We set out below an overview of some recent regulatory developments which might be of interest to financial service providers including investment funds and fund management companies:
On 15 April 2014 the European Parliament approved the proposed Directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as regards depositary functions, remuneration policies and sanctions (“UCITS V”).
Key elements of UCITS V, which will amend UCITS IV (Directive 2009/65/EC), are summarised below:
- UCITS V will narrow the rules on depositary eligibility. Only national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure will be eligible as UCITS depositaries;
- UCITS assets will be protected in the event of insolvency of the depositary through clear segregation rules and safeguards provided by the insolvency law of the relevant member state;
- the depositary’s liability will be strengthened. The depositary will be liable for any loss of UCITS assets held in custody;
- similar to the remuneration rules introduced pursuant to the AIFMD regime, remuneration policies for all risk takers involved in managing UCITS funds will be introduced to ensure that remuneration practices do not encourage excessive risk-taking; and
- UCITS V will strengthen the existing regime to ensure effective and harmonised administrative sanctions.
Once formally approved by the Council of the EU, it is anticipated that the finalised text of UCITS V will be published in the EU Official Journal in the second quarter of this year. It is envisaged that member states will then have 18 months from that date to implement UCITS V into national law. ESMA is expected to issue technical standards and guidance to assist compliance with UCITS V later this year.
PRIIPs KID Regulation
On 15 April 2014 the European Parliament approved the proposed regulation on key information documents (“KIDs”) for packaged retail and insurance-based investment products (“PRIIPs”). PRIIPs can be categorised into four groups: investment funds, insurance-based investment products, retail structured securities and structured term deposits. The KID will be a pre-contractual information document which will be required to be provided to all retail consumers prior to purchasing an investment product from a bank, an insurance company or an investment fund. The KID will be a three page document describing what the product invests in, the risks and potential rewards relevant to the product and the costs associated with the product. The KID will only be required to be produced when a relevant product is sold to retail investors – no similar requirement arises for professional investors. Private pension products will not be required to comply with the new rules.
On the basis that the UCITS key investor information regime is already in place, the European Commission has proposed that UCITS funds would be exempt from the new KID requirements for a transitional period of five years. However, possible refinements to the UCITS key investor information will be considered at the end of this transitional period to more closely align the UCITS key investor information with the KID.
On 15 April 2014 the European Parliament approved:
- the proposal for a Regulation on markets in financial instruments and amending Regulation [EMIR] on OTC derivatives, central counterparties and trade repositories (“MiFIR”); and
- the proposal for a Directive on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council (the “MiFID II Directive”), together (“MiFID II”).
Key elements of MiFID II are set out below:
- the introduction of a market structure framework which ensures that trading, wherever appropriate, takes place on regulated platforms;
- an increase in equity market transparency and the establishment of a principle of transparency for non-equity instruments such as bonds and derivatives;
- the introduction of strengthened supervisory powers and a harmonised position-limits regime for commodity derivatives;
- improvement in conditions for competition in the trading and clearing of financial instruments;
- the introduction of trading controls for algorithmic trading activities;
- provision for stronger investor protection by the introduction of better organisational requirements;
- the introduction of effective and harmonised administrative sanctions; and
- the introduction of a harmonised regime for granting access to EU markets for firms from third countries based on an equivalence assessment of third-country jurisdictions.
From a UCITS perspective, units in a UCITS fund are currently regarded as financial instruments and therefore investment services relating to them are already fully covered under the existing MiFID regime. MiFID II maintains the general classification of UCITS as non-complex instruments but it introduces the exception of ‘structured UCITS’ which will now be treated as complex instruments for the purposes of the execution-only regime.
It is anticipated that, once it has been formally approved by the Council of the EU, member states will have two years to transpose the MiFID II Directive into national law. MiFIR shall be directly applicable in all member states – certain provisions will be immediately applicable after the regulation enters into force. ESMA is expected to publish a consultation on draft technical standards later this year (or early 2015).
The European Commission proposes to introduce a new investment fund framework designed for investors who wish to invest money in companies and projects that require long term capital. These private European Long-Term Investment Funds (“ELTIFs”) would only invest in businesses that require capital to be committed for long periods of time. It is envisaged that ELTIFs will provide finance to various infrastructure projects, unlisted companies or listed small and medium- sized enterprises of lasting duration that issue equity or debt instruments for which there is no readily identifiable buyer. The ELTIF would be structured as an alternative investment fund (“AIF”) for the purposes of the Alternative Investment Fund Managers Directive (“AIFMD”) and would be available for investment by all types of investor across Europe subject to certain requirements.
Once agreement is reached on the ELTIF Regulation at a European level, the European Commission will carry out detailed work on the implementing measures. It is anticipated that the proposed ELTIF Regulation will enter into force in early 2015.
Money Market Funds
The European Parliament's Economic and Monetary Affairs Committee (ECON) was due to examine the proposed new regulation on Money Market Funds (the “MMF Regulation”) in March 2014 (with a European Parliament plenary session vote scheduled for 15 April 2014). However, examination of the MMF Regulation has now been postponed until the next European Parliament. The proposed new MMF Regulation, which forms part of the European Commission's work on shadow banking, will create new rules regulating how Money Market Funds will operate.
Central Bank’s Consultation Paper 68
On 28 March 2014 the Central Bank of Ireland (the “Central Bank”) published the results of its "Consultation on types of alternative investment funds under AIFMD and unit trust schemes under the Unit Trusts Act 1990” (“CP 68”). By way of reminder, CP 68 considered whether certain investment structures should be regarded as AIFs for the purposes of AIFMD. The Central Bank, having considered the detailed responses received from industry in relation to this issue, provided specific guidance for market participants in relation to the treatment of Exempt Unit Trusts (“EUTs”), Real Estate Investment Trusts (“REITs”), and Special Purpose Vehicles (“SPVs”). A brief summary of the Central Bank’s conclusions are set out below (for further detail regarding CP 68 please click here):
EUTS: from 1 May 2014, a new unit trust scheme made available to investors in Ireland should seek authorisation from the Central Bank under the Unit Trusts Act 1990 where it is an AIF. A unit trust which is already in existence and which, had it come into existence after 1 May 2014, would have required authorisation under the terms of the above requirement must apply for authorisation by 1 October 2014. Certain exemptions are available for schemes which are single investor vehicles, closed ended schemes and in circumstances where eligible investors are confined to certain categories of charities and/or regulated occupational pension schemes.
REITS: the Central Bank has indicated that it will consider a REIT to be an AIF unless a REIT can demonstrate that it is not an AIF, but notes that it may revisit this issue in light of future ESMA conclusions.
SPVs: the Central Bank’s feedback statement refers to its previous guidance regarding the treatment of SPVs, which stated that an SPV would not normally be an AIF (please click here for our previous briefing note on this issue) noting, however, that it anticipates further consideration of this issue by ESMA.