UCITS V: Strengthening the EU brand name in funds
23 October 2015
UCITS V: Strengthening the EU brand name in funds
Back in 1985, the original UCITS Directive (85/611/EEC) created the internal market for investment funds in Europe. “UCITS” or “Undertakings for the Collective Investment in Transferable Securities” are investment funds regulated at European Union level. They account for around 75% of all collective investments by small investors in Europe.
The current EU legislation for investment funds (the UCITS Directive) has been the basis for an integrated market facilitating the cross-border offer of collective investment funds. Managing almost €6 trillion in assets, UCITS have proved successful and are widely used by European retail investors. UCITS are also regularly sold to investors outside the EU where they are valued due to their high level of investor protection.
UCITS funds can take many forms, depending on where they invest. They can be equity funds (funds that invest in shares of companies), money market funds (funds that invest in short-term debt securities), bond funds (funds that invest in bonds or other debt securities), they can be mixed funds, exchange traded funds (funds that track an index, a commodity or a bond), the list practically limitless.
Since 1985, the UCITS Directive has been amended five times, in order to take into account market developments and the experiences of market participants and supervisors. In Cyprus, the UCITS Directive has been transposed into national Law by the Open Ended Undertakings for Collective Investments Law of 2012 (L. 78(I)/2012).
The latest amendment to the current UCITS rules (UCITS V Directive) is based on the experience from the financial crisis, and aims to continue to ensure the safety of investors and the integrity of the market. In particular, UCITS V will ensure that the UCITS brand remains trustworthy by ensuring that the depositary's (the asset-keeping entity) duties and liability are clear and uniform across the EU, there are clear rules on the remuneration policy of UCITS managers and there is a common approach to sanctions regarding breaches of the legal framework. Directive 2014/91/EU (the UCITS V Directive) must be transposed into national legislation by 18 March 2016.
As mentioned above, UCITS V Directive addresses three areas:
1. A precise definition of the tasks and liabilities of all depositaries acting on behalf of a UCITS fund;
2. Clear rules on the remuneration of UCITS managers: the way they are remunerated should not encourage excessive risk-taking. Remuneration policy will be better linked with the long-term interest of investors and the achievement of the investment objectives of the UCITS; and
3. A common approach to how core breaches of the UCITS legal framework are sanctioned, introducing common standards on the levels of administrative fines so as to ensure they always exceed potential benefits derived from the violation of provisions.
Regarding the new remuneration policy being introduced, it tries to control the risky behavior of people in a position to take added risks during the management of UCITS. These are usually the people who take investment decisions, like investment advisors, analysts and senior management. The Directive forces UCITS management companies to introduce sound and effective risk management. In particular, it limits variable remuneration to exceptional circumstances and pay-for-performance is limited to the first year of engagement.
Regarding depositaries, UCITS V clarifies which legal entities may be appointed as depositaries and that a single depositary needs to be appointed for every UCITS, having general oversight duties over the assets of the UCITS. A uniform list of oversight duties is introduced in order to ensure a harmonized approach by member states to the performance of the depositaries duties. It is also clarified that the depositary is responsible for the proper monitoring of the cash flows of the UCITS and that all assets belonging to the investors of the UCITS are booked correctly on accounts opened in the name of the UCITS or in the name of the management company or the depositary acting on behalf of the UCITS.
The remunerationpolicy and the provisions regarding depositaries are nothing new to the fund industry. They are almost identical to similar provisions found in the Alternative Investment Fund Managers Directive (2011/61/EE),
Regarding the new provisions on sanctions, UCITS V copies to a great extend other recent European legislative acts that are entering into force in the next few months, like MiFID II, MAR, CRD IV, PRIIPs and the Transparency Directive. The idea is that sanctions should be imposed in a uniform and harmonized manner across the EU to ensure consistency of approach by regulators and regulatory convergence.
Cyprus needs to implement UCITS V into its national legislation by March 2016. The Cyprus Securities and Exchange Commission, the local regulator for funds, has already prepared a draft law amending the current UCITS Law and has conducted a public consultation with market participants that ended a few weeks ago. One therefore can only wait for the draft Law to become actual Law and complete the national legal framework on UCITS.
