Kees Groffen is a partner in the investment management group of De Brauw Blackstone Westbroek N.V. He specialises in investment management including providing regulatory advice to domestic and foreign investment funds and asset managers, and advising on the structuring and restructuring of investment funds, including retail and private equity funds. He also advises asset managers and pension funds on discretionary and fiduciary asset management agreements and asset pooling. We sat down with him to discuss the changes to come under UCITS V and what this means for fund managers.
Ucitsindex.com: Mr. Groffen, the final text of the UCITS V Directive now has been agreed. Could you sum up the key changes for UCITS managers?
Kees Groffen: UCITS V introduces rules on remuneration for identified staff of UCITS managers. A UCITS manager must adopt a remuneration policy and apply the policy to identified staff: senior management, risk takers, control functions and employees receiving the same remuneration. Restrictions apply with respect to the type of variable remuneration (in principle units in the UCITS or equivalent instruments) and part of the variable remuneration (40 – 60%) must be deferred for at least three years. Information on remuneration must be disclosed in the annual report and the key investor information (KIID). UCITS V introduces additional requirements for depositaries relating to minimum capital (at least EUR 730,000 and possibly more based on an extensive set of calculation requirements), organisational and administrative arrangements and appropriate and proportionate systems, resources and procedures. The liability of the depositary will be extended to offer the same liability regime as is the case under the AIFM Directive. However, unlike the AIFM Directive regime, a depositary cannot discharge itself of liability in the case of delegation to a sub-custodian. The re-use of assets (e.g. securities lending) by the depositary or a sub-custodian will become subject to additional rules. Re-use should be for the benefit of the UCITS and the transaction should be covered by high quality and liquid collateral received by the UCITS under a title transfer arrangement. The market value of the collateral at all times has to amount to at least the market value of the re-used assets plus a premium.
Ucitsindex.com: Manager Remuneration was a big point of discussion during the drafting stage. The bonus cap was voted down finally, but how will bonus like exactly in the future?
Groffen: UCITS V does not introduce a bonus cap, but it remains to be seen what position national regulators will take on the required appropriate balance between fixed and variable remuneration. National regulators could use this requirement to impose a bonus cap at a national level. The preamble of UCITS V mentions that the remuneration policy should apply also to third parties to whom functions have been delegated and to an investment advisor. It is expected that ESMA will give further guidance on this topic.
Ucitsindex.com: In contrast to AIFMD, Ucits V prohibits a depositary from discharging or transferring its liability to a sub-custodian. Does this add additional safety for investors compared to AIFMD funds or just adds costs for managers?
Groffen: In theory the requirement creates additional safety for investors. In case of loss of assets they can hold the depositary liable and do not have to file a claim against one or more sub-custodians. The prohibition to transfer liability to a sub-custodian will benefit depositaries with an extensive chain of in-house sub-custodians. Those who rely on third party sub-custodians will find it more difficult to cope with this restriction and may wish to reflect the additional risk in their fees. This restriction and the additional requirements imposed on depositaries could lead to a consolidation of depositaries.
Ucitsindex.com: What are the next steps regarding UCITS V?
Groffen: The implementation of UCITS V into national law is expected by mid-2016. In July 2012 the European Commission launched a consultation on a number of issues which could result in further amendments to the UCITS Directive, referred to as UCITS VI. Issues include an EU passport for depositaries allowing them to provide their services on a cross border basis, shadow banking, eligible assets and the use of derivatives – in particular, whether it is necessary to limit the scope of eligible derivatives and the use of derivatives generally to those traded on multilateral platforms and cleared by a central counterparty and liquidity management rules. The regulatory environment for UCITS will keep changing for the next years and it will remain a challenge for managers to keep up with the developments.
Ucitsindex.com: Thank you for the interview.