Implementation of UCITS V in the UK Karagh Gilliatt and Aidan - PowerPoint PPT Presentation

Implementation of UCITS V in the UK Karagh Gilliatt and Aidan Campbell UK – 210969696.1 | 20 January 2016

Agenda - Overview of the key elements of UCITS V - Highlight where the provisions differ from the equivalent AIFMD provisions - Summary of UK proposals for implementation 2 UK – 210969696.1 | 20 January 2016 CMS Firm

Snapshot of UCITS V Legislative History - Recast UCITS Directive (2009/65/EC) • Implemented in UK - UCITS V Directive (2014/91/EC) • Requires Member State Implementation - Commission's Delegated Regulation on obligations of Depositaries – “Level 2” • Directly applicable – no Member State implementation required - ESMA Guidelines on Sound Remuneration Policies – “Level 3” • Requires Member State adoption 3 UK – 210969696.1 | 20 January 2016 CMS Firm

UK Proposed Implementation - Amendments to Collective Investment Schemes Sourcebook (“COLL”) - COLL 4.2.5: prospectus updates - COLL 4.7: KIID update - COLL 4.5: Annual report - COLL 6.6A: requirements regarding ManCo in respect of depositaries - New COLL 6.6B: requirements on UCITS depositaries • Requirements in COLL 6.6A and 6.6B broadly similar to FUND 3.11 - New SYSC19E - Other amendments to Glossary, CASS, SUP and IPRU (INV) - Amendment to FSMA and secondary legislation 4 UK – 210969696.1 | 20 January 2016 CMS Firm

Timeline 28 August 2014 23 July 2015 3 September 2015 23 October 2015 UCITS V Directive ESMA publishes FCA publishes HM Treasury published draft Guidelines on CP15/27 publishes sound consultation remuneration under UCITS V and AIFMD 17 December 2015 Q1 2016 18 March 2016 Q3 2016 UCITS V Level 2 Level 2 Regulations Deadline for Date of application Regulations to be finalised and implementation by of Level 2 issued by published in Official Member States Regulations? European Journal Commission Expect: FCA Policy Statement and made legislation 5 UK – 210969696.1 | 20 January 2016 CMS Firm

UCITS V – Key Elements - The key elements of UCITS V are uniform rules on: • UCITS depositary functions • UCITS Management company (“ManCo”) remuneration requirements • Sanctions 6 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary Provisions - Depositary provisions have not changed since introduction of UCITS in 1985 - readjustment arguably overdue! - Principal components: • Appointment and eligibility of the depositary • Safekeeping of assets - Delegation • Oversight • Liability - Many of the detailed UCITS V depositary requirements are contained in delegated European Commission Regulations (“Level 2 Regulations”) 7 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Eligibility Criteria - Prescribed classes of institution eligible to be depositaries • National central banks • Credit institutions • Other legal entities authorised to carry out UCITS depositary activities - (“non-bank depositaries”), which must • be subject to prudential regulation requirements • be subject to regulatory supervision • meet certain minimum operational requirements - FCA “gold-plating” 8 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Appointment (1) - ManCo must appoint a single depositary for each UCITS it manages - ManCo must have in place a decision-making process for choosing the depositary - ManCo must demonstrate satisfaction of appointment to the UCITS’ home Member State competent authority - ManCo must also justify to UCITS investors, on request, its choice of depositary - Must be written contract in place between ManCo and depositary - Both UCITS depositary and ManCo must act “ honestly, fairly, professionally and solely in the interests of the UCITS and the investors of the UCITS ” 9 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Appointment (2) - Level 2 Regulations, Chapter 4: independence requirements • ManCo and depositary must at all times comply with certain conditions which are designed to ensure independence of the depositary. • In certain limited circumstances, ManCo may appoint a linked depositary. - Tends not to be an issue for UK funds and provisions are designed to allow continuation of practices in Continental Europe. 10 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Written Contact (1) - The Level 2 Regulations require the written contract with the depositary to include (broadly): • Description of services • Information flows • Processes and procedures 11 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Written Contact (2) - More specifically: • A description of depositary services and the depositary’s procedures for each type of assets in which the UCITS may invest; • A description of how the safekeeping and oversight functions will be performed; • The term of the contract and the requirements for amendment and termination; • The parties’ respective confidentiality obligations; • Provisions regarding transmission of information between depositary and ManCo (and, if applicable, any third party); • Procedures to be followed when considering an amendment to the UCITS’ rules, instrument of incorporation or offering documents; • Information which must be exchanged in respect of sale, subscription, redemption, issue, cancellation and repurchase of units of the UCITS; 12 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Written Contact (3) • A commitment to regularly provide details of any third party appointed by the ManCo or depositary, and, upon request, information on the selection criteria and on monitoring procedures regarding the appointment; • The parties’ obligations regarding prevention of money laundering and terrorist financing; • Information on cash accounts in the ManCo’s name on the UCITS’ behalf and procedures for ensuring the depositary is notified of the opening of new accounts; • Details of the depositary’s escalation procedures; • A commitment by the depositary to notify the ManCo that the segregation of assets is no longer sufficient to ensure protection from insolvency of a third party to whom safekeeping has been delegated; • Procedures for ensuring the depositary has the ability to enquire into the conduct of the ManCo, including rights of access, and for ensuring the ManCo can review the performance of the depositary. - Requirements broadly mirror the requirements for depositary contracts prescribed by AIFMD. 13 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Safekeeping of Assets - Division of asset types • Financial Instruments which can be held in custody - Transferable securities (including those embedding derivatives) - MMIs - CIS units (but not necessarily all) • Other assets - Cash deposits - Derivatives - Other CIS units - Comprehensive inventory of all assets to be provided by depositary 14 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Safekeeping of Assets: Custody - Where the depositary holds FIs in custody its duties include: • Ensure proper registration • Ensure segregation • Perform asset reconciliation • Maintain records - Prohibition on the re-use of assets • Limited exception - Stock lending subject to certain criteria. 15 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary - Safekeeping of Assets: Other Assets - No requirement to hold legal title to those other assets - Ownership verification required • Depositary to maintain record 16 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Delegation (1) - Restrictions on delegation by depositary • Depositary may only delegate custody function - Such delegation only permitted where: • it is not aimed at avoiding UCITS V requirements; • there is an objective reason for delegation; • due skill, care and diligence has been exercised in the selection and appointment - ongoing monitoring of the delegate required • No contractual discharge of liability is permitted - AIF depositaries may discharge liability in certain circumstances • Depositary must ensure delegate complies with depositary’s obligations under written agreement with ManCo 17 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Delegation (2) - Depositary required to ensure the delegate takes all necessary steps to ensure that the assets of a UCITS held by it in custody are unavailable for delegate’s creditors in event of its insolvency • High standard • independent legal advice required • Early termination of agreement • Inform ManCo - ManCo to inform FCA and take all appropriate measures - EEA delegate required to provide a regular statement to the depositary detailing the assets • Also when a change occurs - Provisions to apply down the custody chain 18 UK – 210969696.1 | 20 January 2016 CMS Firm

Depositary – Oversight Obligations (1) - Oversight obligations on depositary in respect of: • Cash monitoring • Valuation • Sale/issue/redemption/cancellation of Shares • Income Distribution - Strategy & risk profile of UCITS relevant 19 UK – 210969696.1 | 20 January 2016 CMS Firm