Introduction

There remains considerable confusion as to how exactly the MiFID and UCITS Directives will interact in the long run. This uncertainty reflects the growing pains of a regulatory transformation that represents nothing less than a tectonic shift from intense and prescriptive product regulation to a more flexible, principles-based regulation of management functions. Unlike UCITS, MiFID is a horizontal directive that cuts across the entire financial services industry (except for insurance). Precisely because the two directives are rooted in diverging regulatory philosophies, they are not natural partners, and the exercise of trying to fit the two together is likely to be neither effortless nor seamless.

This confusion can be traced to apparently contradictory – or, at the least, ambiguous – wording in the MiFID as to how its provisions relate to collective investment schemes. In reality, the UCITS–MiFID nexus is a web of dizzying complexity, on which this chapter attempts to shed more light. On the one hand, MiFID Recital 15 and art. 2(1) (h) state that collective investment schemes (whether or not coordinated at EU level), their management companies and depositaries are excluded from the scope of MiFID provisions. Since UCITS are collective investment undertakings that are coordinated at Community level, they, their managers and depositaries do not come under MiFID rules.

On the other hand, UCITS are listed in Section C of MiFID Annex I as MiFID financial instruments. Therefore, in their dealings with clients involving transactions in UCITS, all MiFID firms must apply conduct of business rules, which include best execution and suitability.