Ucits V was recently adopted in Brussels. In investor protection terms, it is arguably the most profound of all the Ucits directives – but it is not yet the end of the story.
To date, EU legislation required each Ucits to have an independent depositary and contained a few short sentences on the role of that depositary – to safeguard the assets of the fund and to oversee that the fund is correctly managed. In some member states those few short sentences were all that was contained in their national law.
In contrast, in the UK, the standard of investor protection provided by the depositaries has been high for many years. Depositaries are specifically authorised as such. They are subject to capital requirements, conduct of business requirements, systems and controls requirements, the approved person regime. And they must be demonstrably independent, which for retail funds has meant in a different group to the manager.
Ucits V replaces those few sentences with several pages of rules, which are broadly in line with current UK requirements. They do not impose an equivalent of the approved person regime and we have yet to see the detailed definition of what independent means. But there are at last stipulations as to what is meant by the depositary being liable for safe-keeping of the assets, overseeing the manager’s systems and controls, the fund’s cash flows, the pricing and so on.
But, as the saying goes, the proof of the pudding will be in the eating. How long will it take depositaries that have been used to a minimalist regime fully to embrace the new rules? How thoroughly will they question the eligibility of assets? Will they actively question, monitor and challenge the manager’s systems and controls? Are they truly independent or conflicted?
We also need to ask similar questions of the national regulators. In the UK, we have long had a regulator – through its many name changes – that takes action; that requires a fund and exited investors to be compensated promptly for any irregularities. Investors in UK funds do not have to await the outcome of lengthy court cases. Moreover, were the level of compensation ever to be so large as to cause the manager to become insolvent, the depositary might be called on or the Financial Services Compensation Scheme would kick in.
There are long-standing proposals to revise the Investor Compensation Scheme Directive, which include bringing Ucits within the remit of national schemes. The UK has been a lone voice in agreeing with the principle of that proposal – our input has related solely to the manner and quantum of the pre-funding of the schemes – because we will not have a truly common level of investor protection until the ICSD is revised.
Julie Patterson is regulatory affairs director, investment funds & retail, at the Investment Management Association