UCITS V challenges and opportunities for the investment industry
UCITS V will bring forward challenges and opportunities for both asset servicing and asset management companies.
Setting up and running a sub-custodian network, which has always been challenging, has become increasingly complex, particularly as there is no harmonised approach among Member States regarding the conditions applicable to this delegation and its on-going monitoring.
The proposed rules governing remuneration will ensure compensation of senior management, risk and controls functions is consistent with the UCITS risk management and profile.
Regarding the harmonised sanctions regime, member states will have to compile a list of minimum penalties for three types of offences (1) fund authorisation (2) fund operational (3) reporting rules. The penalties shall range from a public warning to a temporary suspension and fines.
These rules have been included in the Directive on Alternative Investment Fund Managers (AIFMD) which governs alternative investment funds.
Asset servicing firms
UCITS V’s new regime for depositaries will certainly impact the fund custodian service offering. The increase of duties and responsibilities will require a stronger controls framework and related processes which may have an impact on custodian’s fee schedules, especially for SICAV and complex UCITS. As a result, competition will potentially increase whereas some actors may decide to focus on more secure markets and assets, leaving global covering actors a competitive advantage.
The depositary’s due diligence obligations on sub-custodians will require asset servicing banks to increase monitoring on regulatory responsibilities and mitigate risk, meaning that the initial and on-going due diligence processes, including on counterparties outside the depositary network, must be reviewed.
The fund administration will need to support the AM to implement business conduct policies, monitor breaches and apply sanctions, which will consist in additional compliance monitoring requirements.
As a result of the new depositary regime, actors with the necessary operating strength may gain market share as less sophisticated actors may exit market segments for risk mitigation purposes. This increased market share can be leveraged by depositaries to realise economies of scale and maintain a competitive service fee. For asset servicing firms, UCITS V will increase the opportunity to become the asset manager’s entrusted business partner and advisor in terms of products and service offering and to propose all-in-one asset servicing packages to smaller AM’s.
Asset managers and ManCos
Asset managers will also need to redesign their monitoring processes taking into consideration new depository duties (i.e. contract and reporting between ManCo and CU). Actors operating x-border will be even more impacted as they will need to operate with custodians under different local regulatory regimes.
From a product offering perspective, UCITS V is a good opportunity to review the existing products range and consider further rationalisation, as liability and compliance cost may further increase. As a result, the choice of the investor may be more limited as investment in risky countries may become less viable for asset managers.
Asset managers will also have to implement remuneration policies in line with product risk profile. As a result, a remuneration committee may be required. The implementation of breaches and applicable sanctions monitoring will also require an upgrade of the compliance processes.
UCITS V compliance measures will improve the reputation of the UCITS brand and help the asset manager to further enhance the trust base relationship with their investors. Regulatory readiness implementation could also be an opportunity to serve UCITS and AIF’s with a streamlined infrastructure.
We see a clear momentum for a review of the operating model, especially for managers operating in multiple jurisdictions.