On 13 March 2014, the Council of the European Union published the final compromise text on the proposed UCITS V Directive, reflecting the political agreement reached with the European Parliament in February. The agreed text has since received approval from the Council’s Permanent Representatives Committee (COREPER), enabling the Directive to be adopted by Parliament at first reading prior to the Parliament adjourning for elections in May 2014.

Key elements of the agreed compromise text are as follows:

Remuneration Policies

UCITS management companies will be required to establish and maintain remuneration policies and practices in compliance with the Directive.

The compromise text specifies in this regard that at least 50% of any variable remuneration must consist of shares in the UCITS concerned, unless the management of the UCITS accounts for less than half of the total portfolio managed by the management company.  At least 40% of variable remuneration must be deferred for at least 3 years although, in the case of particularly high bonuses at least 60% will have to be deferred.

The remuneration requirements must be applied to all categories of staff within UCITS management companies whose professional activities have a material impact on the risk profiles of the UCITS they manage. The rules will also apply to the same categories of staff within self-managed UCITS investment companies.

Importantly, the preamble to the agreed compromise text, provides that remuneration policies and practices, in compliance with the Directive, “ should apply, in a proportionate manner, to any third party which takes investment decisions that affect the risk profile of the UCITS”.

ESMA is to prepare further guidance as to the persons to whom the remuneration policies and practices are to apply and as to the proportionate application of same. Such guidelines are, where appropriate and to the extent possible, to be aligned with those applying to funds regulated under AIFMD. 

Depositaries

Only national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure will be eligible to act as UCITS depositaries.

Depositary liability has been strengthened such that depositaries may be held liable for any loss of assets held in custody, even where custody has been delegated to a third party. Depositary liability cannot be excluded or limited by agreement.

Sanctions

All member states will have to provide harmonised administrative penalties for UCITS that fail to comply with national UCITS authorisation and reporting rules. 

Penalties may include, among others, suspension of the UCITS’ authorisation and bans from fund management. Companies will be subject to maximum fines of at least €5 million or 10% of their annual turnover and individuals  to maximum fines of at least €5 million. Sanctions will also include the ability to impose fines of at least twice the amount of monetary benefit derived from any particular infringement.

Contributed by James Phelan