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Details

  • Service: Infrastructure, Legal Services, Legislative and Regulatory
  • Industry: Financial Services, Fund Management
  • Type: Business and industry issue, Publication series
  • Date: 8/28/2012

Contact

Nathalie Dogniez
Partner
Tel. +352 22 51 51 - 6253
nathalie.dogniez@kpmg.lu

 

Charles Muller

Partner

Tel. +352 22 51 51 - 7950

charles.muller@kpmg.lu

 

Dee Ruddy

Senior Manager

Tel. +352 22 51 51 - 7369

dee.ruddy@kpmg.lu

UCITS V 

On 3 July 2012 the European Commission issued a proposal for a Directive amending the UCITS Directive as regards depositary functions, remuneration policies and sanctions, known as the "UCITS V" proposal.


The Madoff fraud and the Lehman Brothers default have drawn the EC’s attention to the UCITS depositary whose duties had been governed by a set of generic principles that led to diverging national interpretations across the EU, specifically in relation to liability. The challenge is to clarify the role and responsibilities and ensure consistency between Member State rules, thus enhancing investor protection. The EC also intends to align the UCITS framework with the Alternative Investment Fund Managers Directive (AIFMD) regime, which will enter into force in July 2013.

 
The financial crisis has also brought attention to remuneration policies and incentive schemes across the financial sector. UCITS V intends to apply new rules on remuneration of UCITS managers consistent with those under the AIFMD and the Capital Requirements Directive.


Finally, another feature of UCITS V is a new harmonised sanctions regime for breaches of UCITS rules.

Depositary regime

 

Appointment

  • A single depositary must be appointed for each UCITS.
  • The appointment must take the form of a written contract.
  • Only an authorized credit institution with its registered office in the EU or a MiFID investment firm (subject to capital adequacy standards) may act as depositary.
  • Grandfathering period of 2 years for UCITS to appoint this category of entity as depositary.

 

Oversight duties (uniform duties for both contractual and corporate fund types)

  • The depositary will have to ensure that subscription and redemption activities are in accordance with national laws and the fund rules.
  • The depositary has to ensure that the value of the units of the UCITS is calculated in accordance with national laws and fund rules.
  • The depositary must ensure that transactions involving the assets of the UCITS and any consideration are remitted to the UCITS within the usual time limits.
  • It must also ensure that the income of the UCITS is applied in accordance with applicable national laws and the fund rules.
  • It must carry out the instructions of the Management Company.

 

Cash-monitoring duties

  • The depositary is required to monitor all cash flows of a UCITS. No cash account can be opened without the depositary’s knowledge. 
  • The depositary will need to ensure that payments made by investors for subscription to shares or units of the UCITS are received and all cash is booked in the accounts of a credit institution, central bank or third country bank, in the name of the Management Company, UCITS or depositary.
  • The principle of segregation of client money from the depositary’s own funds will need to be applied.

 

Safe-keeping duties

  • A distinction is made between the depositary’s safe-keeping duties relating to financial instruments which can be held in custody and those relating to other assets.
  • The depositary must hold in custody: (i) all financial instruments belonging to the UCITS which may be registered in a financial instruments account and (ii) all financial instruments that can be physically delivered to the depositary.
  • For all other assets of the UCITS, the safekeeping duty of the depositary is limited to verifying ownership and maintaining a record of the assets for which it is satisfied that they belong to the UCITS or to the management company acting on behalf of the UCITS.
  • The ownership verification should be based on all information and documentation provided by the UCITS or the management company and, where available, on any external evidence.

 

Liability

  • The depositary will be liable for all losses suffered by the UCITS or its investors as a result of the depositary’s negligent or intentional failure to properly fulfill its obligations.
  • The depositary will also be liable for the loss of financial instruments held in custody by the depositary itself or by a third party to whom custody has been delegated (sub-custodian).
  • If a financial instrument is lost, the depositary will have the obligation to return a financial instrument of the identical type or of the corresponding amount to the UCITS.
  • The depositary is not liable if it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary.
  • Unlike the AIFMD, the depositary’s liability cannot be delegated or transferred contractually.

 

Delegation

  • The depositary may delegate safe-keeping duties, but not any other duty.
  • For this, the depositary needs to demonstrate that the tasks are delegated for an objective reason and not with the intention to avoid the requirements of the Directive.
  • The delegate must be subject to effective prudential supervision and comply with equivalent segregation rules.
  • The depositary must also exercise all due skill, care and diligence in the selection and the appointment of any third party and monitor the third party on an ongoing basis.
  • The third party delegate may sub-delegate these tasks, provided that the same conditions are met.
  • The depositary’s liability is not affected by delegation.

 

Remuneration

 

  • UCITS management companies will need to implement and apply remuneration policies that are consistent with, and which promote, sound and effective risk management and which discourage disproportionate risk-taking.
  • A remuneration committee should be established where it is justified by the size of the UCITS manager and the UCITS it manages.
  • The remuneration requirements will apply to senior management, ‘risk takers’, those who exercise control functions and other employees with equivalent compensation packages and will vary depending on the size and complexity of the management companies and the UCITS they manage.
  • Remuneration policies must be in line with the business strategy, objectives, values and interests of the ManCo and the UCITS or the investors and must include measures to avoid conflicts of interest.
  • The UCITS ManCo must disclose in the annual report of each UCITS the amount of remuneration (split into fixed and variable remuneration) paid by the management company for the financial year, the number of beneficiaries and where relevant carried interest paid by the UCITS.
  • The assessment of performance is set in a multi-year framework appropriate to the life cycle of the UCITS managed.
  • Guaranteed variable remuneration is exceptional.
  • Fixed and variable components of remuneration need to be appropriately balanced, and the fixed component must represent a sufficiently high proportion.
  • At least 50% of variable remuneration consists of shares in the UCITS.
  • 40% of variable remuneration is deferred over at least 3-5 years.

 

Sanctions

 

  • National authorities will have to have sanctioning powers in relation to breaches of the Directive.
  • A harmonised catalogue of administrative sanctions and measures, a harmonised list of sanctioning criteria and rules in relation to the establishment of a whistle-blowing mechanism are set out.

 

Impact analysis

 

  • UCITS Management Companies will need to determine the impact on current business structure.
  • UCITS Management Companies will also have to review existing remuneration policies and adjust them to the new requirements.
  • Depositaries will have to review service offering and liability risks as well as IT requirements linked to the new requirements.
  • Depositaries will also have to review their sub-custodian network, the selection of sub-custodians & due diligence processes and their ongoing monitoring of sub-custodian activities.
  • Depositaries will have to assess the costs of the strict liability regime and the impact on fee levels. 

 

Next steps


The Proposal takes the form of a Directive and would therefore require implementation into national law. The Proposal will now go to the European Parliament and the Council for their consideration under the codecision procedure. The European Parliament plenary sitting to consider the Directive has been set for 12 March 2013. Once they reach an agreement the proposed Directive can be adopted. The draft Directive does not yet specify the date by which Member States must transpose the Directive into their national laws. Usually Member States are granted a two year implementation period, meaning that the new rules could apply by the 2nd quarter of 2015 at the earliest. The necessary implementing measures should also be adopted by the Commission by this date.

 

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