The Directive on Undertakings for Collective Investment in Transferable Securities (ucits) - Development and Key Practical Aspects

The directive on undertakings for collective investment in transferable securities (UCITS)- development and key practical aspects.

Introduction

Investment funds are of importance for personal finances, companies and the society as a whole. Funds ensure that the individual savers receive a part of global growth, while at the same time it helps to finance enterprises investments and motivates overall socioeconomic growth. The rapid development of the European Financial markets during the last 50 years have also created a crucial need for a thought-through regulations of the funds that would be based on common standards, investment and investor safeguards while at the same time contributing to the financial growth of the region. European Union is now the world’s second largest fund market after the United States and the rapid popularity of the EU funds are often linked with the well regularised framework and fund directives that ensure that the funds are attractive to the investors.  The attractiveness of funds being – mitigated and regulated risks, eased administrative burden and availability and transparency of the information flow.

As part of its effort to regulate the investment fund deals, the EU has so far enacted several legislations: The directive on undertakings for collective investment in transferable securities (UCITS) which is the main European framework covering collective investment schemes. This category of investment funds accounts for around 75% of all collective investments by small investors in Europe, Alternative investment fund managers, The alternative investment fund managers (AIFM) directive which covers managers of funds that are not regulated at EU level by the UCITS directive. They include hedge funds, private equity funds, real estate funds and a wide range of other types of funds. Moreover there are regulations that focus exclusively on young and innovative companies (European venture capital funds (EuVECA)), European social entrepreneurship funds regulation that focuses on social enterprises as well as European long-term investment funds regulation that focuses on funds that invest in an alternative asset classes. There is currently another pending proposal from the side of the European Commission on regulating the money market funds. ^[1]

The main aim of this paper is to overview the main European framework for the fund management namely:  Undertakings for collective investment in transferable securities (UCITS) Directives with a focus on the historical and current developments of the Directive and that basic elements of the regulation such as: scope of coverage, main rules for implementation and various practical aspects namely: how it addresses domiciliation, tax requirements and administrative burdens.  

UCITS – importance and development

The UCITS regulation has existed for over 25 years, the basic concepts and legislation on collective investment was incorporated in the European Union law already in 1985, it defined the scope of securities that could be acquired under UCITS, what is the minimum information that must be provided and how units and shared of the UCITS funds can be bought or sold.  The introduction of the legislation was triggered by the rising popularity of the investment funds all over the world and a lack of the EU-wide umbrella regulatory framework that would ease cross-border deals, regulate tax barriers and modify national laws, which in many cases were forbidding investment deals that involved a second country.  The introduction of UCITS allowed fund companies to distribute their investment funds in other EU countries by notifying the local regulators.

Overall the UCITS Directive has been key to the development of the European investment fund industry. Year 2016 data demonstrates that the assets under management of UCITS funds were over €8.277 trillion, representing 65% of all investment fund assets in Europe. Funds marketed on a cross-border basis play an increasingly important role in the industry. The UCITS fund passport has paved the way for extensive cross-border marketing of funds. The success of UCITS is not limited only to the European Union countries. UCITS are widely perceived as being regulated to a high standard and their status as a global “brand” has continued to boost net sales of cross-border funds outside Europe.^[2] 

The UCITS Directive is constantly evolving. While the original UCITS Directive was completed and published in 1985 the UCITS IV was published in 2010, and UCITS V adopted in 2016  while the future of UCITS VI are already currently being discussed.^[3]  Since the first introduction in 1985 the UCITS Directive has undergone multiple amendments. As any other Directive it must firstly be proposed by the European Commission and after authorization by the European Parliament and the Council; each new directive is then translated and transposed into the local law of each EU country individually. While there are multiple Directives that over the duration of multiple years, and sometimes decades bounces forth and back at the Commission – Parliament-Council bureaucracy levels, the developments of UCITS clearly demonstrate another extremely positive aspect, that is a common stance of the regulators, member states and the EU institutions on the need of developments in the regulation and continuous improvement of UCITS standards and scope.

Overall the amendments are addressing the rapid evolution and changes of the financial world, the lessons learned during and after the world’s financial crisis and they even include counter-measure aspects addressing some individual large scale fraud cases in order to prevent any future occurrences and eliminate existing loopholes.

Since the original UCITS 1985 Directive there have been four attempts for the amendments, three of which have been successful.  The only failed attempt for the amendment of the UCITS Directive was that of 1998, that was later abandoned as the member states failed to reach an agreement on scope and purpose of the amendment, the key provisions of it were however later included in 2001 UCITS III amendment. The UCITS III Directive in practice constituted of two different directives – Management Directive, which key point was creation of European Passport, which allowed the UCITS fund authorised in its home could be easily sold anywhere else within the EU and also introduced simplified definitions for definition of key features of the fund. The following UCITS IV of 2011 included key provisions on streamlined regulator notification procedures, introduction of management company passports, and simplification of the documentation required and defined a framework for domestic and cross-border fund mergers.^[4] The latest directive UCITS V Directive was published in the EU Official Journal on 18 August 2016 with the given deadline to be transposed in the national law of the member states by March 2016.                         Unlike the UCITS IV Directive, the UCITS V Directive does not recast the UCITS Directive. Instead, it amends and stands alongside the UCITS IV Directive. UCITS V further increases the level of protection of the investors with an aim to rise the investors’ confidence in the UCITS. It aims to do so by enhancing the rules on the responsibilities of depositaries and by introducing remuneration policy requirements for UCITS fund managers.UCITS V also aims to ensure that all EU regulators responsible for the supervision of UCITS funds and their managers have a common minimum set of powers available to investigate infringements of national laws transposing the UCITS Directives and to sanction any breaches. Other key changes include: A requirement to appoint a single depositary for each UCITS, disallowing the appointment of multiple depositaries, an exhaustive list of entities eligible to act as a depositary of a UCITS, the harmonisation of the duties of a depositary to keep the assets of the UCITS safe, monitor cash movements to and from the fund, and oversee the fund manager’s performance of its key functions and specific safe-keeping requirements that a depositary needs to comply with in respect of financial instruments that may be held in custody as well as for other assets. Moreover a new requirement on Member States is introduced to ensure that assets held in custody by a depositary or its delegate are protected in the event of the depositary or its delegate becoming insolvent as well as strict liability regime making the depositary liable for the avoidable loss of a financial instrument held in custody and a requirement for UCITS management companies to have remuneration policies, complying with certain remuneration principles, covering their key staff and a requirement to make those policies transparent. Lastly the Directive also harmonises the administrative sanctions that must be available to EU regulators for breaches of the UCITS Directive.^[5]