ESMA UCITS V Q&A

In addition to the recent FCA policy statement regarding UCITS V, ESMA has also published a Q&A on the application of UCITS. As with the policy statement, both pieces of guidance will come into force on 18 March 2016. Unfortunately, as with the FCA’s recent policy statement, ESMA is unable to shed any light on what steps firms should be taking from when the Level 1 UCITS V comes into effect and the unknown implementation date of the Level 2 measures on depositaries and sanctions.

Key investor information document (“KIID”)/Prospectus

One of ESMA’s more important statements relates to their confirmation that UCITS’ requirement to update the KIID can be included at the next annual update after 18 March 2016 or when the KIID is next revised or replaced (except where it is subject to related requirements in its home Member State). As a result, the remuneration-related disclosures also required in the prospectus under UCITS V can also be added the next time it is revised or at some point up until 18 March 2017.

Annual Reports

UCITS V also requires firms’ annual reports to include remuneration related information but ESMA have clarified that it is not necessary for firms to include remuneration information in its reports pre-18 March 2016. For annual reports after 18 March 2016, but before UCITS management companies have to comply with the Directive, they should include remuneration information using best efforts, to the extent possible.

UCITS Depository Contracts & Liability

Under UCITS V, UCITS firms will be under an obligation to appoint a depositary which must be evidenced through a contract. The Level 2 measures, as mentioned before, have not yet been published but they will detail how these arrangements should be managed. Until the Level 2 information has been finalised, ESMA can only offer advice that firms should be revising their UCITS depositary contracts “in accordance with any transitional arrangements outlined in the delegated acts”. Unfortunately, ESMA are unable to provide any more guidance on how firms should prepare themselves up until the Level 2 provisions come into effect.

Depositary liability is an important issue and it is likely that current depositary contracts will contain liability provisions which will become inconsistent with UCITS V. ESMA has clarified that such provisions will be void under UCITS V with effect from 18 March 2016.

UCITS V enforces a strict liability regime making the depositary liable for the avoidable loss of a financial instrument held in custody. The new Article 24 of the UCITS Directive provides that depositaries are liable to the UCITS and unit-holders of the UCITS for loss by the depositary (or a third party to whom custody of financial instruments have been delegated to). In such a case of loss, the depositary must return a financial instrument of an identical type or the corresponding amount to the UCITS (or the management company acting on behalf of the UCITS). Additionally, depositaries will be liable where losses have been suffered as a result of the depositary’s negligent or intentional failure to fulfil its obligations pursuant to the Directive.

Liability will be withdrawn where a depositary can prove that the loss arose as a result of an external event beyond its reasonable control (i.e. force majeure). Paragraph 3 of Article 24 is especially important as it explicitly states that the liability of the depositary cannot be excluded or limited by agreement and in doing so well render the agreement void.

There is an additional requirement in relation to depositaries that only a single depositary can be appointed for each UCITS.

Should you have any questions about putting in place a revised depositary agreement, Cleveland & Co, your external in-house counsel, is here to help.

To view the full ESMA Q&A document on the application of the UCITS V Directive, please click here.

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