What's Happening on UCITS V?

by Dechert LLP

Where are we on implementation? Are we nearly there yet? 

Yes and no. The UCITS V directive comes into force on 18 March 2016. But:

  • Additional implementing rules (known as "Level 2") on the duties of UCITS depositaries and management companies dealing with those depositaries have yet to be finalised and will not come into effect until (at earliest) the third quarter of 2016.
  • ESMA has consulted on but not yet finalised its additional guidelines ("Level 3") on sound remuneration policies for UCITS and AIFMD managers.
  • There are various transitional arrangements affecting management companies' remuneration and fund disclosure requirements.
  • There is likely to be further guidance from the FCA once Levels 2 and 3 have been finalised.

What should managers be doing? 

Anyone concerned with the management of a UCITS or, in the UK, a NURS, should check that they understand the new obligations and can meet them as they fall due. The main requirements relate to manager’s remuneration, disclosure and depositary arrangements.


The new UK rules (set out in SYSC 19E) come into effect on 18 March 2016. However, management companies need only comply with the remuneration principles contained in SYSC 19E in respect of new awards of variable remuneration from the start of their first full performance period starting after 18 March 2016.

For those familiar with the AIFMD code (SYSC 19B) the approach is broadly similar. For management companies currently operating under BIPRU (SYSC 19C) more fund-focused AIFMD-style requirements will now apply and ESMA and the FCA have given guidance on a number of additional matters. Points to note include the following:

  • A UCITS management company must now carry out proportionality assessment in respect of its UCITS business and consider whether it needs to apply the “pay-out process rules”, including deferral of variable remuneration and payment in instruments.
  • The draft ESMA guidance suggests that managers should only be required to pay bonuses in units of a particular UCITS where that UCITS represents at least 50% of the total UCITS assets under management. However it is understood that this is a mistake and the final test is expected to be whether UCITS represent 50% or more of all the manager’s assets under management. Even where the management company is below this threshold, the FCA considers that a substantial portion of variable remuneration should still be paid in non-cash instruments, subject always to the proportionality principle.
  • As with the AIFMD code, there will be flexibility to use other non-cash instruments as an alternative to payment in units so long as this provides staff with equally effective incentives.
  • As with AIFMD, the ESMA guidelines extend the remuneration rules to investment management delegates where the rules would otherwise be circumvented.
  • There is some clarification of the roles expected of the management company's management and supervisory bodies, though this still does not translate well into an English law governance context.
  • Where the UCITS management company is subject to other sectorial remuneration regimes the manager should assess which sectorial remuneration principles would be most effective in aligning relevant staff interests with those of the fund investors ESMA sees the AIFMD and UCITS remuneration regimes as equivalent so either regime should be adequate. The appropriate treatment for a UCITS management company which is also subject to the BUPRU or IFPRU regime is less straightforward.


The prospectus of a UCITS (or a NURS) must include:

  • Details of the remuneration policy, including a description of how remuneration and benefits are calculated, the persons responsible for awarding the remuneration and benefits, including the composition of any remuneration committee.
  • A statement that the details of the remuneration policy are available on a website and by a paper copy.

The prospectus must be updated with the relevant new disclosure requirements by 30 September 2016 (extended to 31 March 2017 for a NURS). There is no equivalent requirement in the AIFMD rules.

The fund’s key investor information document (KIID) must contain a statement that the details of the up-to-date remuneration policy, including certain specified information on the policy, is available on a website and on request. This must be included in the KIID as part of the 2017 annual update by no later than 18 March 2017 (or earlier if the KIID is updated before then and the relevant information is available at the time of that update).

The fund’s annual report must include information on:

  • Total remuneration paid during the fund’s financial year, split into fixed and variable remuneration, paid by the management company to its staff, the number of beneficiaries, and any amount paid by the UCITS itself.
  • The aggregate amount of remuneration broken down by categories of staff that are subject to the remuneration rules.
  • A description of how the remuneration and benefits have been calculated.
  • The outcome of the annual review of the remuneration policy.
  • Details of any material changes to the policy.

Elements of this, notably the description of how remuneration and benefits have been calculated and the outcomes of the annual review, go beyond the requirements for an AIFMD fund report.

Depositary arrangements

The following matters are covered in the as yet unfinalised Level 2 directive:

  • The minimum terms to be included in the contract between the management company and the depositary.
  • Detailed requirements on how the depositary should perform its oversight, cash monitoring, and safekeeping duties.
  • Types of financial instruments that the depositary must hold in custody and how these should be segregated from the depositary’s own assets.
  • Terms and conditions of the depositary’s liability for losses of financial instruments, including the circumstances under which financial instruments are considered to be lost.
  • Terms of the depositary’s delegation of the safekeeping function to third party custodians.
  • Requirements for independence between the management company and the depositary.

Pending finalisation of Level 2 the FCA has said that firms should continue to comply with COLL and CASS until the new Level 2 regulation becomes applicable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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