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Key developments impacting UCITS
UCITS have become not just the EU, but the global standard for mutual funds, recognised for the high level of investor protection, regulation and oversight they provide. However, UCITS are not isolated from the post financial crisis wave of regulation. New requirements have been implemented and further changes are on the way.
The success of the UCITS brand is undisputed. UCITS are distributed in over 70 countries across the global and total assets under management exceed €6 trillion. UCITS continue to appeal to investors worldwide and with regulators highly focussed on investor protection since the financial crisis, new requirements are evolving.
UCITS IV introduced new mechanisms to enhance efficiency and economies of scale in the European industry but these measures were supplemented by further management company requirements
ESMA’s guidelines on ‘ETFs and other UCITS issues’ have focussed on tightening investment rules, including new requirements for collateral, financial indices, total return swaps and efficient portfolio management techniques, as well as enhancing disclosures
UCITS V seeks to align UCITS with AIFMD in terms of the depositary and remuneration rules. It also includes proposals for a new, harmonised sanctions regime across the EU.
UCITS VI is the most fundamental of the measures being contemplated. It may seek to row back on eligible assets and limit the use of complex derivatives structuring in UCITS.
Developments in UCITS will also be impacted by planned EU measures relating to Packaged Retail Investment Products (PRIPs) which could introduce a “complexity label” for some UCITS and introduce a new Key Information Document (KID) to replace the existing Key Investor Information Document (KIID).
In the eye of the storm: Debate on money market funds rages on
The controversy surrounding the future regulation of money market funds shows no signs of abating following the release of a draft report in the European Parliament on 15 November 2013. The draft report goes further than the original Commission proposal in many respects and sets the scene for more intense discussion on the future viability of money market funds in Europe. Most notably, the draft report would impose a 3% capital buffer on constant NAV money market funds by the end of 2014, leading up to an outright ban of such funds by 2019.
ESMA’s ‘guidelines on ETFs and other UCITS issues’ are a regulatory response to concerns over increasing complexity in UCITS in recent years. With this increase in complexity, regulators became concerned over information deficits, the extent of index tracking errors, securities lending and other practices and counterparty exposure risks. The key areas covered are:
- ETFs and index tracking UCITS
- Efficient portfolio management techniques
- Collateral management
- Total return swaps
- Financial indices
The guidelines took effect on 18 February 2013 with a 12 month transition period for existing UCITS in relation to certain provisions, including collateral management and financial indices.
ESMA has issued a Q&A in to address various aspects of the guidelines.
The financial crisis highlighted divergent depositary regimes across the EU and focussed regulators on remuneration and behaviour in the financial sector.
Reflecting these concerns, UCITS V has three key aims:
- To harmonise the UCITS depositary regime clarifying duties and liability (in line with AIFMD)
- To harmonise remuneration rules across the financial sectors (and in particular with AIFMD)
- To harmonise the treatment of sanctions for UCITS breaches
On 3 July 2013 the European Parliament adopted its position on UCITS V, rejecting a controversial bonus cap.
Given that the European Parliament ultimately rejected some of the more controversial elements, agreement between the EU institutions could be easier to reach. The Lithuanian EU Presidency restarted negotiations in Autumn 2013. Implementation is likely in Quarter 4 2015/Quarter 1 2016.
Only days after the release of the UCITS V proposal, the European Commission published a consultation document on UCITS on 26 July 2013. This was a very open-ended consultation, inspired largely by the regulatory concerns over the potential risks and impacts of “shadow banking” as well as concerns over retail investor protection. The consultation paper covered eight wide-ranging areas and sought more information on market practices. This initial consultation paper has been dubbed “UCITS VI” as it is seen as the origin of a further set of amendments to the UCITS Directive.
Since that consultation paper, two areas (money market funds and long-term investments) have been addressed separately outside of the UCITS framework.
For an overview and analysis of the proposed Money Market Fund Regulation click here
Further measures from the original UCITS VI consultation, particularly in relation to eligible assets, OTC derivatives and EPM techniques can be expected.
The delay in adopting UCITS V has undoubtedly impacted further progress on UCITS VI.
The UCITS IV package of measures seeks to enhance efficiencies in Europe’s UCITS market by facilitating cross-border fund consolidation and management and by improving regulatory notification and cooperation procedures.
A further key aim of UCITS IV is to simplify the information provided to investors. Additional regulatory, governance and organisational requirements and duties were also added to the Directive as it evolved.
Mandatory requirements have actually increased compliance costs yet the streamlined notification process has begun to yield efficiencies for fund promoters launching cross-border funds.
The deadline for implementation of the UCITS IV Directive was 1 July 2011. Attention is now gradually shifting back to UCITS IV’s key efficiency enhancing provisions as managers consider the strategic and operational implications. Can UCITS IV live up to the high expectations it raised with regard to generating efficiencies?