RBC Investor & Treasury Services
Sébastien Danloy of RBC Investor & Treasury Services gives the low-down on the latest version of UCITS
With UCITS V receiving approval in the European Parliament shortly before the elections, what do those on the servicing side need to be aware of?
Receiving approval from the European Parliament brings more clarity for service providers over some of the details of the directive, although other areas still need to be finalised and there is still work to be done.
UCITS V is expected to bring further improvements to the protection of UCITS investors, which is welcomed by service providers. Similar to the Alternative Investment Fund Managers’ Directive (AIFMD), UCITS V primarily establishes a clear “duty of care” framework for depositories, including strengthening liability and the restitution of lost assets held in custody, more cash management oversight of the UCITS fund and more stringent conditions for depository delegation to cover safe-keeping functions only, and not include general oversight and cash management functions.
Service providers will need to consider how they can efficiently and effectively implement the UCITS V requirements in order to keep the associated costs under control, and the similarities with AIFMD will mean some mutualisation of systems and therefore cost.
Service providers, though, must be wary not to view UCITS V as simply an extension of AIFMD and will need to bear in mind those areas where the two directives differ, such as in the circumstances for the re-use of assets, or on how investors are provided with information on delegated safekeeping functions by the depository.
The approval from the EU Parliament means that the implementation phase of the directive should now be considered in earnest and as such it is one of the major priorities for service providers for the months ahead. This will involve scoping out the requirements and operational and IT developments required and how, for example, increased depository liability obligations may affect existing sub-custody networks. Equally important will be supporting and informing clients of what the directive means for them.
What does UCITS V enact in terms of depository liability?
The liability of depositories is set to be hardened, with responsibility for any loss of UCITS assets held “in custody”, corresponding with the liability provisions under AIFMD. In particular, it is expected that under limited exclusion, if a depository cannot prove that a loss of assets occurred due to an external event “beyond reasonable control”, and the consequences of which could not have been avoided, then they would be obliged to replace the lost assets.
Depositories will also be liable to the UCITS fund and its investors for any other losses incurred by them through negligence by the depository or an intentional failure to properly carry out its obligations.
In addition, UCITS V is expected to confirm a depository’s liability for losses caused by its appointed sub-custodians or safekeeping agents, unless they are able to prove that the loss occurred through an external event beyond reasonable control and the consequences of which could not have been avoided (referred to as “limited exclusion”). Under UCITS V, depositories would not be able to transfer nor discharge the liability for losses of financial assets, even if they can demonstrate that they have “exercised all due skill, care and diligence in the selection and the appointment of its delegates.”
Why were additional depository rules required when AIFMD deals so much with that area?
AIFMD and UCITS are of course two different legal frameworks dealing with two different fund ranges, so the provisions of the one will not automatically inform the content of the other.
In terms of the additional responsibility, AIFMD and UCITS concern generally different investor groups and profiles, even if the aims of more investor protection and greater clarity of responsibilities are common between the two. Funds managed under AIFMD tend to be reserved for professional investors, while UCITS products are widely distributed to retail investors. As a result, in some circumstances and in order to facilitate protection and restitution of retail investors’ assets, the depository rules under UCITS V go further than those under AIFMD.
For example, under UCITS V depositories would be prevented from re-using assets under management for their own benefit, unlike under AIFMD, which does permit the re-use of assets on condition that the prior consent of the fund’s manager has been obtained.
How will UCITS V affect the brand of the fund structure?
UCITS is an established and trusted brand that has been built up over more than 25 years and it will continue to evolve to remain competitive with further additions to the directive—there is already talk of UCITS VI.
Potential unintended effects on the brand of some of UCITS V’s requirements should be considered such as how additional liability requirements may affect depository costs, or how the increased obligations around delegation may affect sub-custody networks and the impact on choice.
That said, it is unlikely that UCITS V will damage the brand in the eyes of the end investors or the fund selectors, and managers now distributing UCITS products, not only in Europe but also Asia, the Middle East and Latin America. Indeed, the focus on increasing transparency and investor protection should serve to strengthen the brand’s status as the gold standard of regulated fund vehicles.
