European Union: UCITS V Directive - Update


On February 25, 2014, following the trilogue negotiations among the European Parliament, the European Council and the European Commission, agreement was reached in relation to the European Commission's set of proposals to strengthen the rules for undertakings for collective investment in transferable securities ("UCITS"). This concluded the negotiations in relation to the draft UCITS V proposals which were originally put forward by the European Commission in July 2012 with the aim of addressing lessons learned from the financial crisis, most notably in connection with the Madoff fraud and the Lehman Brothers default which revealed material divergences in rules on depositary duties and liabilities across EU member states. The new rules are designed to significantly increase the level of protection enjoyed by UCITS investors and are seen as a key step towards restoring investor confidence in the wake of the financial crisis.

As set out in the Dillon Eustace brochure headed "UCITS V Directive", published in July 2012, UCITS V focuses on three main areas, namely, (i) clarification of the UCITS depositary's eligibility, its functions and its liability in circumstances where assets in custody are lost; (ii) rules governing remuneration policies; and (iii) the harmonisation of the minimum administrative sanctions regime across Member States.



Under original UCITS V proposal, the depositary must be either a credit institution or a MIFID investment firm. In the compromise text agreed at the end of February, and as proposed by the European Council, a third category of eligible depositary has also been included, namely, any other legal entity authorised by the competent authority under the laws of the Member State to carry on depositary activities which is subject to capital adequacy and own funds requirements and which is subject to prudential regulation, ongoing supervision and satisfies certain minimum requirements, including requirements in relation to infrastructure, experience, administrative and accounting procedures, internal control mechanisms, procedures for risk assessment and arrangements to prevent conflicts.

This third category of eligible depositary is a welcome development given that in Ireland only a small minority of entities authorised by the Central Bank to provide depositary services would have fallen within the narrow categories of credit institutions or of MiFID firms as proposed in the Commission's original proposals.

Existing depositaries of UCITS who do not fall into the above three categories will have a 2 year grandfathering period within which to convert into eligible entities.


The original UCITS V proposals in relation to the delegation of custody will now be aligned with those set out in the Alternative Investment Fund Managers Directive ("AIFMD"). Under UCITS V, a UCITS depositary will only be permitted to delegate all or part of its safekeeping tasks to a sub-custodian where certain conditions are satisfied, including:

  1. the tasks are not delegated with the intention of avoiding the requirements of the UCITS Directive;
  2. there must an objective reason for the delegation; and
  3. the depositary must exercise all due skill, care and diligence in the selection and appointment of any sub-custodian and there must be periodic review and ongoing monitoring of the sub-custodian.

The depositary must also determine that the sub-custodian itself satisfies certain requirements during the performance of the tasks delegated to it, including the requirement to have structures and expertise that are adequate and proportionate to the nature and complexity of the assets of the UCITS. The sub-custodian must also segregate the assets of the depositary's clients from its own assets and from the assets of the depositary so that they can be clearly identified as belonging to the clients of the depositary.

In circumstances where the appointment of a sub-custodian is required under local law, the depositary may appoint a local entity which does not satisfy the delegation requirements set out in UCITS V provided that investors are informed that the delegation is required due to local legal constraints in such third country are informed, of the circumstances of the delegation and are informed "of the risks involved in such delegation" (the latter text having been agreed in the final compromise text).

Assets held in custody will not be permitted to be reused by the depositary or any third party unless certain conditions are met, including a new requirement set out in the final compromise text that the transaction "is covered by high quality and liquid collateral received by the UCITS under a title transfer arrangement" where the market value of the collateral is at all times at least equal to the market value of the reused assets plus a premium.

It is also of note that, notwithstanding the wording put forward by the European Council and the Parliament in earlier drafts of the Directive, the final compromise text provides that UCITS will be required to disclose in its prospectus a description of any safekeeping functions delegated by the depositary, the list of delegates and sub-delegates and any conflicts of interest that may arise from such delegation.

This new provision can be distinguished from the requirement in the AIFM Directive which merely stipulates that such information should be made available to investors (not that it must be disclosed in the prospectus).

Depositary Liability

With the aim of harmonising depositary liability under UCITS V, new requirements in relation to depositary liability have been introduced. Similar to AIFMD, UCITS V distinguishes between:

  1. financial instruments that are capable of being held in custody, where the depositary will be liable for the loss of such assets on a strict liability basis (i.e. irrespective of fault or negligence) unless the depositary can prove that the loss of assets is due to an "external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary"; and
  2. all other assets (such as OTC derivatives), which are subject to recordkeeping and ownership verification duties and where the depositary will only be liable if a loss is suffered as a result of its negligence or intentional failure to properly fulfil its obligations under the Directive.

In the case of (i) above, a UCITS depositary is obliged to return a financial instrument of the identical type or corresponding amount to the UCITS, without undue delay, if it is deemed liable for the loss.

In addition, the depositary's liability will not be affected by the fact that it has entrusted to a third party all or some of its custody tasks. Therefore, the depositary will be liable for the loss of assets even where the loss occurred at the level of the sub-custodian. Unlike depositaries of alternative investment funds, which are permitted under AIFMD to transfer liability for the loss of financial instruments held in custody to the relevant sub-custodian, depositaries of UCITS will not be permitted to exclude or limit their liability under contract. In its original proposal, the Commission noted that it would be inappropriate and unfeasible to require retail investors to understand the consequences of such contracts.

UCITS V also gives new rights to all UCITS investors so that they are able to directly or indirectly have recourse to the UCITS depositary. The final compromise text states that such right of recourse shall be subject to the condition that "this does not lead to a duplication of redress or to unequal treatment of the unitholders".

Duties of the Depositary

In addition to the new safekeeping requirements which, as above, distinguish between (i) financial instruments that can be held in custody by the depositary and (ii) record keeping and ownership requirements relating to other assets, UCITS V includes a uniform list of oversight duties (similar to the existing oversight duties applicable to depositaries of Irish UCITS) as well as new cash flow monitoring requirements. Similar to AIFMD, UCITS depositaries will now be required to ensure that the cash flows of UCITS are properly monitored and to ensure that all payments made by or on behalf of an investor upon the subscription of units have been received and that all cash has been booked in cash accounts that meet certain conditions.

Furthermore, in performing its tasks, a depositary will be obliged to act honestly, fairly, professionally, independently and in the interest of the UCITS and its investors.


Of considerable interest are the new provisions being introduced in relation to remuneration. Consistent with the approach adopted under AIFMD, UCITS V provides that Member States shall require management companies to establish and apply remuneration policies and practices that are consistent with and promote sound and effective risk management and do not encourage risk- taking which is inconsistent with the risk profiles, rules or instruments of incorporation of the UCITS they manage and do not impair compliance with the management company's duty to act in the best interests of the UCITS.

The remuneration policies and practices will apply to those categories of staff, including senior management, risk takers, control functions and any employee receiving total remuneration that falls within the remuneration bracket of senior management and risk takers whose professional activities have a material impact on the risk profiles of the management companies or of the UCITS they manage.

Following the introduction of UCITS V, UCITS managers' remuneration structures will be required to include:

  1. criteria for calculating compensation for different categories of staff;
  2. a ban on guaranteed variable remuneration except in exceptional circumstances;
  3. rules for fixed and variable components of total remuneration (including a requirement that at least 50% of any variable remuneration is in the form of units of UCITS);
  4. rules on pension benefits; and

(v) rules for payments related to early termination of employment (to ensure that failure is not rewarded).

UCITS managers will, however, have the flexibility to allow for the sound application of the remuneration policies in a manner proportionate to its size, its internal organisation as well as the nature, scale and complexity of its activities.

A new requirement in the final compromise text of the Directive provides that details of the up to date remuneration policy (including a description of how remuneration and benefits are calculated, the identities of persons responsible for awarding the remuneration and benefits) will need to be disclosed in the Prospectus. Alternatively, the remuneration policy may be summarised in the Prospectus, provided a statement is included that further details of the policy are available by means of a website and that a paper copy is available to investors free of charge upon request (this information must also be disclosed in the Key Investor Information Document).

Recital 2 of the Directive suggests that the remuneration rules shall apply also to UCITS self-managed investment companies. Recital 2 also states that the remuneration policies and procedures should apply "in a proportionate manner, to any third party which takes investment decisions that affect the risk profile of the UCITS because of functions which have been delegated in accordance with Article 13". This latter text, which did not appear in earlier drafts of the Directive, may catch US managers offguard and concerns have arisen that such provisions could deter US fund staff from managing mainstream European funds. The requirement for managers to receive a minimum of 50% of their bonuses in units of the fund they manage is particularly problematic as US nationals cannot own shares of UCITS. However, it may be that US (and other third party) managers can rely on the fact that the UCITS accounts for less than half of the total portfolios under management by such entity (in which case the minimum of 50% above does not apply). In the meantime, it will be interesting to see how Recital 2 is interpreted by the European Securities and Markets Authority (ESMA), who are expected to issue guidelines on remuneration policies in the coming months.


In order to harmonise the application of sanctions across member states, UCITS V sets down an exhaustive list of breaches which require sanctions by competent authorities. The final proposed text also sets out a minimum list of administrative sanctions and measures which may be applied in the event of any such breach, including prescriptive limits on fines which may be imposed by competent authorities.

Other measures being introduced are the requirement for Member States to establish effective mechanisms to encourage the reporting of breaches and to provide a secure channel to enable such communication. The proposals also require appropriate protections to be put in place for employees of UCITS management companies and investment companies who report breaches committed within the company.


Following the agreement reached on February 25, 2014, it is expected that the final UCITS V Directive will be published in the Official Journal shortly. Member States will then have eighteen months from the date of publication to transpose the Directive into their domestic laws, during which time it is expected that implementing measures providing greater clarity on certain provisions of UCITS V will be issued.

In preparation for the transposition date, which is now likely to fall in 2015, UCITS and UCITS managers will need to consider how the new requirements will impact on their depositary arrangements, remuneration structures and fund documentation. In particular, the following steps will need to be taken:

  • Depositaries will need to analyse and assess the impact of the new depositary safekeeping, delegation and liability provisions. In particular, sub-custody arrangements will need to be reviewed to determine what changes will be required to the existing due diligence process. Depositaries will also need to review their capabilities in order to discharge the new cash monitoring oversight duties. Custody contracts will need to be updated to reflect the new safekeeping and oversight duties and, in particular, to reflect the relevant changes to liability standards. The new requirements in relation to delegation will also require depositaries to amend their sub-custodian agreements to ensure that all of the requirements imposed on delegates under UCITS V are reflected in the contractual arrangements.
  • UCITS managers will need to review their existing remuneration policies and to examine which members of staff and which employment contracts may be impacted. Managers will also need to review their delegation arrangements and to identify what third parties to whom functions have been delegated may be impacted by the new rules.
  • UCITS will need to review their fund documentation. In particular, it will be necessary to update the Prospectus to reflect the new disclosure requirements in relation to remuneration and
  • depositaries; Key Investor Information Documents will also need to be reviewed. Business Plans will also need to be examined to reflect details of the remuneration policy.
  • Annual accounts will need to be updated to reflect the new disclosure requirements in relation to remuneration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Dillon Eustace
Maples and Calder
Dillon Eustace
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Dillon Eustace
Maples and Calder
Dillon Eustace
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions