Sébastien Danloy of RBC Investor & Treasury Services charts the global evolution of Ucits
Sébastien Danloy, head of Investor Services, Europe & Offshore at RBC Investor & Treasury Services sees momentum behind Ucits V being agreed before European elections in 2014.
Ucits has evolved to become the gold standard of the investment industry and prospects for the next iteration of the directive look positive. Under the Lithuanian presidency, momentum for Ucits V is gathering pace, with a clear impetus for it to be passed ahead of next year’s European elections in the spring.
The new directive will see Ucits adapt further to the changing investment landscape. Both fund managers and service providers need to examine these developments closely, as they have a significant role to play at this juncture in maintaining the brand’s credibility.
One of the main benefits of Ucits historically has been its broad appeal to investors across Europe, which spans from the most vanilla of retail investments to sophisticated alternative strategies packaged in so-called “Newcits funds”. In addition, over its 25-year life, Ucits’ geographical reach has widened extensively, with emerging market investors, particularly those in Asia and Latin America, now becoming increasingly interested in the benefits of the label. Overall, Ucits funds boast nearly $6trn in assets under management.
As we progress to Ucits V, its future potential in new markets and retaining global appeal will depend on keeping the framework harmonised across EU jurisdictions and simple enough for international investors to access. Looking beyond to Ucits VI, future iterations of the directive need to keep the flexibility which underpins this arrangement, enabled by its principles-based approach. It was this openness that allowed providers to encompass so many tools within Ucits, as well as adapt the brand to frequently evolving market conditions.
However, this brings its own challenges. One of the issues that has arisen in the development of Ucits is that EU Member States have in some cases been able to develop their own interpretations of the same framework, which has resulted in uncertainty and debate between different fund centres. These need to be resolved before moving ahead to ensure that regulators do not take this as a cue to become more prescriptive, and instead continue to maintain Ucits’ flexibility and openness.
From an operational perspective, the main evolution of Ucits V is the extended principle of depositary liability, largely transposed from the Alternative Investment Fund Managers Directive (AIFMD) which was brought into effect in July 2013. Essentially the burden of risk now shifts from investors to custodians in the event that assets are lost, even if this occurs through a sub-custodian to which safekeeping of assets has been delegated independently of the custodian.
The new depositary liability regime will have the benefit of establishing a harmonised liability and responsibility framework for depositaries across European countries. This will help to build investor confidence and further establish the quality of the brand.
However, it could have a considerable impact on the structure of the industry. It will inevitably prompt an exit of some smaller or more conservative players on the servicing side, arising from the fact they are either unable or unwilling to accept significantly increased levels of financial risk to service Ucits funds.
In addition, this could also have a bearing on the geographical and asset class exposures that there is appetite to place within a Ucits vehicle. In emerging and frontier markets, for example, there may be a higher level of risk when it comes to guaranteeing the safety of assets, so providers may be more cautious when launching funds with exposure to riskier assets, or take them out of the Ucits structure altogether. The same may be true for alternatives strategies which contain more esoteric or high risk assets for which it is expensive or problematic to provide protection.
The interim period before Ucits V is passed next year also provides the industry with time to consider the previous directive and ensure they have maximised business advantages from it.
Ucits IV put a strong cross-border framework in place, with the advent of the management company passport and master-feeder structures. These have built a consistent framework that can support strong inflows within the continent – and operationally, fund houses looking to take advantage of that as Ucits proceeds to its next stage of evolution, will need to ensure they work with a service provider that can also operate comfortably across borders using economies of scale. Otherwise it will be difficult for managers to cost effectively service pan-European and emerging market inflows as the brand’s international popularity grows.
The imminent arrival of Ucits V, although it will bring challenges for both fund houses and their service providers in the form of depositary liability, will continue to build on the vehicle’s reputation for strong investor protection, and in turn its global appeal. Provided divergent EU markets and regulators can work together to agree a consistent future direction for the framework, it should continue to gather momentum and investment assets as we start to consider Ucits VI.