Preparing for UCITS V and VI

What’s the current status of UCITS V and VI? Imogen Garner, partner at Norton Rose Fulbright, says practitioners need to understand the new requirements of UCITS V and should be evaluating its impact on their clients’ businesses—particularly those with clients in the asset management, custodian and depositary spheres.

What is UCITS V?

UCITS V (Directive 2014/91/EU) is an EU Directive which makes a number of reforms to the rules governing UCITS funds and their management. It’s probably easiest to summarise UCITS V as focusing on three areas.

First, it makes a number of changes to the regime for UCITS depositaries. It introduces a cash monitoring role for UCITS depositaries, and introduces specific provisions around safe-keeping for different categories of assets (ie ‘custody assets’ versus ‘other assets’, which will be subject to an asset verification obligation). It also imposes restrictions on delegation by depositaries, and makes some changes to the existing rules on depositary liability (including making depositaries strictly liable to restitute lost custody assets except in fairly limited ‘force-majeure’-type circumstances). Many of these changes align the regime for UCITS depositaries to that already in place for depositaries of non-UCITS funds under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFMD)—although there are still a number of differences between the two regimes.

In addition, UCITS V introduces a remuneration regime for UCITS management companies. Consistent with the approach we have already seen in the AIFMD (and elsewhere), UCITS management companies will need to implement remuneration policies for some categories of staff that are consistent with effective risk management and do not encourage inappropriate risk taking. The new rules will cover fixed and variable pay (including ensuring an appropriate balance between the two, requirements for deferral of variable remuneration and to pay a substantial proportion of it in non-cash instruments). They will also cover early termination payments and pension payments, and are to be applied on a proportionate basis by reference factors like