The UCITS Rulebook consultation
A simplified framework?
The publication of a new draft UCITS Rulebook under CP77 signals a change in approach by the Central Bank of Ireland (CBI) to move to a more concise, rules-based framework. The aim is to eliminate duplication or paraphrasing of the UCITS Regulations and to clearly distinguish between rules and guidance. Much of the guidance will be recast as rules while other elements will be removed entirely or published separately to the Rulebook online. The outcome may therefore have some implications for your compliance approach and it has yet to be fully determined which guidance will be published separately to the UCITS Rulebook.
Key changes include:
- a reorganisation of the rules into product, management company and depositary requirements;
- the removal of the UCITS promoter regime;
- the removal of the CBI guidance on “regulated markets”; and
- the extension of financial reporting requirements.
Aside from these changes, the conditions imposed on UCITS will materially remain as before. However, the new framework will afford the CBI greater certainty in its supervisory and enforcement activities and alter the existing treatment of rules and guidance.
Currently, the UCITS regulatory framework in Ireland consists of the UCITS Regulations supplemented by a set of UCITS Notices and additional Guidance Notes. The UCITS Notices set out conditions with which UCITS, their management companies and depositaries must comply while the Guidance Notes explain and clarify various aspects of the regime. The Notices replicate to a large extent the Regulations while also including additional rules side by side with material that may appear advisory or clarificatory in nature.
The CBI considers this approach no longer desirable and plans to issue a new UCITS Rulebook, written in a more directive style, which will avoid duplicating the Regulations and eliminate texts whose standing is unclear. Many elements of guidance have been incorporated into the Rulebook in a more abbreviated form. Any “residual guidance” the CBI wishes to maintain following the review will be published separately to the Rulebook on the CBI’s website. This follows a similar approach taken by the CBI in relation to the publication of the Alternative Investment Fund (AIF) Rulebook in July 2013.
The CBI considers that its new framework will provide greater “precision” but the change will inevitably be less convenient for the industry in no longer having the comprehensive set of UCITS Notices to rely on. In future the UCITS Rulebook will need to be read in conjunction with the UCITS Regulations in order to have an accurate view of all regulatory requirements. In some cases, guidance may be withdrawn and therefore no longer relied upon or guidance may be recast as rules. Firms could therefore have to exercise more judgement in areas where the rules are less prescriptive or guidance is absent. Such an approach will afford firms greater flexibility but also less comfort in being able to rely on guidance or detailed rules.
Removal of the UCITS promoter regime
The CBI currently requires that each UCITS application is supported by an approved “fund promoter” with sufficient financial resources and a relevant track record. In light of evolving regulatory requirements, the CBI has already removed the promoter requirement for AIFs, with reliance instead on the management entity. The CBI now proposes to remove this requirement for UCITS with reliance on the regulatory regime for UCITS management companies. As a further safeguard, the CBI will elaborate on the obligations of directors when a UCITS gets into difficulty. The promoter capital requirement of a minimum of €635,000 in net shareholder funds had acted as a significant barrier to entry for many entities and will therefore be welcomed by industry participants.
UCITS are permitted to invest in transferable securities and financial derivative instruments which are listed or traded on stock exchanges or regulated markets. The interpretation of the rules governing UCITS “eligible assets” has been a key feature of regulatory landscape over the years. The CBI issued Guidance Note 1/96 to provide further clarification and the framework was subsequently updated by UCITS III and the European Commission’s Eligible Assets Directive (2007/16/EC).
In light of duplication between local guidance and the Commission Directive, the CBI plans to withdraw Guidance Note 1/96. Consequently, the CBI will no longer review submissions on proposed regulated markets and will no longer publish a list of permitted markets for UCITS. In future, UCITS and their depositaries will directly apply the EU rules on eligible assets and exercise their own judgement to determine which markets meet the eligibility requirements. While this move may give firms greater discretion, their determination in the absence of regulatory approval may create an additional compliance risk.
Half-yearly financial statements
Currently UCITS management companies and depositaries are required to submit half-yearly management accounts covering the first six months of the financial year as well as audited annual accounts. With the aim of enhancing supervision, the CBI is proposing to require the additional submission of half-yearly management accounts covering the second six months of the financial year. Since these accounts would need to be submitted within two months of the period end, the supervisory objective appears to be the earlier receipt of accounting information. The imposition of this requirement will add an additional administrative burden on management companies and their administrations and will potentially require an additional, earlier sitting of the board to sign off the half-yearly accounts. The proposal is therefore likely to be resisted by the industry.
The CBI is requesting submissions to the consultation by 28 March 2013, following which a technical review of the UCITS Rulebook will be completed before publication. Presumably, the “residual guidance” will also be published at that stage. UCITS management companies and depositaries need to analyse the proposed UCITS Rulebook and consider how it might impact their compliance approach. While the regulatory requirements will materially stay the same, compliance functions will need to carefully consider their treatment of guidance under the existing framework and any potential areas of judgement under the proposed UCITS Rulebook. The proposed simplification could therefore impact the compliance and risk approach in various ways. Deloitte is actively involved in industry level discussions on the proposed UCITS Rulebook and can assist you in analysing their impact.