EU Presidency text paves way for UCITS V
A compromise text on UCITS V, agreed by the EU’s Council of Ministers on 4 December 2013, means that negotiations with the European Parliament can now commence with a view to adopting the Directive in early 2014. UCITS V had not featured as an EU Presidency priority since it was proposed by the European Commission in July 2012 but now looks likely to be adopted in advance of the European elections in May 2014. This means that that the new UCITS rules on the depositary, remuneration and sanctions would take effect in 2016.
UCITS V brings the UCITS depositary framework into line with AIFMD by defining specific depositary duties in relation to safekeeping, oversight and cash monitoring. One key difference with AIFMD is that UCITS V does not allow the depositary the ability to contractually discharge its liability to a sub-custodian under any circumstances. The Council text maintains this position, despite industry calls for consistency with AIFMD. The depositary eligibility criteria remains a sticking point for some member states but it may be left up to individual member states or ESMA to decide certain criteria, such as capital requirements. The wording which prohibits the reuse of custody assets by third parties has been expanded to provide some leeway for UCITS to potentially engage in activities such as securities lending.
Overall, the new UCITS depositary rules have not undergone very significant change in the compromise daft but are still likely to create significant operational challenges for depositaries which have been adjusting to the AIFMD regime. The sheer volume of assets coming within the new strict liability regime under UCITS V means that depositaries will have to scale up their operations and avoid reliance on manual or inefficient reporting and oversight processes.
The Council of Ministers has given more discretion to individual member states to define their own list of offences and sanctions and has removed the request to ESMA to issue guidelines in this area. National regulators would still be required to publish details of breaches and to take into account a range of criteria when determining the type and level of administrative sanctions. The Council also wants to remove the requirement to impose administrative pecuniary sanctions of up to twice the amount of the profits gained or losses avoided because of the breach where those can be determined. This contrasts with the Parliament which would increase this limit to 10 times profits gained or losses avoided. Sanctions remains an area on which further changes could develop in light of differing views on the extent of harmonisation required.
The common position adopted by the Council enables negotiations to start with the European Parliament with the aim of adopting UCITS V at first reading in early 2014. Given that the Parliament ultimately rejected some of the more controversial elements related to remuneration, agreement could be easier to reach in advance of the EU elections. The Commission would also not want to see further delays, as this will create an undesirable divergence with AIFMD standards.
For more information read our previous UCITS V update or contact your Deloitte representative.