Big mis-selling risk from hedge fund UCITS: Efama

Date: Wednesday, March 24, 2010
Author: Reuters

The European fund sector is risking a mis-selling scandal as hedge fund-style investments are brought into a market more used to plain vanilla products, said the president of industry body Efama.

Jean-Baptiste de Franssu, president of the European Fund and Asset Management Association, said that bringing such complex products into the marketplace for EU-regulated UCITS funds could expose deficiencies in the knowledge-base of advisors.

"We are going toward creating products that are more and more sophisticated. We want to make the sure the products are as well explained as possible otherwise we are heading for a mis-selling situation," de Franssu told the Reuters European Funds Summit.

"From the moment you lack a clear understanding of the nature of the product you are selling, and the investor doesn't understand the product, and the eligible assets are wide, the risk of mis-selling is high," he said.

Hedge funds have been keen to boost assets by launching UCITS versions of existing strategies, taking advantage of new rules under the EU's cross-border regulations which allow the use of derivatives and short-selling.

This has raised concerns among some industry participants who fear the UCITS brand -- which has thus far been associated with mainstream, long only funds -- will be damaged if something goes badly wrong with the new breed of products.

UCITS, or Undertakings for Collective Investment in Transferable Securities, are EU-domiciled mutual funds targeting retail investors, and the industry is seeking to expand the vehicle's take-up in emerging markets.

De Franssu said that regulators had focused on product development but very little had been done on the regulation of distribution, and therefore there was a need to raise the quality of advice given at the point of sale.

He proposed a certificate for investment advisers awarded after they had passed an exam, to harmonise the standard of advice given at the point of sale and improve investor trust.

"It is one thing to sell a traditional mutual fund but another to sell a complex product like a structured note," he said. "We haven't got an organised set of principles for the people distributing the product. Something must be done."

As products become more complex the industry is also considering giving investors a window during which they can change their mind after buying an investment product, as is already the case with some products and some jurisdictions.