On 2 February 2016, the FCA published policy statement (PS16/2), which sets out the proposed rules and guidance for implementing the UCITS V Directive. PS16/2 has a particular focus on the requirements applicable to management companies and the changes to the regime for depositaries following two related consultation papers (CP15/27 on UCITS V implementation and CP15/8 on depositaries and AIFs) the UCITS V implementation.
The changes will impact: management companies (remuneration principles and transparency obligations towards investors), depositaries (criteria and capital requirement for firms acting as depositaries of UCITS and AIFs) and managers of non-UCITS retail schemes (NURS).
Requirements for UCITS managers
The proposed remuneration code will remain unchanged although it was suggested that the UCITS Remuneration Code could be merged with the current AIFMD Remuneration Code. The FCA believe that there are enough differences to warrant a separate code which will, allegedly, be the least disruptive way to implement the remuneration requirements. Once ESMA’s UCITS V remuneration guidelines are finalised, the FCA are considering providing further guidance to management companies on this topic.
Multiple respondents asked the FCA to reconsider the extension of prospectus disclosure requirements to managers of NURS specifically relating to the potential burden of including a list of depositary delegates and sub-delegates in the prospectus. The suggestion was based on the fact that AIFMD only requires the AIFM to provide a list of depositary delegates but not sub-delegates too. The FCA has reconsidered this area of disclosure requirements and agrees that it is not necessary to require managers of NURS to list sub-delegates in prospectuses. The relevant provisions in COLL 4.2.5R have also been revised so that it only applies to managers of UCITS.
However, there are other disclosure requirements which the FCA will not be reconsidering e.g. disclosure of potential conflicts of interest between the manager of NURS and other parties to the prospectus. This is because, in the FCA’s opinion, such disclosures enforce their main principles; transparency and as a result of such transparency, encouraging investors to make more informed investment choices.
Requirements for depositaries of UCITS
Some of the respondents proposed changes to the FCA’s approach of implementing the UCITS rules applicable to depositaries in COLL. Importantly, one of the respondents enlightened the FCA that the proposed COLL 6.6B.25R rule does not include the same requirements that article 22a(3)(d) of the UCITS V Directive does. The Directive requires the depositary to take all necessary steps to ensure UCITS assets are protected if the third party becomes insolvent, which consequently led to the FCA making the appropriate amendments to COLL.
Additionally, two of the respondents focused on the standard set in article 22 of the UCITS Directive which does not allow the reuse of assets which are being held in custody by the depositary. Article 22(7)(c) states one of the exceptions “the reuse is for the benefit of the UCITS and in the interests of the unit holders”. Two of the respondents stated that article 22(7)(c) was inconsistent with COLL 5.4.3R(1)(b) whereby that COLL rule sets a higher standard as it refers to the “best interests” of the unitholders. Subsequently the FCA agreed to make the change and have removed “best” from the COLL rules.
In relation to delegating functions, two respondents asked for clarification by including specific guidance in COLL 6.6B that depositaries of UCITS should be able to delegate administrative and technical tasks to third parties. The FCA did not agree that including an equivalent provision in COLL would be necessary because it is not explicitly referred to in the UCITS Directive. Nonetheless, they did confirm that depositaries of UCITS should be able to delegate the performance of such tasks to third parties using the existing delegation agreements available under AIFMS and the Handbook requirements, as long such an arrangement does not specifically conflict with the UCITS Directive.
The FCA notes that the final text for the Level 2 Regulation is yet to be published, so the exact date of application is unclear. The draft text does allow for a 6-month transitional period from when the UCITS V Regulation comes into force (18 March 2016). Unfortunately, there is a mismatch between the date the regulation comes into force and when the Level 2 detailed provisions will become available. However the FCA have stated that although this leaves uncertainty for firms, they expect firms to make efforts to comply with the UCITS V from the date of entry even if the Level 2 regulations are not yet applicable and, additionally, to comply with any existing Handbook rules (i.e. COLL and CASS provisions).
To view the full policy statement, please click here.
Should you require any further advice or information on UCITS V, Cleveland & Co, your external in-house counsel, are here to help.