The amended UCITS Directive (UCITS V) will come into force on 18 March 2016. It is intended to address the wider issues and risks that arose as a result of the financial crisis and to increase investor protection and confidence in UCITS. This is reflected by the enhancement of responsibilities for depositories and introduction of remuneration policy requirements for management companies. This harmonizes the new rules with corresponding AIFMD requirements. Changes also ensure that EU Regulators supervising UCITS have a common minimum set of powers to investigate and sanction any breaches of Directive requirements.
At the time of the Consultation Paper’s publication, the process of adopting delegated acts to form Level 2 measures had not yet begun. However, the FCA expects these measures to be broadly in line with AIFMD Level 2. A separate consultation will be undertaken once the requirements become known in order to deal with any consequential issues.
The Directive also requires ESMA to issue Level 3 guidelines on: remuneration policies and practices for management companies, and; to draft standards (requiring adoption by the Commission) for national competent authorities to submit information to ESMA on penalties and measures imposed on management companies.
The Consultation Paper is divided into three sections, and our focus will be on Part I:
Part I consults on rules and guidance on the transposition of the recent changes to the UCITS Directive. Responses to this part are required byMonday 9 November 2015. Feedback received will be addressed in a Policy Statement expected to be published in early 2016.
Part II consults on changes to the Handbook to ensure the EU Regulation introducing ELTIFs operates effectively. The ELTIF Regulation will apply from 9 December 2015. Responses should be submitted by Monday 5 October 2015, with a summary of feedback expected to be published by 9 December 2015.
Part III consults on miscellaneous changes to the Handbook updating rules and guidance for authorized investment funds. Consultation closes on Monday 7 December 2015. A final policy statement is intended to be published in 2016.
Part I-Implementing UCITS V
Requirements for management companies including:
- Remuneration principles will be introduced via a new remuneration code SYSC 19E of the Handbook. It will broadly follow the structure and scope of the AIFMD remuneration code as the risks and incentives of the two sectors are similar. Subject to confirmation the Code will be applicable for new awards of variable remuneration from the first full performance period starting on or after 18 March 2016. However, application dates may be subject to review and are dependent on the publication of ESMA guidelines. The application of remuneration principles will be subject to a proportionate approach and further clarification on this will be provided by ESMA guidance. A management company which is also subject to other remuneration codes by virtue of being within the scope of AIFMD, CRD or BIPRU will need to take these requirements into account.
- Transparency obligations will include requirements to disclose additional information to investors in the following ways:
- Potential conflicts of interest and delegated safe-keeping functions will need to be disclosed in the prospectus
- The management company’s remuneration policy and arrangements will need to be included on a website or in the prospectus and signposted in the KIID to explain how to obtain this information
- Details of the remuneration paid by the management company to its staff and of its remuneration practices will be required to be incorporated into the fund’s annual long report. Transitional arrangements will apply where the annual long report needs to be completed before the end of the first financial year after 18 March 2016 during which the UCITS Remuneration Code becomes applicable.
The FCA has acknowledged that changes to the prospectuses and KIID disclosures may require prior-approval and devised a timetable to allow for transitioning, including steps to be taken during the transition period.
It is the FCA’s view that further guidance on this matter is unlikely to be included in Level 2 measures.
Changes to the regime for depositories including:
Eligibility criteria for firms acting as depositories of UCITS: institutions which are neither central banks nor credit institutions would need to be Full scope IFPRU investment firms or investment management firms subject to IPRU (Inv) 5. Both these types of firm would need to satisfy a £4 million own funds requirement (as opposed to the minimum of €730,000 which applies in some instances under UCITS V).
Obligations of depositories: The requirements in COLL 6.6B will broadly follow AIFMD requirements and will be additional to the general requirements in COLL 6. Obligations for the management company, in relation to the depository will be transposed into COLL 6.6A.
Transitional provisions: allow depositories appointed before 18 March 2016, if they do not meet the operational and capital resources requirements, to continue to act as depositories until 18 March 2018.
Part II-The European Long Term Investment Fund (ELTIF) Regulation
The ELITF Regulation is directly applicable under EU law and does not require implementation by FCA. It will come into force on 9 December 2015.
This section will be of interest to UK AIFMs, EEA AIFMs, UK depositaries of AIFs and UCITS providing services to UK ELTIFs and advisors and distributors of ELITFs.
ELTIFs are a new type of fund which focus on attracting non-bank financial investors to fund long-term infrastructure projects and unlisted small or medium sized enterprises in the EU. The aim of the Regulation is to create a cross-border framework for this type of investment and stimulate demand from institutional and/or retail investors that are ‘patient’ in the provision of capital because there will be long lock-in periods and few chances to redeem.
ELTIFs will operate within the AIFMD regime and managers will be required to be authorized as full-scope AIFMs and the fund will require authorization by the FCA (if domiciled in the UK).
Further, the redress model for these funds and their managers will be subject to the Financial Ombudsman Service and the Financial Services Compensation Scheme.