1. This Regulatory Impact Assessment is of the Open-Ended Investment Companies Regulations 2001 made under Section 262 of the Financial Services and Markets Act 2000.
2. The Financial Services and Markets Act 2000 (the Act) will, when brought into force, replace the regulatory arrangements currently contained in the Financial Services Act 1986, the Banking Act 1987, the Insurance Companies Act 1982, the Building Societies Act 1986 and the Friendly Societies Act 1992. It creates a single statutory regulator for the UK financial services industry, with a single set of functions and powers. This will benefit both businesses and consumers.
3. Section 262 of the Act gives the Treasury the power to make regulations governing the establishment, carrying on, and regulation of open-ended investment companies (oeics). It provides a wide-ranging and non-exhaustive list of matters which the regulations may provide for. These include imposing criminal liability, conferring functions on the Authority (including rule-making powers and power to waive or modify rules) and power to modify or exclude any statute or rule of law.
4. The regulations which govern oeics currently are the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996 (the "1996 Regulations") which were made under the European Communities Act 1972.
5. First, the formation of an oeic will no longer be governed by the European Directive on Undertakings for Collective Investment in Transferable Securities ("the UCITS Directive"), as the regulations are made under the Act as opposed to the European Communities Act. The effect of this is that, following the appropriate amendment to Financial Services Authority (FSA) regulations, it will be possible to incorporate oeics that invest otherwise than in transferable securities. The details of the investment objectives of oeics will be for the FSA to decide but the types of schemes that will become available in this form will include money market funds, property funds and funds of funds.
6. The second main change is that the FSA will become responsible for the registration of oeics. This function is undertaken currently at Companies House;
7. Third, the regulations provide for the modification or waiver of the application of FSA rules to the company, its directors or the depositary, in similar terms to the general modification or waiver provisions in section 250 of the Act
8. Fourth, the regulations provide for warning notices to be issued when it is decided to refuse approval of certain changes related to an oeic.
9. In addition, the regulations provide that companies constituted under the 1996 regulations are treated as formed under these regulations.
10. The Act rationalises and simplifies the regulation of collective investment schemes. These regulations perform the same function for oeics. There is a risk that, without these regulations, the regimes governing authorised unit trusts and oeics would diverge causing confusion and potential costs.
11. There are around 200 authorised collective investment schemes that will be able to adopt corporate form by becoming oeics, which they cannot do under current rules. A significant proportion of the funds held by these schemes can be expected to be placed in oeics in order to obtain the economic and marketing benefits that they can confer.
12. At the end of 2000, there were around fifty oeic providers, offering around 25% of total investment funds by number. Oeic funds under management accounted for 28% of all industry funds under management. Anecdotal evidence suggests that, once the range of permitted investments is extended beyond transferable securities, this proportion can be expected to become even higher.
13. Benefits will also arise as the regime for oeics is largely brought into line for that for authorised unit trusts (which is set out in the Act). This ensures a consistent approach by the FSA, which will particularly benefit those providers who choose to offer both unit trusts and oeics.
14. In allowing for an additional type of vehicle for certain collective investments, whilst leaving existing vehicles still available, the regulations will impose no negative regulatory impact. There should be modest compliance cost savings through the economies of scale derived from the increased value of funds that will be capable of being held in oeics.
15. The FSA will be primarily responsible for securing compliance with these regulations.
16. There is no impact on small business. The regulations relate to the establishment and operation of oeics within the financial services sector, an activity in which there is unlikely to be any small business involvement.
17. The Regulations broadly replicate the existing regulatory regime. The extension to allow oeics to be established that invest otherwise than in transferable securities should result in competition benefits as increasing numbers of providers convert their collective investments schemes to oeics.
18. The effect of these regulations is broadly to reproduce existing provisions, but rationalised and improved. In addition, these regulations will result in greater potential flexibility and choice for investors because of the range of oeics available.
I have read the Regulatory Impact Assessment and I am satisfied that the benefits justify the costs.
Melanie Johnson MP
Economic Secretary to the Treasury
HM Treasury
26 February 2001
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