UCITS V Directive Proposal

Matczuk Wieczorek and Partners, being vitally interested in the development of the investment fund market in Poland especially in rapidly changing legal aspects of those funds’ activity, wishes to bring you closer to the upcoming changes in the functioning of the UCITS in the European Union. Of course we are taking into account the fact that those changes will be probably implemented into our law at the last moment or, as in case of UCITS IV, with nearly two-year delay. However, it seems that it’s worth to have a closer look at modifications proposed by UCITS V now.

At this point, it’s worth to recall that in 1985 The European Parliament and The Council adopted the UCITS Directive (Undertakings for Collective Investments in Transferable Securities). It consists of a number of legal regulations regarding UCITS depositaries, that have remained unchanged since their adoption. The financial crisis and the Madoff affair from 11th of December 2008, exposed weaknesses in UCITS rules on the duties and liability of depositaries. It also highlighted the problem of the lack of general principles referring to the remuneration and sanctions regimes.

The period prescribed for transposing the co-called UCITS IV Directive into  national laws had expired on 30th of June 2011 (implemented in Poland by the Law of 27 November 2012, which entered into force on 1 February 2013), hardly one year after (on 3rd of July, 2012), the European Commision published a “Proposal for a Directive of The European Parliament and the Council amending the UCITS IV Directive (the “UCITS V Proposal Directive''). Further amendments to the UCITS V Proposal Directive were adopted by the European Parliament on 3rd of July 2013. On 4th of December 2013, the Permanent Representatives Committee gave its view on the changes proposed by the Commission.

Under the current legal regime, all assets of a UCITS fund must be entrusted to a depositary. The depositary is liable for losses suffered as a result of a failure to perform its duties, even though both the boundaries of this liability and the scope of those duties are defined by the laws of The Member States. Such a system leaves too much room for diverging interpretations by the Member States and leads to the situation in which UCITS investors are facing uneven levels of protection in different jurisdictions. Excessive interpretation difficulties are caused by the issue of the liability of a depositary where custody of a UCITS fund's assets is delegated to a sub-custodian. Certain divergences can also be detected in the system of sanctions that is currently in place. What is more, the remuneration policy encourage investors to make short-term decisions and to take undue risk.

The proposed by UCITS V Directive regime will regulate the depositary’s safekeeping and oversight duties in detail. For example, an amendment to the article 22, paragraph 1 provides that a single depositary shall be appointed for each UCITS fund and paragraph 2 of this article proposes to specify that the appointment of a depositary shall be evidenced by written contract. Suggested amendment to the article 23 sets out an exhaustive list of entities that are eligible to act as depositaries. Article 24 paragraph 1 is changed to clarify the scope of depositary’s liability. It establishes that the depositary, in case of losing a financial instrument held in custody, is obligated to return a financial instrument of the identical type or of the corresponding amount to the UCITS. The depositary may discharge itself of liability  only if it can prove that the loss is due to an 'external event beyond its reasonable control'. It’s worth to mention that, despite earlier announcements, UCITS V has not introduced the possibility for UCITS to have a depositary in country other than that in which UCITS is established, that is ‘Depositary passport’- that topic is now a part of consultations launched by the European Commission in order to specify future framework for UCITS funds.

About the remuneration policy, the proposed UCITS V Directive introduces a requirement for the UCITS management company to implement such a policy that is coherent with sound risk management.

Will or will not the legal regime turn out to be stable enough to resolve uneven level of consumer protection that arisen from different interpretation among the European Union? To answer this question we will have to wait for a little while. Negotiations between the European Parliament and the Council and Commission shall begin shortly. Once a final text will be published, the Member States will have two years to transpose the directive into national law.