1 Legal & Regulatory

1.1 UCITS Update

There have been a number of developments over the quarter:

Central Bank UCITS performance fees review

On 4 September 2018 the Central Bank published the outcome of an inspection into UCITS performance fees in a letter to industry. Fund management companies are responsible for the effective oversight of performance fee charges and, in some instances, it found that performance fees were not calculated in accordance with the Central Bank's UCITS Performance Fees Guidance. It also highlights concerns that this guidance is not being applied consistently across industry. Following this all fund management companies whose UCITS funds charge performance fees are required to review their use of performance fees for compliance with the guidance by 30 November 2018.

Central Bank Q&A

On 5 July 2018 the Central Bank published the twenty third edition of its UCITS Q&A amending Question ID 1002 on UCITS investing in non-UCITS investment funds. The amendments clarify that where a UCITS invests in a non-UCITS fund, the constitutional document of the non-UCITS must include a prohibition on investing more than 10% in other investment funds; and that the non-UCITS must be subject to requirements in its jurisdiction of domicile which are equivalent to certain UCITS investor protections. If this is not the case the non-UCITS fund must have requirements of the same effect in its constitutional or offering document.

UCITS should be in compliance with this revised Q&A as soon as possible taking into account the best interests of the investors. In any event, compliance should be ensured no later than 5 October 2018.


On 23 July 2018 ESMA updated its UCITS Q&As which include new questions and answers on:

  1. Whether a UCITS is permitted to invest in other UCITS or collective investment undertakings with different investment strategies or investment restrictions (new Question 6a);
  2. Whether netting and hedging arrangements can be taken into account for the purposes of calculating issuer concentration limits under Article 52 of the UCITS Directive (new Question 5b);
  3. Reuse of assets by a UCITS depositary under Article 22(7) of the UCITS Directive; (Section X, new Question 1); and
  4. The supervisory responsibilities of competent authorities in host member states when a UCITS management company provides investment services through a branch established in the host member state (new Question 7a).

ESMA peer review on Guidelines on ETFs and UCITS Issues

On 30 July 2018 ESMA published a final report following its recent peer review on the guidelines on exchange traded funds ("ETFs") and other UCITS issues following on-site visits to six national competent authorities ("NCAs") (Germany, Estonia, France, Ireland, Luxembourg and the UK). It calls for NCAs to:

  • Ensure a more systematic review of the required efficient portfolio management ("EPM") disclosures, allowing investors to better understand funds' EPM engagement, the risks involved and the cost and fee policy concerning EPM.
  • Provide more comprehensive internal supervisory guidance on costs, fees and revenues regarding EPM.
  • Ensure that all net revenues from EPM are returned to investors.
  • Revise existing national exemptions to the guidelines on collateral requirements so that fund assets can only be used for EPM purposes where UCITS receive high quality and liquid collateral.

ESMA noted that the guidelines have been transposed into Irish law and that the Central Bank has issued supporting guidance and factored the requirements in the Guidelines into its UCITS application forms (these were highlighted as good practices).

See our client update, ESMA highlights improvements needed in regulation of UCITS EPM practices

Depositary safekeeping duties

Article 22a(3)(c) of the UCITS Directive 2009/65/EC requires that where a depositary delegates safe-keeping functions to third parties (custodians), the assets also need to be segregated at the level of the delegate. Delegated Regulation (EU) 2016/438 on safe keeping duties of depositaries details how this obligation is to be fulfilled. On 29 May 2018 the European Commission consulted on a draft delegated regulation which amends Delegated Regulation (EU) 2016/438 and sets out further requirements where custody of UCITS clients' assets is delegated to a third party. In response to industry requests, the Commission deferred the application date of the new delegated regulation for 18 months post finalisation and it published a further draft of it on 12 July 2018. The Council of the EU has confirmed that it will not to object to it and the next step is for it to be considered by the European Parliament.

To view the full article, please click here