors have shifted from
the integrated old model to an “open architecture”
model, which allows clients to choose from a whole
range of third party funds. Private Banks and fund
supermarkets were the first to adopt this model.
Gradually, retail banks and IFAs shifted toward the
guided architecture model and put in place
distribution agreements with a few selected asset
management houses which they trust. There are
uncertainties with regards to the future of open or
guided architecture with regulators shifting toward
a tougher disclosure on products, which may slow
down the path to a real open architecture, as
distributors may not want to be held responsible for
third-party products that they are not able to fully
control.
Europe is a very fragmented market when it comes
to distribution channels. Spain, Italy, Netherlands
and Germany are the strongholds of powerful
banks whereas the UK is dominated by IFAs.
Germany also has a growing IFA market. Private
Banks are of particular importance in Switzerland
and a lesser extent Austria. The French market still
presents the most widespread use of distribution
channels with retail banks, private banks and
insurance companies all having significant market
shares.

As mentioned, the UK is dominated by the IFA
channel. A new proposed regulation, the Retail
Distribution Review (RDR), will have big
implications for the distribution market in the UK.
It will apply to all advisers in the retail investment
market, regardless of the type of firm they work for
(e.g. banks, product providers, IFAs or wealth
managers). It aims to improve the interactions
between consumers and the industry by improving
the clarity with which firms describe their services
to consumers; addressing the potential for adviser
remuneration to distort consumer outcomes; and
increasing the professional standards of investment
advisers.
The extent to which RDR will reshape the
distribution pattern in the UK is a much-talked-
about subject. A number of sources have estimated
the likely reduction in the number of IFAs as a
result of this regulation. The FSA expects around
18% of existing IFAs to leave the industry before
the implementation of the RDR. The general
expectation is that the banks will be the winners
under RDR but it is likely that it will not be
financially viable for banks to offer advice to the
mass market under the new regulation. The actual
cost of an adviser is very substantial. Banks would
have to charge clients large fees just to break even.
According to a Cerulli survey in May 2011 some of
the above mentioned “bank-centred” countries may
now be ready for opening to new channels. They

were asked to evaluate the foreseen most important
distribution channel for future. France reported
that IFAs and fund platforms have by far the
highest momentum. This was also the case in Italy.
Spain still bet on a further development of bank-
driven distribution of funds, but also predicts a
substantial growth for direct sales.
In conclusion, although there is movement towards
distribution channels other than the dominant
banking channel, the survey found that the banking
channel was the most popular overall clearly
cementing the fact that the dominance of the
banking fund distribution channel is not yet over.



UCITS Fund Distribution 2012
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The KIID - Fund charges & SRRI
Fund Charges
UCITS funds must now provide a Key Investor Information Document (KIID) to investors. Any new UCITS
funds set up since July last year have already been publishing KIIDs. All existing UCITS funds had a year to
make the switch, as of 1 July 2012 they must also publish KIIDs. The KIID, which replaces the simplified
prospectus, is a two-page document that provides detail about the fund’s objective and investment policy, risk
and reward, charges and past performance.
One of the main changes implemented with the introduction of the KIID is the introduction of the Ongoing
Charges Figure (OCF). This is a replacement for the Total Expense Ratio (TER) figure. The aim of these figures
is to allow investors to directly compare the costs of various UCITS funds. For the most part the costs included
in the OCF are the same as the TER but the improved term makes it clearer to investors that it covers charges

that are applied on an ongoing basis not the total costs.
Unlike where there was no enforceable requirement for funds to display the TER they must now show the
Ongoing Charge Figure prominently in the KIID. The methodology for calculation of the OCF is set out in
ESMA guidelines and aims to ensure a harmonised approach to the calculation of this figure, thereby enabling
investors to compare UCITS more easily. The methodology identifies clearly which items should be included in
the OCF which was not always as clear for the TER figure.
The below table attempts to compare what charges are included in the calculations of the two figures.
Charges
OCF
TER
Management fees
INCLUDE
INCLUDE
Director fees
INCLUDE
INCLUDE
Depositary fees
INCLUDE
INCLUDE
Investment advice
INCLUDE
NOT INCLUDED
Fund Accounting
INCLUDE
INCLUDE
Transfer Agent
INCLUDE
INCLUDE
Audit fees
INCLUDE

INCLUDE
Administration fees
INCLUDE
INCLUDE
Regulatory fees
INCLUDE
INCLUDE
Legal fees
INCLUDE
INCLUDE
Distribution costs
INCLUDE
INCLUDE
Performance fees
NOT INCLUDED
INCLUDE
Entry fees
NOT INCLUDED
NOT INCLUDED
Exit fees
NOT INCLUDED
NOT INCLUDED
Taxes – VAT, stamp duty
NOT INCLUDED
INCLUDE
Interest on Borrowing
NOT INCLUDED

Soft commissions
NOT INCLUDED

Brokerage charges
NOT INCLUDED
NOT INCLUDED
Bank charges
NOT INCLUDED
INCLUDE
Payments for holding FDIs
NOT INCLUDED

Liquidity costs
NOT INCLUDED
INCLUDE

UCITS Fund Distribution 2012
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The main difference is the exclusion of the performance fee from the OCF, this is included as a separate figure
in the KIID. The TER figure also included other charges not now included in the OCF such as; liquidity costs,
bank charges and taxes. Investment/financial advice is one that is included in the OCF that was omitted from
the TER figure. Entry and Exit fees were also not included in the TER but will now be included as separate
figures in the KIID. There are also some additional clarification on some charges which are not to be included
in the OCF which may have been a grey area when calculating the TER figure such as soft commissions. It is
assumed that certain costs such as director, regulatory and legal fees are also considered organisational charges
for the TER figure as it not clear what fees should be included as organisation charges. Fees mentioned as
examples to be included under this charge include the main service provider fees i.e. administrator, depositary,
auditor and transfer agent.
How is it calculated?
OCF: The OCF shall be the ratio of the total discloseable costs to the average net assets of the UCITS. The
figure shall be expressed as a percentage to two decimal places.

TER: The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which
represents the TER.
While the OCF omits the performance fee, it still bundles together the fees collected by various service
providers i.e. distributors, custodians and administrators. Deconstructing that ratio of fees collected by service
providers and what is retained by fund management is still difficult through the new OCF disclosure. The
bundling of distribution and investment management fees has made it more difficult to understand the costs
charged by the various types of organizations in the fund value chain. Distribution costs are covered through
retrocessions embedded in the fund management fees. Regulators and legislators are addressing this lack of
transparency and bundling of distribution fees with changes to the rules on selling through upcoming
regulations such as PRIPs, RDR and MiFID II.
Data made available to Strategic Insight (‘SI’) in the EFAMA members’ survey 2010 provided valuable
information about the various components of investment management fees and the TER. The study showed
that, on average, UCITS fund managers retain just 42% of TERs. Through retrocessions, distributors are paid
41% of the TER. The balance of 17% is used for operating services such as custody, administration, transfer
agency, etc.
Total Expense Ratio by Fund Type and Distribution Channel
For the five fund types, the asset-weighted average total expense ratios are:
Equity ~ 1.75% Alternative/Others ~ 1.54%
Absolute Return ~ 1.59% Balanced/Asset Allocation ~ 1.42%
Bond ~ 1.17%
Across the four major European distribution channels analyzed in our survey, asset-weighted average
total expense ratios were nearly the same:
Bank ~ 1.50% Platform ~ 1.54%
IFA/Advisor ~ 1.50% Insurance ~ 1.53%
Source: EFAMA survey – data compiled by Strategic Insight


UCITS Fund Distribution 2012
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For the four distribution channels, the asset-weighted average annual management charges are split between
fund managers and fund distributors as follows:
Distribution Channel
% Retained by Fund Manager
% Retrocession to Distributor
Bank
47%
53%
1-FA:Advisor
56%
44%
Platform
54%
46%
Insurance
45%
55%

For the five fund types, the asset-weighted average annual management charges are split between fund
managers and fund distribution as follows:
Fund Type
% Retained by Fund Manager
% Retrocession to Distributor
Equity
51%
49%
Bond
52%
48%
Balanced/Asset Allocation

45%
55%
Absolute Return
52%
48%
Alternative/Other
52%
48%
Source: EFAMA survey – data compiled by Strategic Insight
We examined a small subset of UCITS to see what the average OCF was compared to the TER’s mentioned
above. We looked at over 100 equity and 100 bond funds from the top ten cross-border management groups.
We found there was not much of a difference between the two figures. The average OCF for the equity funds was
1.77% compared to a TER of 1.75% and the average OCF for the bond funds was 1.18% compared to a TER of
1.17%.
The SRRI
As part of the new Key Investor Information Document (KIID), all UCITS investors will be provided with an
SRRI. The Synthetic Risk and Reward Indicator (SRRI) displays the historic volatility of the fund’s performance
and categorises it accordingly. It aims to give an overview of the key risks an investor may encounter by
investing in a given fund. The values will range from 1 to 7, where 1 will mean lower risk and 7 indicates that the
level of risk is relatively high, see example below.




UCITS Fund Distribution 2012
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It is important to understand that the SRRI is not static as it will be calculated on an on-going basis using the
most recent data for the UCITS fund. Increased or decreased volatility over time may result in the SRRI moving
to a lower or higher rating. In the event that the SRRI number changes from its published value, this will trigger

the prompt publication of a revised KIID.
The first review of Synthetic Risk and Reward Indicators (SRRIs) across the European funds industry has been
completed by Lipper. It provides details of the proportion of funds in different risk bandings. The report
examines the SRRIs for all mutual funds and ETFs in Europe that have sufficient historical data upon which
this risk measure is based. Over 21,400 funds/share classes are covered by the current report, with calculations
based on the five year period ending 31 March 2012.










The Lipper analysis found that 49.3% of all funds analysed fall within SRRI bandings 6 or 7, where most equity
funds are categorised. 31.7% of funds fall within bandings 3 and 4, where most bond funds are categorised.
Figure 1 provides an overview of equity funds’ SRRI bandings, with 94.5% of funds falling in to bandings 6 or 7
(58.8% and 35.7% respectively). Figure 2 shows an overview of bond funds’ SRRI bandings which shows that
74.4% sit in bandings 3 or 4 and a further 11% in each of the bandings just above and below this (i.e. 22% in 2 or
5). The vast majority of funds that sit outside bands 3 and 4 are either short-term bond funds (less risky) or
emerging market or high yield funds (more risky).
Drilling down further, some of the largest classifications (by number of funds) have been selected to establish in
more detail how SRRIs can vary not only between different classifications, but also within groups of broadly
similar funds.



UCITS Fund Distribution 2012

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Regulatory
impacts
UCITS IV update
Over a year on since the implementation of UCITS
IV and how has the industry fared from the updated
legislation? The main changes were the
introduction of the KIID document which we
discussed in section The KIID – Fund charges &
SRRI, updated notification procedures and the
introduction of fund merger/master feeder
mechanisms/ management company passport. It
was hoped that the lather would help managers
with fund rationalisation and restructuring of their
companies to benefit from greater economies of
scale. Yet a year on and there has been little or no
use of the UCITS IV reforms. This could be mainly
a result of the regulatory onslaught that investment
managers have to address at the moment. There are
some teething problems with some aspects of the
UCITS IV reforms which should be amended within
the two more reforms of this directive under way –
UCITS V & UCITS VI.
UCITS V
This reform focuses mainly on depositary liability
and remuneration. The financial crisis, together
with the Madoff fraud perpetrated in the United
States, highlighted a number of weaknesses in the
overall consumer protection which require another

look. In particular, the proposal will ensure that the
UCITS brand remains trustworthy by ensuring that
the depositary's (the asset-keeping entity) duties
and liability are clear and uniform across the EU.
The European Commission (EC) has proposed:
a precise definition of the tasks and liabilities
of all depositaries acting on behalf of a
UCITS fund
clear rules on the remuneration of UCITS
managers - they should not be remunerated
in ways that encourage excessive risk-taking,
and remuneration policies should be better
linked with the long-term interest of
investors
a common approach to sanctions, including,
introducing common standards on the levels
of administrative fines, to ensure the fine
always exceeds the potential benefits derived
from the violation.
UCITS VI
The EC initiated the process that will lead to UCITS
VI, in its consultation paper issued on 26 July
"Product Rules, Liquidity Management, Depositary,
Money Market Funds, Long-term Investment". The
UCITS VI proposal comes fast on the heels of the
proposal to amend the UCITS Directive in relation
to depository functions, remuneration and
sanctions issued on 3 July 2012 (UCITS V). The
UCITS VI consultation considers eight areas:
Eligible assets and use of derivatives -

looking at how UCITS gain exposure to
ineligible assets and whether complex
derivatives should be banned.
Efficient portfolio management techniques -
examining the requirements around the
liquidity of collateral and whether new
restrictions should be imposed on posting
collateral to counterparties.
OTC derivatives - with more OTC derivatives
being centrally cleared under EMIR,
considering whether new UCITS rules are
needed to limit counterparty risk, e.g.
involving the daily calculation of both
counterparty exposure and the value of
UCITS assets.
Extraordinary liquidity management tools -
suggesting new rules to help funds maintain
liquidity in periods of market stress, further
defining the current use of 'exceptional case'
in the UCITS Directive, under which funds
are allowed to suspend redemptions.
Depositary passport -bringing in a depositary
passport to allow depositaries authorised in
one EU Member State to passport their
activities to other Member States, like the
management company passport introduced
under UCITS IV.
Money market funds (MMFs) - reducing
perceived systemic risks posed by MMFs
through enhancing their liquidity, to prevent

massive runs on MMFs. The EC would also
like to remove any investor perception that
funds in MMFs are somehow guaranteed like
bank deposits. It may consider introducing
capital buffers for Constant NAV MMFs
(which the EC believes represent 40% of EU
MMFs). New rules could also be introduced
to ban valuations on an amortised cost basis
rather than mark-to-market in market stress
conditions and to impose a 'liquidity fee' or
other limits on redemptions. Imposing such
a fee could hinder the success of MMFs in
future because they may become more
expensive to hold than deposits.

UCITS Fund Distribution 2012
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Long-term investments - considering
changes to the eligible assets to allow retail
investors to invest in long-term investments,
such as real estate or private equity, either
through a UCITS or another type of retail
vehicle. Some Member States have discretion
under AIFMD to permit such funds to be
marketed to retail investors.
Improving UCITS IV - assessing possible
changes to UCITS Directive to improve
UCITS IV measures relating to master-feeder
structures, fund mergers, and regulator-to-

regulator notification procedures.
Alignment to AIFMD - requesting industry's
feedback on areas where the UCITS Directive
and AIFMD should be better aligned.
PRIPs and IMD revision
The EC's latest round of consumer protection
proposals are shaking up the €10 trillion retail
investment market in Europe.
The proposals, which will probably be implemented
over the next 3-4 years, include regulations which
cover:
key information documents for packaged
retail investment products (PRIPS)
revision of the Insurance Mediation Directive
(IMD)
The proposed regulation on PRIPS aims to improve
the quality of information provided to retail
consumers when considering investments in the
EU. The EC recognises that many investment
products are complex and it can be difficult for
consumers to compare them or fully grasp the risks
involved.
A Key Information Document (KID), a key proposal
at the heart of PRIPS, will provide standard
product information. Every manufacturer of
investment products (e.g. investment fund
managers, insurers, banks) will have to produce a
KID for each product providing information on its
main features, and the risks and costs associated
with it. The EC want to ensure that KIDs have a

common structure, content, so consumers can use
them to compare different products and ultimately
choose the product that best suits their needs. It is
suggested that the KID will replace the KIID (Key
Investor Information Document) adopted in
respect of UCITS within a few years after the
Regulation is adopted.
The EC has proposed revising the IMD, which
currently regulates selling practices for all
insurance products, from general insurance
products (e.g. motor and household insurance) to
those containing investment elements. Although
IMD will remain a 'minimum harmonisation'
Directive, the possibility of the adoption of
delegated acts (most likely regulations) in key areas
of detail, particularly in relation to insurance
investment products, is hoped to increase the level
of consistency across the European Union and to
ensure the regime is comparable to MiFID II. The
difference in legal basis, however, does raise some
questions in this respect.
It is seeking to "upgrade consumer protection in the
insurance sector by creating common standards
across insurance sales and ensuring proper advice"
by improving transparency and establishing a level
playing field for insurance sales by intermediaries
and insurance firms. The proposals should make it
easier for intermediaries to operate cross-border,
thus promoting the emergence of a real internal
market in insurance services across the EU.

The EC wants to amend IMD to ensure that:
the same level of consumer protection
applies, regardless of the sales channel used
(i.e. insurance firm, broker, agent or other
intermediary);
consumers are provided in advance with
clear information about the professional
status of the person selling the insurance
product, introducing rules to address more
effectively the risks of conflict of interest,
including disclosure of remuneration
received for sales; and
insurance product sales are accompanied by
honest, professional advice.
MiFID II
Building on a comprehensive set of rules already in
place, the revised MiFID sets stricter requirements
for portfolio management, investment advice and
the offer of complex financial products such as
structured products. In order to prevent potential
conflict of interest, it was proposed that
independent advisors and portfolio managers
should be prohibited from making or receiving
third-party payments or other monetary gains. A
crucial vote on MiFID II, which included the
proposals to ban inducements for independent
advisers, was postponed until at least September as
the political haggling continues over the revised
directive. The European Commission’s move to
ban retrocession fees is widely expected to be

absent from MiFID II after an influential European
Parliament committee opposed the proposal. The

UCITS Fund Distribution 2012
PwC Page 23 of 33

European Council, which represents EU member
states, is in favour of a ban, but the sense is the
proposal will be dropped from the final MiFID II
text. It has been proposed that there should be
tougher rules on remuneration and disclosure
instead. An EU-wide ban on inducements for some
intermediaries is still expected even if it is ruled out
of the upcoming MiFID II directive.
Retail Distribution Review
(RDR)
The RDR is a new regulation unique to the UK
market. It is due to be implemented on 31
st

December 2012. Despite its title, it is concerned
specifically with retail investments. It specifically
covers the advised sale of all packaged products
including pensions, annuities, onshore and offshore
bonds and collective investments. The RDR will
require fundamental changes in operating models
at all levels impacting on both product providers
and adviser firms. Several countries have similar
reviews underway and indeed a ban on the payment
of commission already exists in Norway and

Finland and will be introduced in Australia (2012)
and the Netherlands (2013).
In summary:
Firms must describe their advice service as
either ‘independent’ or ‘restricted’.
Firms providing independent advice will be
expected to conduct a comprehensive and
fair analysis on a wider range of retail
investment products. They must always act
in the consumer’s best interests.
The definition of retail investment products
is similar to the European PRIPs including
structured investments but excluding
structured deposits.
The FSA will introduce ‘Adviser Charging’
which will involve all firms that give
investment advice to retail clients setting
their own charges with definitively no
involvement of product providers.
Adviser firms will no longer be able to receive
commissions set by product providers in
return for recommending their products.
Product providers will be able to facilitate the
collection of adviser charges through the
product on a matched basis but only if they
wish to do so.
There is to be no factoring of adviser charges
by product providers.

Revised rules and guidance on inducements

will curtail the potential of ‘soft commissions’
to circumvent the new regulations.
Adviser charging will not apply to non-
advised services where investment sales can
continue to earn commission.
The RDR is running concurrently with major
consultations taking place in Europe as mentioned
above; PRIPs and reviews of MiFID and IMD. The
FSA has stated publicly that these new directives
pose no insurmountable problems to the RDR.



UCITS Fund Distribution 2012
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Taxation of
UCITS funds
Investor Tax Reporting
A comprehensive approach to tax reporting is a
must for investment funds that want to be
considered transparent and ultimately tax-efficient.
Nevertheless, tax reporting for investment funds is
a very demanding and constantly evolving area. In
recent years, several European jurisdictions, such
as Austria, Switzerland, Belgium, Germany, Italy
and the UK, have either introduced new tax
reporting regimes or modified existing ones.
Indeed, Europe is far from adopting a harmonised
approach to tax reporting for investment funds

spread across multiple countries. As a result, it is
increasingly difficult for the fund industry to keep
up with developments in the various countries. A
lot of the funds tax regimes that have been
introduced to date have been as a result of putting
funds on an equal footing to the tax position for
domestic funds.
Looking ahead it is more likely that more EU
countries, will introduce specific rules for foreign
UCITS be met in order to obtain a specific tax
status to make them attractive to local investors.
We have outlined below the current tax reporting
regimes in the European Union and the United
States below.
Germany
In Germany the tax treatment for German investors
is significantly better if they are investing in a
transparent fund. For this reason most potential
German investors require funds to have
transparency status. In order to achieve tax
transparency status the fund must satisfy various
filing and reporting requirements, which include
publication requirements in the German Electronic
Federal Gazette (“Bundesanzeiger”) and obtaining a
certificate from the German tax authorities that the
fund’s German tax reporting is in compliance with
German tax law.
Tax information must be certified by a tax auditor
and published in the German electronic federal
gazette within four months of the financial year

end. In addition to annual reporting Germany
requires daily reporting for certain parts of the
fund’s income. Funds which fulfil the complete
range of annual and daily reporting requirements
are qualified as tax transparent. The consequence
of being labelled non-transparent impacts
negatively the tax treatment of German resident
investors.
Austria
From an Austrian tax point of view, investment
funds are considered transparent, implicating a
direct allocation of income of the fund to its
investors. The tax figures have to be calculated
according to Austrian tax rules.
In Austria, foreign UCITS funds may appoint a
local tax representative who along with the Fund
administrator calculates and provides information
(within certain timeframes) to the Oesterreichische
Kontrollbank (OEKB) on deemed distributed
income, net interest income and information on the
taxable portion of the distributions paid to
investors. If a UCITS fund does not have the
reporting status, it may be subject to unfavourable
lump sum taxation.
United Kingdom
Non UK UCITS funds which distribute in the UK
may be regarded as “offshore funds”. In order to
prevent offshore funds having a competitive
advantage over UK funds (regarding the tax
treatment of UK investors), by accumulating

income in the fund, the UK tax authorities
introduced anti-avoidance measures in the form of
the UK Distributor Status regime. In 2009 the UK
Distributor Status Regime was replaced by a new
Fund Reporting Regime. Under the Fund
Reporting regime, a fund is required to obtain
confirmation from the UK tax authorities
prospectively that it meets the eligibility criteria to
be considered for Reporting Fund Status. Once
Reporting Fund Status is obtained a fund must
then comply with the reporting requirements set
out in the regulations which require that it reports
100% of its income returns (calculated under the
UK tax rules) to UK investors and the UK tax
authorities on an annual basis. Where a UCITS
fund has Reporting Fund status, UK investors will
be taxed under the Capital Gains Tax (CGT) regime
upon realisation of their investment in the fund,
rather than as offshore income gains taxable at
investors’ marginal tax rate.
Switzerland
Swiss individual investors require tax reporting so
that they can declare their taxable income and the
value of the investment in their tax return.
Otherwise they would suffer prohibitive income tax.
Foreign funds are treated like Swiss funds if they
pass certain equivalence criteria. If the foreign fund
is to be distributed in Switzerland, an up-front

UCITS Fund Distribution 2012

PwC Page 25 of 33

authorization by the Swiss Financial Markets
Authority (FINMA) has to be obtained.
The tax reporting involves the preparation of a
calculation to separate the taxable income from tax
exempt capital gains in the hands of the Swiss
investor based on Swiss taxation principles. The
taxable income and net asset value per share for
income tax and personal net wealth tax purposes
can be provided to the Swiss Federal Tax
Administration (FTA) which then publishes these
values in the official rates list. No tax information is
required to be published for institutional or
corporate investors.
Belgium
There is not investor tax reporting in Belgium as
such, but it is required that tax is payable on net
assets of the fund in Belgium and an accompanying
return submitted to the Belgian tax authorities
(“UCI Certification”). The Belgian Net Asset Tax is
due on the net amounts invested in Belgium which
equates to subscriptions (net of redemptions) made
through a Belgian financial intermediary.
Where Belgian residents subscribe via foreign
intermediaries, these subscriptions are excluded
from a fund’s taxable base, irrespective of whether
or not the fund is registered with the Belgian
Banking, Finance and Insurance Commission. The
applicable tax rate is 0.08% and the tax is due and

payable by 31 March each year.
Italy
Starting from 1 January 2012, profits deriving from
Italian and certain EU and EEA foreign UCITS and
non-UCITS Funds and SICAVs will become subject
to a 20% tax rate. The increase from 12.5% to 20%
of the tax rate applicable to profits deriving from
investments funds will mainly affect Italian
resident private individual investors and certain
non-Italian resident investors (investors tax
resident or established in Countries – e.g., Cayman
Island, Jersey and BVI – which have not agreed to
co-operate with the Italian Tax Authorities in
international tax matters through exchange of
information).
Tax reporting will be required going forward in
Italy to identify the portion of profits/losses
associated with “indirect” investment in eligible
bonds. It will be necessary to determine an average
% on the basis of the ratio between the value of the
eligible bonds and the total asset value based on the
two last available financial statements of the fund.
US Tax Reporting
Various tax reporting requirements apply to both
US taxable and tax-exempt investors. As such
consideration must be given to whether opening up
an investment fund to US investors creates
additional reporting obligations and costs for the
investment manager. The US tax reporting
landscape is changing rapidly as US Treasury and

IRS ensure investors are paying their fair share of
taxation. There is greater emphasis on compliance
with local US rules otherwise penal taxes may apply
as illustrated with further US tax reporting
requirements under FATCA.
US tax reporting requirements that are applicable
to a certain investor depend on several factors, such
as the investor’s own tax profile, the location of the
investment fund, classification of the investment
fund for US tax purposes, the stake of the
investment fund held by the US investor and the
type of income earned.
Looking Ahead
With the exception of Switzerland, all funds prepare
profit and loss accounts and balance sheets based on
local GAAP. The reporting regimes require more
than just a particular calculation method they also
require the requalification of the underlying assets.
For funds it is essential to have clear processes in
place for calculating the relevant tax reporting
figures. This will become even more prevalent as it is
expected that more countries will introduce tax
reporting regime models in the future.