Dechert’s Declan O’Sullivan and Conor Durkin pick apart Ucits V vote in European Parliament

The European Parliament voted to adopt the Ucits V Directive on 15 April, which should bring Ucits generally more in line with the AIFM Directive objectives, say Declan O’Sullivan and Conor Durkin, Dublin based partner and senior associate respectively at law firm Dechert [Update: Durkin has since taken a role with Mason Hayes & Curran].

The European Parliament voted to adopt the Ucits V Directive  on 15 April 2014, in advance of Parliamentary elections next month. The final vote followed a period of uncertainty where there was potential for the progress of Ucits V to be thrown off course because of political argument over the scope of the remuneration rules.

Ucits V is aimed at improving the protections afforded to Ucits investors, preventing a repeat of the abuses seen at the time of the Madoff scandal and brings the Ucits framework into alignment with some of the innovations of the Alternative Investment Managers Directive. Michel Barnier, Internal Market and Services Commissioner of the European Commission, has emphasised the need to maintain the Ucits framework as a “gold standard for fund regulation globally”.

The key provisions of Ucits V are:

• Ucits management companies will be required to establish remuneration policies that are consistent with sound and effective risk management.

• New rules relating to depositaries concerning liability, delegation and entities eligible to act as depositaries.

• Harmonisation of administrative sanctions.
Remuneration

The issue of remuneration was the major battleground in the negotiation of Ucits V and, for a piece of financial services regulation, it became quite politicised, particularly in March 2013, when the European Parliament’s Economic and Monetary Affairs Committee (ECON) voted to cap bonuses for asset management staff at a 1:1 ratio with their annual salary. Unusually and to the relief of many in the asset management industry, the bonus cap proposal was voted down at the plenary session of the European Parliament.

Consistent with AIFMD, under the final text of Ucits V, Ucits management companies will be required to establish remuneration policies and practices that are consistent with and promote sound and effective risk management. These remuneration policies must not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the Ucits under management and cannot impair compliance with the management company’s duty to act in the best interests of the Ucits.

These remuneration provisions are subject to a proportionality test and Ucits management companies must comply with the remuneration principles set out in Ucits V in a way that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities.

In addition, Ucits V empowers the European Securities and Markets Authority to issue guidelines on the scope of staff to be caught under the new remuneration rules and the application of the new remuneration principles for Ucits management companies. These guidelines are intended to add flesh to the bones of the Ucits V remuneration principles and are expected to be largely aligned with Esma’s Guidelines on Sound Remuneration Policies under AIFMD, which provided guidance on proportionality, which remuneration would be affected and how to identify categories of staff covered by the Guidelines. The guidelines expected to be issued by Esma in relation to remuneration policies under Ucits V will not be binding, however, financial regulators and market participants will be expected to comply on a ‘comply or explain’ basis. To date under AIFMD and the Guidelines, the sole proponent of explain rather than comply has been Malta.

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