The Front Page, Asset Management & Investment Funds: EU & International Developments


The transposition deadline for UCITS V is 18 March 2016. As of now the Delegated Level 2 Regulation supplementing UCITS V on the obligations of depositaries is not yet final, the ESMA Guidelines on sound remuneration policies under the UCITS Directive and AIFMD (the Guidelines) have not yet issued and the implementing technical standards are also still in draft form. By 18 March 2016, UCITS were to have in place UCITS V compliant depositary agreements, remuneration policies and procedures, whistleblowing policies and procedures, as well as prospectus and KIID updates. The ESMA UCITS Q&A (detailed below) has been of assistance in terms of the transition. Notwithstanding that Q&A, many UCITS and UCITS depositaries will be anxious to ensure that depositary agreements correctly reflect the legal position as of 18 March and any necessary disclosures are correctly reflected in prospectus and other documentation (particularly any additional depositary fees). Some updated depositary agreements will not be in place by 18 March, particularly where Central Bank review is required. While whistleblowing policies can be adopted, the correct approach to the adoption and implementation of remuneration policies and procedures is unclear. In the absence of final Guidelines, our view is that UCITS should adopt remuneration policies and procedures (if practicable) by 18 March on the basis that these will likely need to be updated. In our view, it would be unlikely that enforcement action would be taken if a policy had not been adopted, given the absence of the Guidelines.

ESMA UCITS Q&A gives detail on the timing of documentation updates for the remuneration and depositary requirements of UCITS V

As flagged in our Front Page newsalert the European Securities and Markets Authority (ESMA) published a new Q&A document on the application of the UCITS Directive, as most recently revised by UCITS V.

The Q&A includes the following new Q&A on the documentation updates which UCITS funds need to provide to meet the remuneration and depositary requirements of UCITS V. Key points are;

  • On remuneration disclosures in KIIDs and Prospectus. UCITS may update their KIIDS (on or after 18 March 2016)  when the KIID is next revised or replaced for another purpose (if the information is then available) and in any event no later than its next annual update (19 February 2017). Similarly, UCITS may update their prospectus when it is next revised for another purpose (if the information is then available) and in any event by 18 March 2017. In the meantime, the additional information on remuneration arrangements should be made available (on or after 18 March 2016) on a relevant website as soon as it becomes available.
  • On remuneration disclosures in annual reports. It is not necessary to include the remuneration-related information in annual reports for periods ending before 18 March 2016. For annual reports relating to periods ending on or after 18 March 2016, but before the UCITS management company has completed its first annual performance period, the remuneration-related information should be included on a best efforts basis and to the extent possible, explaining the basis for any omission.
  • On timing of updates of depositary contracts. UCITS depositary contracts should be revised promptly in accordance with any transitional arrangements outlined in the delegated acts.  As reported in our December Front Page, the European Commission published the first official draft of the UCITS V level 2 Regulation in December and we await its publication in the Official Journal. It will come into force 20 days after that date and (based on that draft) it will apply from a date 6 months after the entry into force of the Regulation. However ESMA note that any provisions in existing contracts concerning depositary liability which conflict with the UCITS V depositary liability provisions will be void with effect from 18 March 2016 and the UCITS V depositary liability provisions will apply instead. ESMA point out that the liability provisions in existing depositary contracts should be amended to reflect the UCITS V depositary liability provisions when those depositary contracts are revised to comply with the delegated acts as detailed above.

The new Q&A also repeals and replaces four Q&A's on UCITS that ESMA has previously issued:

UCITS V Delegated Regulation on the obligations of depositaries

The Council of the EU has published a press release reporting that the Council decided not to object to the Delegated Level 2 Regulation supplementing UCITS V on the obligations of depositaries. The regulation was previously adopted by the European Commission  and will enter into force, unless the European Parliament objects. 

AML / CTF and the Fourth Anti-Money Laundering Directive

The European Commission has published an Action Plan to strengthen the fight against terrorist financing.  There are two main strands to this plan:

  • enhanced detection of terrorists and tracing of their financial movements; and
  • disrupting the sources of revenue of terrorist organisations, by targeting their capacity to raise funds.

This Action Plan envisages that the implementation date of the Fourth Anti-Money Laundering Directive will be brought forward to Q4 2016 (from mid-2017).

FATF held a meeting in Paris on 17-19 February 2016. The main issues dealt with included:

  • Work on terrorist financing, which remains the top priority for the FATF, including:
    • Approval of a Consolidated FATF Strategy on Combating Terrorist Financing. 
      • Focus on enhancing effective exchange of information.
      • Considering whether changes are necessary to the FATF Standards for combatting terrorist financing.
      • Assessing and improving implementation of counter terrorist financing measures.
    • A statement on Brazil’s continued failure to address the serious deficiencies identified in its mutual evaluation reports.
    • Two public documents identifying jurisdictions that may pose a risk to the international financial system. 
  • Revising the FATF/FATF-Style Regional Body High-Level Principles and Objectives.
  • Developments on de-risking.

ESMA follow up peer review on compliance with MMF guidelines

ESMA issued a follow-up peer review into the compliance of national competent authorities (NCAs) with guidelines regarding money market funds. This report follows up an earlier peer review published in April 2013, focusing on eight NCAs that were not compliant with the guidelines. The follow-up peer review covers the period from 1 May 2014 to 1 May 2015. Out of the eight jurisdictions subject to this follow-up peer review assessment, the guidelines are now applied in seven countries. The countries now fully applying the guidelines (in addition to those identified in the 2013 report) are: Bulgaria, Cyprus, Liechtenstein, Lithuania, Latvia, Malta and Portugal.

ESMA supervisory convergence work programme and 2016 regulatory work programme

On 11 February 2016, ESMA published its 2016 supervisory convergence work programme (SCWP) detailing the activities and tasks it will carry out to promote sound, efficient and consistent supervision across the EU. ESMA published its 2016 regulatory work programme in table form alongside the SCWP.

This launches the implementation of ESMA's 2016-2020 Strategic Orientation, which reflects a significant change of direction towards more activities in the field of supervisory convergence (and less focus on the single rulebook). The work programme will contribute towards a number of aims including the effective implementation of rules, the co-ordination of supervisory activity, the development of effective supervisory approaches, and the identification of barriers to convergent supervision.

The supervisory convergence work programme sets a timeframe for the finalisation of guidelines concerning the application of the remuneration principles set out under Article 14b of the UCITS Directive of Q1 2016. It also states that consideration will be given to issues relating to the development of common approaches to the rules on eligible assets in the UCITS Directive.

More generally on investment management, section 5.3 of the SCWP states; 

"42. The main focus of work in 2016 is to support the sound, efficient and consistent application of the AIFMD. When AIFMD was first applied in 2013, many of the entities it covered had previously been unregulated. As a result, it has taken some time to build experience of practical supervision, including in cross-border situations, and as experience has grown, new questions on the practical application of the legislation have continued to emerge. There are also important provisions which have not yet taken effect, in relation to the passporting of non-EU AIFMs and AIFs.

43. Priority activities in this area will therefore include:

a. Regular updates of the AIFMD Q&A to answer questions from external stakeholders and NCAs on such issues as reporting, depositaries and scope;

b. Improvement of the availability and quality of data on AIFMs and AIFs and starting to use analytical reports to identify and assess potential issues;

c. Follow-up to the consultation on asset segregation under AIFMD;
d. Development of a common procedure for the operation of the powers to impose leverage limits on an AIFM or group of AIFMs envisaged under Article 25;

e. Development of cooperation procedures in the context of the AIFMD non-EU passport (Article 37) allowing for smooth cooperation between the NCAs and ESMA. This work can be considered as a follow-up to the advice delivered in July on the extension of the AIFMD passport to non-EU jurisdictions to the European Commission;

f. Information gathering and sharing of experiences on supervisory actions in relation to liquidity management tools;

44. In addition, work will continue to support the consistent application of the UCITS framework, with activities in this area including the finalisation of guidelines concerning the application of the remuneration principles set out under Article 14b of the UCITS Directive in Q1 2016. Consideration will also be given to issues relating to the development of common approaches to the rules on eligible assets in the UCITS Directive.

45. Some work is envisaged which will support both these areas of focus, in particular:

a. A thematic study on the operation of home and host responsibilities under AIFMD and UCITS with a view to clarifying the respective responsibilities of the NCAs and promoting the smooth operation of the EU passports for marketing and management; this is a high priority in view of the significance for the delivery of a fully functioning and efficient Capital Markets Union;

b. In 2015 we (ESMA) have been analysing the phenomenon known as 'closet indexing' which would occur where funds are being distributed as being actively managed in accordance with the terms of their legal and marketing documents while they are instead tracking indices. This is misleading for the investors on the investment product they are buying and it prevents them to make an informed decision, based among other on the appreciation of the level of fees charged by such funds, in line with the investment strategy implemented. ESMA will continue to facilitate co-ordinated action by NCAs in relation to this issue in 2016, with the aim of achieving consistent outcomes for investors.

46. We (ESMA) plan to have a common supervisory priority in 2017 on the identification and tracking of delegation arrangements under AIFMD. It is possible that some preparatory work for this will be required at the end of 2016."

Overall, the priority areas for 2016 identified by ESMA are:

  • Preparing for the sound, efficient and consistent implementation and supervision of the MiFID II Directive and MiFIR, and finalising the data and IT infrastructure needed to support the effective implementation and supervision of MiFID 2/MiFIR and the Market Abuse Regulation.
  • Facilitating the sound and consistent supervision of OTC derivatives markets and in particular of EU central counterparties (CCPs).
  • Supporting the effective application of the European Commission's Capital Markets Union plan.

ESMA will monitor the implementation of the 2016 supervisory convergence work programme, and the priorities may be readjusted depending on developments during 2016. The supervisory convergence work programme can be used to inform ESMA's risk-based approach to its annual work programme and its supervisory convergence work programme for future years.

European Commission proposes to extend MiFID II application date by one year

On 10 February 2016, the European Commission announced that it is proposing a one year extension to the application date of the MiFID II legislative package ).This is to take account of the exceptional technical implementation challenges faced by regulators and market participants.

Member states must transpose the MiFID II Directive by 3 July 2016. Both the MiFID II Directive and MiFIR are scheduled to apply as of 3 January 2017. Under the Commission's proposal, NCAs and market participants will have an additional year to comply with MiFID II. The proposed new application date is 3 January 2018. However, the extension will not have an impact on the timetable for adoption of the Level 2 implementing measures under the MiFID II Directive and MiFIR.

The proposal will affect aspects of the Market Abuse Regulation and the Regulation on improving securities settlement and regulating central securities depositories.

Central Bank of Ireland

The Central Bank has not yet issued the number of new platforms and new funds (including sub-funds) which were authorised by the Central Bank in January 2016.

For more information please contact Nollaig Greene or a member of the Asset Management & Investment Funds Team.

Date published: 26 February 2016