The European Commission has been contemplating a further update to the UCITS framework (UCITS V) since December 2010, when it launched a consultation on proposed changes to the depositary function and to UCITS managers’ remuneration.
The Madoff fraud and the Lehman Brothers default have focussed the attention of the European Commission on the depositary function with a view to clarifying its roles and responsibilities, ensuring consistency between member state rules and enhancing investor protection. The Commission is also seeking to align the UCITS depositary framework with the new rules relating to the depositary under the Alternative Investment Managers Directive (AIFMD).
The financial crisis has also focussed attention on remuneration across the financial sector and UCITS V seeks to apply new rules on remuneration of UCITS managers consistent with those under AIFMD and Capital Requirements Directive.
A further element more recently added to UCITS V is a new harmonised sanctions regime. This followed an ESMA study in May 2011 revealing wide divergence across EU member states in relation to the criteria and sanctions applicable for breaches of UCITS rules
The Commission formally proposed the UCITS V text on 3 July 2012.It will now pass to the European Parliament and Council of Ministers for consideration and adoption. The exact timeline for adoption is unknown but this could possibly happen during 2013.
The Commission is seeking to define the notion of “safekeeping” distinguishing between custody duties and asset monitoring duties. It also proposed to harmonise depositary oversight duties between different legal structures, restrict delegation to safekeeping duties and ensure that risks are specified where sub-custodian networks are used. The proposals also include cash monitoring duties for depositaries.
It is proposed to clarify depositary liability by introducing a 'strict liability' standard obliging depositaries to return instruments lost in custody.
It is proposed to introduce consistent eligibility criteria for depositaries across the EU, which must be either credit institutions or investment firms subject to extensive conditions.
The new UCITS depositary rules will most likely lead to increased liability and compliance costs for depositaries. Depositaries will need to review and amend their systems, processes and procedures and their sub-custody arrangements in light of the new requirements.
Remuneration policies should be designed to promote sound and effective risk management and discourage any risk-taking which is inconsistent with the UCITS risk profile or constitutional documents. Policies should be designed to prevent conflicts of interest and protect investor interests. The text details a set of remuneration principles, including the treatment of fixed and variable remuneration.
Remuneration policies should apply to “staff whose professional activities may have a material impact on the risk profile of the UCITS” and in particular to senior management including the board of directors, those in supervisory functions, risk management functions and any employee who is in the same remuneration bracket as senior management.
The management body should adopt the general principles of the remuneration policy and be responsible for the implementation and periodical review of these principles. The implementation of the remuneration policy should be internally reviewed at least annually. A remuneration committee should be established where it is justified by the size of a UCITS manager and a UCITS it manages.
The new requirements will require a review of current remuneration policy resulting in possible changes to policies, the formalisation of processes and additional disclosures.
Member state regulatory authorities shall in future adhere to a new, harmonised sanctions regime for UCITS and ESMA will be required to draw up a detailed list of sanctions guidelines. Under the proposals, competent authorities will be required to publish any sanction or measure imposed for the breach of national provisions.