The European Fund and Asset Management Association (EFAMA) has commented on the European Commission’s legislative proposals to amend Directive 2009/65/EC (the UCITS V proposals).

EFAMA expressed its general support for the Commission’s UCITS V proposals in respect of depositaries, remuneration and harmonisation of sanctioning regimes, but articulated its concerns about the significant consequent changes which UCITS and their managers will have to make and the attendant costs.

EFAMA broadly supports the Commission’s general approach in providing for consistency between the UCITS and the Alternative Investment Fund Managers Directive (AIFMD) depositary frameworks. While it recognises that a number of adjustments to the AIFMD depositary regime may be needed to take into account the specificities of the UCITS investors’ base, it warns that the right balance must be struck in order to preserve the competitiveness of the UCITS brand and returns to investors.

EFAMA reiterates its concerns concerning the proposal to extend the scope of the Investor Compensation Schemes Directive to UCITS and their unitholders. EFAMA highlights the disproportionate additional costs that this extension would entail for unitholders, compared to the increased investor protection that they would enjoy.

EFAMA argues that the eligibility to provide depositary services should not be restricted to credit institutions and investment firms authorised under Directive 2004/39/EC (MiFID) (subject to the minimum capital requirements set out under the Directive 2006/49/EC (CRD)), but should remain open to other institutions authorised to act as depositaries in their jurisdictions, provided they are subject to similar national rules, particularly in terms of prudential regulation and on-going supervision.

EFAMA recommends that the European Securities Markets Authority (ESMA) be given the power to adopt technical standards in relation to the contractual discharge of liability on a third party, in case of delegation of the custody function. As regards conditions for delegation, EFAMA supported the general stance that UCITS assets must be protected from a sub-custodian’s insolvency. However EFAMA argues that the proposed wording is very demanding, and should be amended to take account of situations where under the laws of a third country, the depositaries cannot meet these requirements.

Finally, EFAMA suggests that the text of the UCITS V proposal should be aligned with AIFMD wording in relation to invoking claims against a depositary; the prohibition to re-use assets without prior consent; and the disclosure of the prospectus depositary network and sub-custodians in a fund prospectus.

While EFAMA agrees that consistent principles in relation to remuneration policies should be applied across UCITS management companies and Alternative Investment Fund Managers, it is of the opinion that the requirements should not be identical in detail or application, noting the need for flexibility when applied to different sectors or firms, taking account of, for example, the firm’s size; the nature, scale or complexity of activities undertaken and the internal organisation of the firm. EFAMA, therefore, welcomes the proposal that ESMA develop guidelines in order to achieve the important objective of proportionality in the application of remuneration principles.

EFAMA does not object to the provisions of the UCITS V proposal seeking to promote convergence and reinforcement of national sanctioning regimes. However, EFAMA reiterated the urgent need to clarify the counterparty limits for OTC derivatives in relation to central clearing, discussion of which first arose with the European Commission during the European Market Infrastructure Regulation discussions on the regulation of central counterparties and trade repositories.

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.