With UCITS IV just barely out the back door, UCITS V is on its way in the front door.
The publication of the draft UCITS V directive in July did not deliver the consistency that many of us had expected. There was a view developing that MIFID II, the AIFM Directive and UCITS V would form a triumvirate of truly consistent regulation covering financial advice, asset management and asset servicing, and what is clear from the latest draft is that this ‘joined-up thinking’ and consistency in approach has not materialised in the ways we had maybe expected.
UCITS V itself has three core areas of impact:
- To clarify and alter the role & responsibilities, eligibility, and liability of depositories/custodians
- To deal with management company remuneration
- To broaden the scope of regulatory sanction available to the member state regulators.
One of the most fundamental changes proposed in UCITS V is that a fund appoints a single custodian. The latest draft also speaks strongly to the delegation of custody to third parties – with specific direction on updating the prospectus for a UCITS to disclose any delegation of the safekeeping function – but crucially the primary custodian carries the liability can. This is the section that is attracting the greatest focus of the lobby groups right now. In the last draft, it is proposed that custodians will now be liable for any loss suffered by the UCITS or its investors, unless it can prove that the loss was caused by “an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary”.
UCITS V also sets out to limit the firms that can carry out the custodian role for a UCIT, such that only an EU-authorised credit institution, or investment firms authorised under MiFID may act as a custodian to a UCITS, although I am aware of some very serious and sustained lobbying from ALFI and IFIA to change the proposed ruling, and to bring it into line with compromises reached on the AIFM Directive.
UCITS V also proposes new rules on remuneration for management companies – consistent with those in the AIFM Directive – the UCITS V directive proposes that management companies implement remuneration policies that are aligned with effective risk management and which discourage disproportionate risk-taking – so that remuneration is aligned with the investor’s best interests.
UCITS V also seeks to expand and synchronise the investigative powers, oversight capabilities and administrative sanction armoury of the member state regulators, who will each be required to introduce catalogues of sanctions and punitive measures as part of the national process of transposition.
The earliest point we could expect enforcement will be sometime in late 2014 as there is generally a two year process of final review and transposition into national law in each state – there is also provision for a “grandfathering” period where, for example, a UCITS is currently using a custodian that does not match the criteria laid out in the new directive.
I do not see UCITS V having the same impact on data management strategies and infrastructures that UCITS IV and KIID had as the pain is more focused on the custodian.