On 15 April 2014, during the final week of scheduled voting sessions before MEPs break for the European elections to be held in May, the European Parliament adopted in plenary session the final compromise text on UCITS V. The text was approved by 607 votes to 28 (with 34 abstentions).

UCITS V will introduce new rules in relation to fund manager’s remuneration, depositary eligibility, depositary liability and the duties of depositaries; in addition to rules aimed at harmonising administrative sanctions for UCITS that fail to comply with national UCITS authorisation and reporting rules.

Some of the headline changes to be introduced under UCITS V include:

• UCITS fund managers will have to introduce new remuneration policies and practices, with a view to discouraging excessive risk taking and increasing transparency. The wording of the remuneration-related recitals to the new Directive, which were the subject of heavy negotiation, provide that the new policies and practices “…should apply, in a proportionate manner, to any third party takes investment decisions that affect the risk profile of the UCITS because of functions have been delegated”.
• Those affected by the new remuneration rules will see 50% of their variable remuneration paid in fund units and 40% of bonus payments deferred for at least three years (60% in the case of large bonuses).
• Only national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure will be eligible to act as a UCITS depositary.
• The liability of UCITS depositaries is to be strengthened, with depositaries now liable for any loss of assets held in custody. Investors will also have a right of redress directly against the depositary and will not have to rely on the UCITS manager in this regard.

UCITS V also introduces whistleblowing procedures aimed at encouraging employees of UCITS management companies to report breaches of relevant rules to the relevant regulatory authorities.

Although UCITS V remains subject to formal endorsement by the European Council, it is expected that the new Directive will be published in the European Union’s official journal in the second quarter of 2014. Member States will then have 18 months to transpose the new rules into national legislation.

Contributed by James Phelan