06.03.2015

UCITS V Holds Depositaries to Stricter Accountability

06.03.2015
Terry Flanagan

The UCITS V directive, which will come into force in March, will impose stricter accountability on depositaries, covering safekeeping, cash flow monitoring and oversight functions.

Depositaries are custodian banks that safeguard the assets of UCITS funds, and one of the main aims of UCITS V is to draw upon the lessons of incidents that funds have suffered with the Madoff Scandal and to some extent with the Lehman collapse. “The idea is to put a stricter framework around the way depositary banks have to do their job,” Camille Thommes, director general of the Association of the Luxembourg Fund Industry, told Markets Media.

A major goal of UCITS V is to harmonize the regime across the European Union. “Today you have very different rules around custodians and depositary banks within the various EU member states,” said Thommes.

Both the Alternative Investment Fund Managers Directive (AIFMD) and UCITS V require that managers appoint a depositary to perform cash flow monitoring, safekeeping of assets and oversight of operations.

Under UCITS V, depositaries will face stricter obligations on conducting proper due diligence initially and on an ongoing basis when safeguarding assets on behalf of the funds. to The second element is to increase the liability and responsibility of those depositaries.

“The big difference between the depositary in AIFMD and the depositary in UCITS is that in UCITS the depositary bank has strict liability,” said Thommes. “There is almost no possibility to discharge responsibility or liability on safeguarding of assets, whereas a depositary bank in AIFMD could, based on an agreement with the fund manager, restrict partially its liability.”

The UCITS V depositary regime applies to UCITS established in EU member states, which must transpose UCITS V into national law by March 18, 2016.

Depositaries are one of the three main pillars of UCITS V; the others are remuneration and sanctions.

“On the depositary side we initially thought that depository banks might charge much higher fees because they take over increased liability and responsibility,” said Thommes. “The perception is that this is not going to happen, not to that degree we initially thought.”

On remuneration, the European Securities and Markets Authority needs “to come up with some clear technical guidelines on how those remuneration rules will apply, and especially what the potential impact could be on non-EU managers of UCITS funds,” Thommes said. “We lobby for the fact that you have to take into account the proportionality principles, and to look into whether some equivalent regulations might apply. That’s something that’s still pending, and where we expect additional guidelines to be published in the next month.”

Featured image by pedrosala/Dollar Photo Club

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