Executive Summary
BETTER FINANCE, the European Federation of Investors and Financial Services Users, welcomes the work undertaken by the European Securities and Markets Authority (ESMA) towards reviewing the UCITS Eligible Assets Directive (UCITS EAD). This Directive, which supplements the UCITS framework, was adopted seventeen years ago and has not kept pace with the rapidly changing capital markets, with potential negative consequences for investor protection in UCITS funds.
BETTER FINANCE strongly believes that the UCITS framework is a valuable vehicle for the European Union in its efforts to create a genuine “Savings and Investments Union” (or ‘Capital Markets Union’). This framework must provide competitive, high-performance investment opportunities for European citizens by channelling funding to support the growth and green transition of European firms. In this context, it is important to preserve the focus of UCITS funds on assets that directly contribute to the real economy, with limited complexity and few intermediaries involved. Listed equity and fixed-income securities should remain the core of UCITS investments, ensuring that investment policies are clear, transparent, and intelligible for the average individual investor.
Key Recommendations:
- Focus on core investments: BETTER FINANCE stresses that listed equity and fixed-income securities should remain central to UCITS investments. These assets are well-understood by individual investors and align with clear, transparent, and straightforward investment policies. This focus is essential for maintaining investor confidence and ensuring that UCITS funds remain accessible to retail investors with varying levels of financial literacy.
- Modernisation of rules: BETTER FINANCE supports ESMA’s initiative to update the UCITS EAD by replacing outdated rules with references to more recent legislative frameworks (securities financing transaction set out in the SFTR). These updates should enhance investor protection by addressing current market practices, particularly in areas like securities lending, where greater transparency and fairer returns for retail investors are needed.
- Limitation of complex Instruments and securitisation vehicles: BETTER FINANCE advocates for a conservative approach to UCITS investments in complex instruments, such as derivatives, delta-one products, and securities issued by securitisation vehicles. These investments should be strictly limited, aligned with the fund’s core strategy, and subject to a mandatory look-through approach to ensure transparency. If permitted, they must include prominent warnings to retail investors about the associated risks (ex: crypto-assets).
- Prudent approach to new Asset Classes: BETTER FINANCE urges caution in expanding UCITS-eligible assets to include new asset classes. The strength of the UCITS framework lies in its simplicity and transparency. Introducing new, particularly complex or speculative asset classes could undermine these principles. Any new assets considered must be rigorously evaluated to balance innovation and protection, notably to ensure they do not compromise the UCITs framework’s integrity and should include clear warnings/explanations to retail investors while being in line with the funds’ policy and limited to hedging purposes.
BETTER FINANCE welcomes this opportunity to contribute to the review of the UCITS EAD and to share its views on investment policies that are appropriate for UCITS funds. As a popular vehicle for individual investors’ engagement with capital markets, it is vital that UCITS funds continue to offer safe, transparent, competitive and easily understandable investment options. We remain at ESMA’s disposal for further discussions on any of the issues raised in our response.
⬇️ Read the full response to the consultation below. ⬇️