The UCITS Directive 85/611/EEC (entered into force in 1988 as amended by UCITS III in 2002) has been the key driver contributing to the significant development and success of the European investment fund industry over the last two decades. However, with the rapid evolution of the investment fund market, it was necessary to further enhance the UCITS market and brand.
For that purpose, the recast UCITS Directive ("UCITS IV") introduces five key modifications in the UCITS regulatory landscape, three of which offer fund managers the opportunity to undertake a strategic reflection on their product range and management structure, while the other two are compulsory measures to enhance speed-to-market and investor protection.
Strategic opportunities
UCITS IV addresses the proliferation of UCITS of a sub-optimal size and the lack of organisational flexibility to achieve a global decrease of the cost for operating funds in the EU and provides fund promoters with a helpful toolbox.
- Merger of UCITS and Master-Feeder structure
- Management Company Passport
Merger of UCITS and Master-Feeder structure
UCITS IV introduces a framework for amalgamating assets, either through the cross-border merger of UCITS irrespective of their legal form or by allowing master-feeder structures. However, some issues arise which need to be evaluated on a case-by-case basis, in particular regarding tax impacts at UCITS' and investors' levels.
Main challenges:
- Definition of target set-up (fund range, local management company(ies), distribution, etc.);
- Taxation (investors’ level / portfolio’s level) and VAT issues;
- Migration of funds (marketing and distribution issues, accounting and tax reporting, contractual arrangements, risk management process, corporate governance, etc.).
Management Company Passport
UCITS IV introduces a framework for amalgamating assets through the cross-border merger of UCITS irrespective of their legal form or by allowing master-feeder structures. However, some issues have arisen which need to be evaluated on a case-by-case basis in particular as regards tax impacts at UCITS' and investors' levels.
Today, the UCITS IV management company passport permits the remote establishment and cross border management of UCITS funds and the centralisation of their asset management, administration and risk management operations.
As from March 2019 because of the Brexit, this passport will no longer be valid in relation to the UK. As such, it will no longer be possible for UK Management Companies to act as management companies for UCITS funds. Similarly, the same consequences could apply to EU based UCITS Management Companies, whom would be unable to act as management company for UK funds equivalent to UCITS.
Main challenges for cross-border promoters of UCITS:
- Definition of target corporate set-up, country of location and delegation arrangements (delegation rules remaining at the discretion of each Member State);
- Taxation (personal and corporate tax) and VAT issues;
- Migration of fund operations (staffing, contractual arrangements, risk management process, corporate governance, cooperation between the country of domicile of the UCITS and the management company, etc.;
- Non-EU distribution issues;
- Management of non-UCITS funds and impacts of the AIFM Directive;
- For players imported by the Brexit, it is now urgent to address these challenges.
Mandatory changes
UCITS IV rationalise the notification process and definitely replaces the simplified prospectus since July 2012.
- Notification process
- Key Investor Information Document ("KIID")
Notification process
The notification process is now a regulator-to-regulator process. The UCITS’ Home Member State regulator has only 10 working days to review a standardised (in form and content) notification file and transmit it to the Host Member State, thereby triggering the immediate right to start marketing activities in that country.
For UK UCITS funds sold elsewhere in the EU and for EU UCITS funds not in the UK, this modification process is likely to not work anymore as from March 2019 due to Brexit.
Main challenges:
- Cross-border management companies' need to face regulators;
- Adequate internal process to fully benefit from such a reduced time-to-market opportunity;
- Compliance of the marketing arrangements with local regulations (local marketing activities remaining subject to the supervision of the host regulators on an ex-post basis).
Key Investor Information Document ("KIID")
The KIID is a short document containing Key Investor Information, the content, form and presentation which is fully harmonised so as to facilitate its understanding and direct comparisons between UCITS.
Challenges:
- Sourcing of information to feed the KIID and fund documentation management;
- Consistency between the various information sources (prospectus, KIID, website, factsheets, etc.);
- Automation of the KIID (production and dissemination);
- Review of distribution contracts.
- If PRIIP and the new KIID models are not applicable to UCITS before 31 December 2019, fund managers will have to pass additional information not included in the current KIID, like transactions costs to their Distributors because of MiFID II.
The recent recast: UCITS V
UCITS V introduced new requirements for the depository and remuneration policies and is creating a new sanctions regime.
Directive 2014/91/EU of the European Parliament and of the council of 23 July 2014 (UCITS V Directive) amended further Directive 2009/65/EC. The changes adopted are meant to address perceived failings, better protect investors and align UCITS funds with the measures instituted for alternative investment funds under the AIFMD.
UCITS V has brought clarifications with respect to the UCITS Depositary legal framework, in line with the requirements specified for alternative investment funds in the AIFMD. The proposal also harmonises remuneration policies of UCITS or at management company level and sets a common regime for sanctions to ensure that investor protection is enforced in the same way in all Member States.
Depositary UCITS V key elements:
- A UCITS shall appoint one single depositary to be entrusted with the safekeeping of the fund’s assets.
- A UCITS depositary shall be either a bank or a MIFID investment firm.
- Oversight duties are harmonised to all forms of UCITS (both contractual and corporate UCITS).
- Clarification of the safekeeping duty: UCITS V introduces a distinction between (i) custody duties related to financial instruments that can be held in custody and (ii) asset monitoring relating to the "other" assets.
- Delegation of duties restricted to safekeeping duties, under specific conditions.The liability regime is partially harmonised in case of (i) loss of assets by the depositary itself or delegated sub-custodian or (ii) any losses suffered by investors arising from depositary’s negligence or intentional failure to fulfil its obligations.
- Remuneration policies
- UCITS management companies and UCITS are required to put in place appropriate remuneration policies according to a list of principles.
- Sanctions regime is harmonised by requiring a minimum catalogue of administrative sanctions,measures and a list of sanctioning criteria.
How we can help
With the help of our UCITS Team composed of highly qualified and experienced professionals in Luxembourg and our UCITS network throughout the Europe, PwC offers:
- Assistance in the form of ad hoc advice or analyses;
- Organisation of training sessions and bespoke workshops;
- Fund restructuring integrated advisory and tax services;
- Fund re-domiciliation and migration services (operating model definition, business, regulatory and tax analysis, project management, operational support, contributions in kind);
- Implementation of master-feeder structures (business, regulatory and tax analysis, project management, operational support, contributions in kind);
- Fund and Management Companies assistance set-up;
- Offshoring and outsourcing strategies (operating model definition, business, regulatory and tax analysis, project management, operational support);
- Global fund distribution solutions (support in definition of distribution strategy, support in fund registration, project management);
- Tax impact analysis and tax management (of both the management company and investors);
- Remuneration policy solutions;
- Depositary diagnostics and health checks.
Contact us
Xavier Balthazar
Advisory Partner, Asset Management, Regulatory & Compliance, PwC Luxembourg
Tel: +352 49 48 48 3299
