Boarding for UCITS V Ready for takeoff

Transcription

1 Boarding for UCITS V Ready for takeoff

2 Table of contents Introduction 3 Depositary 4 Remuneration 8 Provisions on Sanctions 12 Contacts 16 2

3 UCITS V, a new challenge for enhanced responsibilities With the adoption by the European Parliament of the fifth release of the European Union Directive on Undertakings for Collective Investment in Transferable Securities commonly named UCITS V, the UCITS industry and related stakeholders will have to adapt their model to comply with new regulatory obligations: Depositary s responsibilities and liabilities will be enhanced Remuneration of managers will be upgraded These two first obligations will aim to align UCITS industry with regulatory requirements of the Alternative Investment Fund Managers Directive (AIFMD) issued in Luxembourg with the Law of 12 July UCITS V will also introduce a new sanctions regime putting all industry players under pressure of potential significant fine in case of non-compliance with regulatory requirements. This new regime will be applicable to companies but also to their employees and representatives, introducing a significant reputational risk due to their public release. All the actors in the industry i.e. depositaries, fund administrators, management companies, conducting officers, Board of Directors members and simple employees will be impacted by this evolution. Professionals will have to reinforce their operational models and develop fine-tuned internal controls to guarantee an appropriate oversight of delegated activities. This reshape will not only consist in a compliance exercise but it will fundamentally impact the daily business of the industry. Simon Ramos Partner Regulatory Strategy This reshape will not only consist in a compliance exercise but it will fundamentally impact the daily business of the industry Boarding for UCITS V Ready for takeoff 3

4 Depositary UCITS V further alignment of Depositary liabilities and duties across the EU One of the main challenges of UCITS V is the reinforcement of the depositary regime. The UCITS depositary obligations are aligned with the AIFMD requirements, however they will still need some refinements in order to ensure UCITS depositaries readiness. The Directive will need to be transposed into the national laws of the EU Member States latest by 18 March The main aim of UCITS V is to increase investor protection by focusing on the eligibility criteria for depositary banks, reuse of assets, specific delegation requirements, enhanced oversight and cash monitoring as well as managing potential conflicts of interests. Luxembourg s financial regulator CSSF (Commission de Surveillance du Secteur Financier) recently introduced new requirements in the Circular 14/587 applicable to Luxembourg credit institutions acting as depositary of UCITS under Part I of the Law of 17 December The circular aims at anticipating UCITS V aspects with important exceptions (e.g. no liability clauses in the circular). Main differences between AIFMD, UCITS V and CSSF circular 14/587 The key elements of the UCITS and alternative investment fund depositary regimes are very similar. We do, however, observe variations that will require review and adjustment of the depositary s organisational, contractual and control frameworks. CSSF circular 14/587 anticipates these changes and introduces specific requirements for depositaries, which have been illustrated in the table on the following page. 4

5 Description AIFMD Scope Oversight requirements apply to both FCPs and SICAVs Eligibility The Depositary must be a credit institution or branch of EU credit institution in Luxembourg Safekeeping Annual confirmation on appropriate segregation required, including from safekeeping delegates UCITS V CSSF 14/587 Inventory of all assets (incl. collateral and other assets) to be provided at least each year end of the fund Written annual confirmation by sub-custodians that due diligence has been appropriately performed on their delegates For other assets, depositary to ensure AIFM/ManCo/UCITS V performs due diligence on the fund s counterparties Collateral requirements in line with fund s efficient portfolio management techniques requirements Clearly defined segregation requirements along the custody chain Legal opinion required in case of insolvency of a sub custodian depending on local jurisdiction Delegation requirements Depositary must identify and monitor on an on-going basis all risks in relation to delegated functions and ensure these are covered by the risk management framework Specific requirements regarding concentration of assets with limited number of sub-custodians (same group entities, objective reason for concentration, disclosure in prospectus, accounts in the name of depositary/fund name) Sub-depositary network to be disclosed in the prospectus Governance & conflicts of interest Stringent duties and guidelines regarding governance and conflict of interest management between the depositary and ManCo/Fund No delegation of portfolio or risk management to any party performing safekeeping All activities that are performed by the depositary must be disclosed (e.g. TA, counterparty, collateral manager) Internal procedures and legal framework Have written procedures on business acceptance Formalise agreements or procedures with all relevant stakeholders in the depositary function and activities New depositaries must disclose to the regulator comprehensive and up-to-date information on a regular basis (name of persons in charge of DB, organization chart of DB, employees KPI s, CV with background of persons in charge of DB, description of IT infrastructure, list of sub-custodians, list of delegates, links with TA and FA, auditors report on organization, compliance measures, operational procedures list, description of UCITS types in custody Reuse of assets permitted under specific conditions Discharge of liability on safe keeping delegates Applicable Non-applicable Regulatory Grey Area Please note that the above table is subject to change according to changes within the specific legal and/or regulatory framework. Boarding for UCITS V Ready for takeoff 5

6 Are you ready for UCITS V? In order to assess your readiness for UCITS V requirements, you need to consider the following: Are your depositary agreements UCITS V compliant? Does your conflicts of interest policy cover relationships with other entities within your group, especially Management Company and your delegates? Do you perform and formalise ongoing monitoring of your delegates and, in particular, the entities safekeeping the assets of your UCITS clients? Is your assets segregation policy with sub-custodians in line with UCITS V? How do you ensure appropriate record keeping of assets not held in custody? Do you have the adequate tools and processes to perform cash monitoring? Is your pricing in line with the risks related to your new roles and responsibilities? Main industry challenges Actors that have already implemented AIFMD requirements need to identify the delta when compared to UCITS V obligations. Depositaries, which have not yet had the chance to do so, should start looking into it now. The following challenges lie ahead for the depositaries: Safekeeping and record keeping of assets Segregation of assets along the custody chain Restriction concerning reuse of assets held in custody by the depositary or its delegate UCITS assets protection in case of insolvency of the third party safekeeping the assets Record keeping of non-custody assets Delegation requirements Proper justification of reasons for delegation Framework for initial and ongoing due diligence of the delegate Full liability for the UCITS financial assets Oversight duties Applicable to all UCITS, regardless of legal form (including SICAV) Cash monitoring Process definition and implementation Automation of the cash monitoring Governance and conflicts of interest Conflicts of interest policy enhancement Review of organisational structure Internal procedures and legal framework Enhancement of existing policies and procedures or establishing new procedures Enlargement of internal audit scope Regular CSSF information disclosures 6

7 How can we help you? Our customisable service offering Deloitte Luxembourg is highly focused on regulatory matters and coordinates various EMEA regulatory initiatives within the Deloitte network of firms. Our deep and extensive market experience and exposure through multiple engagements with most of the largest fund service providers as well as asset managers positions us as the partner of choice of our clients. UCITS V might appear as an easy and straightforward exercise. It is not. Depositaries should already now address the challenges that might arise in order to seize the opportunities the new directive brings. Deloitte offers a complete range of packages of services that you can combine and leverage in order to create unique advantage. Deloitte Luxembourg is highly focused on regulatory matters and coordinates various EMEA regulatory initiatives within the Deloitte network of firms Assessment of potential capital increase and impact on the depository service fee Upgrade ISAE 3402 to the Depositary function Set-up of recordkeeping and ownership verification for non-financial assets Regulatory healthcheck Assist in set-up with Prime Brokers and other counterparties of the fund Review or draft Operating Memorandum between Depositary and ManCo and between Depositary and stakeholders (delegates and counterparties) Network management assessment Initial and on-going due diligence framework set-up Review of organization structure in line with conflicts of interests (e.g. shareholder structure, governance, functions) Set-up of cash monitoring model Review of depositary control framework specific to fund s asset class Boarding for UCITS V Ready for takeoff 7

8 Remuneration UCITS V further alignment of management companies and investment companies liabilities and duties across the EU The UCITS V framework introduces requirements to ensure that the remuneration policies and practices of UCITS management or investment companies ( UCITS managers ) are consistent and promote sound and effective risk management. The main objectives of the directive, where remuneration policies are concerned, are to ensure that three key issues are covered: governance, risk alignment and transparency. While, naturally, a certain extent of alignment with AIFMD is on the agenda and the European Commission s intention is to create a level playing field, there are several UCITS V provisions, which raise additional implementation challenges for the UCITS managers: The main objectives of the directive, where remuneration policies are concerned, are to ensure that three key issues are covered: governance, risk alignment and transparency Remuneration Policies and Practices According to UCITS V, each UCITS manager must put in place remuneration policies and practices that: are consistent with and promote sound and effective risk management of the UCITS do not encourage risk-taking that is inconsistent with the risk profiles or fund rules governing the relevant UCITS do not impair compliance with the UCITS manager s duty to act in the best interest of the UCITS What UCITS managers are concerned? According to UCITS V, the relevant target groups are: all UCITS managers, regardless of their size or systemic importance profiles who have an effect on the risk of the UCITS they manage risk takers other functions that are remunerated in the same manner as risk takers Covered remuneration The concept of remuneration foreseen by UCITS V has to be understood in its broadest meaning. It relates to: all remuneration paid either by the UCITS manager or by the UCITS itself both fixed and variable pay, early termination payments and pension payments performance fees as well as non-cash benefits, such as share options Governance UCITS V requires the UCITS manager s non-executive board members (and those who have some experience in risk management) to: adopt the remuneration policy adopt and review at least annually the general principles of the remuneration policy and take responsibility for and oversee their implementation The remuneration policy s implementation must, at least annually, be subject to a central and independent review to ensure compliance with the remuneration policies and procedures adopted by the UCITS manager. 8

9 Structure of remuneration UCITS V requires UCITS managers to establish a remuneration policy promoting sound and effective risk management: balanced fixed and variable remuneration components guaranteed variable remuneration in the first year following a new hire and even then only in exceptional circumstances use both non-financial and financial criteria to assess performance in the context of a multi-year framework with an adjustment mechanism capable of integrating all types of current and future risks only pay variable remuneration if it is sustainable according to the UCITS manager s financial situation as a whole (malus & clawbacks provisions) variable remuneration must be consistent with the interests, values and the strategy of the UCITS managers and/or the UCITS defer between 40 60% of variable remuneration over a three to five-year period, subject to the over-riding requirements so that the deferral period is: appropriate in view of the holding period recommended to the UCITS investors correctly aligned with the nature of the risk of the UCITS in question pay a substantial portion (of at least 50%) of the variable remuneration component in non-cash instruments such as units of the UCITS concerned, equivalent ownership instruments or other instruments with equally effective incentives. Where the management of the UCITS accounts for less than 50% of the total portfolio managed by the UCITS manager the 50% minimum does not apply, but the obligation to pay a substantial portion of variable remuneration in non-cash instruments remains however, this is subject to the UCITS legal structure, its fund rules or instruments of incorporation link early termination payments to performance hold discretionary pension benefits in non-cash instruments for five years if a staff member leaves before retirement. Following retirement, UCITS managers must also pay discretionary benefits in the form of non-cash instruments which must be subject to a five-year retention period. Boarding for UCITS V Ready for takeoff 9

10 Remuneration Committee Significant UCITS managers must establish a remuneration committee. The term significant is to be understood in terms of the UCITS manager s size, the size of the UCITS it manages, the UCITS manager s internal organisation and the nature, scope and complexity of its activities. ESMA s remuneration guidelines are likely to give further guidance on the definition of significant in the context of this requirement. Disclosure UCITS managers will be facing new disclosure duties as regards remuneration. This information will have to be disclosed externally, to investors/prospective investors, and internally, to the UCITS managers staff members. UCITS V foresees the inclusion of remuneration details in the prospectus, KIID and the annual report. Prospectus: details of remuneration policy itself, or a summary of that policy and a statement that the details of the policy are available on a specified website and that a paper copy will be made available free of charge upon request KIID: statement that the details of the policy are available on a specified website and that a paper copy will be made available free of charge upon request Annual report: disclose aggregate remuneration paid by UCITS managers and by the UCITS, to identified staff, together with the number of beneficiaries and, where relevant, performance fees paid by the UCITS: breakdown of the aggregate amount of remuneration by category of staff description of how remuneration and benefits are calculated detail of the outcomes during periodical reviews material changes adopted to the remuneration policy Proportionality UCITS managers need only comply with the principles in a way and to an extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities. The proportionality principle is likely to be of significance in the UCITS context as UCITS generally pose less risk for investors than other types of investment products as well as posing low systemic risk. 10

11 Specifications Requirements Directive CRD III & IV AIFMD UCITS V Identified staff 01 Staff with a total remuneration of EUR 500,000 or more for the previous financial year 02 Staff within the 0.3% of the number of staff (0.5%) who have been awarded the highest TR in the previous financial year Instruments & Deferral 01 Application of the discount rate for remuneration (maximum 25% of the total VR) if the variable pay is deferred at least 5 years. 02 The VR can only amount to maximum 100% of the total fixed remuneration (under some circumstances up to 200%) Applicable Non-applicable Please note that the above table is subject to change according to changes within the specific legal and/or regulatory framework. Main differences between CRD III/CRD IV, AIFMD and UCITS V The key elements of the UCITS and alternative investment fund depositary regimes are similar. We do however observe several variations compared to the provisions of CRD III/CRD IV, which have been illustrated in the table above. Review and adapt, respectively, assist in defining the remuneration policy (including HR and tax optimisation aspects) How can we help you? Our customisable service offering Deloitte Luxembourg s multi-disciplinary competencies and experience in implementing new regulatory provisions on remuneration policies enable us to provide our clients with tailor-made solutions in implementing the forthcoming UCITS V Guidelines in terms of governance, risk management, human resources and tax optimisation. Deloitte can offer you a complete range of HR-related services, which will ensure your remuneration policy is not only aligned with UCITS V requirements, but also considers recent HR and Reward market trends evolution in Luxembourg. Review and adapt, respectively, design the remuneration governance and process Align the remuneration policy with business objectives and risk culture Support the overall implementation/execution of the remuneration governance process Boarding for UCITS V Ready for takeoff 11

12 Provisions on Sanctions Overview UCITS V seeks to harmonise the administrative penalties across Member States with respect to infringements of national provisions transposing the UCITS Directive. In particular, UCITS V includes: setting out a list of minimum types of administrative penalties and other administrative measures applicable to infringements of the UCITS Directive providing a list of the criteria which Member States must take into consideration when determining the type and level of administrative sanctions to impose The UCITS V provisions on sanctions also deal with mutual legal assistance, whistleblowing and supervisory reporting. Why does UCITS V deal with sanctions? The financial crisis revealed that financial market rules are not uniformly enforced across the EU, giving rise to ineffectiveness and the potential for regulatory arbitrage and related risks. In 2010, following a cross-sector review of the coherence, fairness and actual use of sanctioning powers by EU Member States, the EU Commission issued a Communication on reinforcing sanctioning regimes in the financial services sector. This publication also demonstrated a lack of harmonisation as well as many divergences and weaknesses in national sanctioning regimes. In 2011, the Commission issued a questionnaire addressed to the European Securities and Markets Authority ( ESMA ) as well as to all members of the European Securities Committee, which verified the effective and relevant enforcement of the UCITS Directive. Responses to that questionnaire revealed divergent sanctioning regimes between member states supposedly adhering to the same rules. As a consequence, amendments to the UCITS Directive were proposed which generally sought to strengthen the provisions on sanctions, as well as to increase the harmonisation of administrative sanctions across Member States. The objective was also to promote more effective enforcement of the UCITS requirements. What types of administrative penalties will apply pertaining to a breach of the UCITS Directive? Under UCITS V, Member States will have to ensure that the range of penalties available to National Competent Authority (NCA) for a breach of the UCITS Directive includes the following: a public statement which identifies the person responsible and the nature of the breach an order requiring the person responsible to cease the conduct and to desist from a repetition of that conduct suspension/withdrawal of the authorisation of the management company or the UCITS (where applicable) a temporary or, for repeated serious breaches, a permanent ban against a member of the management or investment company s management body or any other natural person who is held responsible, from exercising management functions in those or in other such companies pecuniary penalties. What level of pecuniary penalties should apply to a breach of the UCITS directive? UCITS V sets out the following provisions in relation to the pecuniary penalties which may be applied by a Member State for an infringement of the UCITS Directive: in the case of a legal person, the maximum administrative pecuniary sanction can be no more than EUR 5,000,000, or 10% of that person s annual turnover in the case of a natural person, the maximum administrative pecuniary sanction can be no more than EUR 5,000,000 in the case of both legal and natural persons, by way of alternative to the above maximum pecuniary sanctions, member states may impose maximum sanctions of at least twice the amount of the benefit derived from the infringement. 12

13 UCITS V seeks to harmonise the administrative penalties across member states with respect to infringements of national provisions transposing the UCITS Directive To what extent does UCITS V require member states to ensure whistleblower protection? UCITS V requires EU Member States and ESMA to establish secure communication channels for those reporting on infringements of the UCITS Directive, and to provide whistle-blower protection at least against retaliation, discrimination and other types of unfair treatment. Member States must also require UCITS managers and depositaries establish appropriate procedures for their employees to report infringements internally, through a specific, independent and autonomous channel. Whistleblowers who are employees of investment companies, management companies, or depositaries must not be considered as infringing any contractual or other type of restriction on the disclosure of information, or be subject to any kind of liability in relation to the reporting. The main challenges for UCITS stakeholders Investment Funds, management companies, and depositaries should start thinking about how to adapt their internal governance, organisation and control structures to meet the regulatory requirements, meet the new requirements on whistleblowing and ensure that they will be able to prevent behaviour that will expose them in future to sanctions and the risk of reputational damage due to publication. Boarding for UCITS V Ready for takeoff 13

14 Our pragmatic approach Providing you with sustainable solutions Deloitte helps you review, adapt and maintain operating models to ensure compliance with UCITS regulatory requirements. Our dedicated team of specialists can assist with: Initial enhanced UCITS health check Analysis of your current operating model Identification of gaps Issuance of recommendations and definition of target operating processes aligned with UCITS regulatory requirements Can potentially take the form of an Agreed upon Procedures (AuP) Remediation actions Development and implementation of tailor-made processes Upgrade of internal control framework within the company Upgrading of oversight framework on delegated activities Development of specific templates, checklists, modus operandi to support controls and on-site visits Upgrading of existing policies and procedures Definition of KPIs for ongoing measurement of performance and alignment to the strategy of the new operating model Upgrade of reporting to executives and to the Board of Directors Continuous support Deloitte helps you review, adapt and maintain operating models to ensure compliance with UCITS regulatory requirements Regulatory compliance hotline: on a permanent basis, our subject matter experts will be available to answer your questions and will help you in find sustainable solutions to comply with UCITS requirements On-site assistance: resources provided will directly intervene in the field with advice and recommendations on compliance and/or organisational matters ensuring that the company and its management will remain fully responsibility for final decisions. These resources will also directly support you with implementation projects related to compliance and/or organisational matters Outsourcing/co-sourcing of your internal audit (IA) function: in addition to superior quality of IA service, you will benefit from an approach ensuring peace of mind for executives and board members by better addressing risks, business advisor-minded IA approach and more efficiently managed IA costs. 14

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16 Contacts Investment Management Vincent Gouverneur Partner - EMEA Investment Management Leader vgouverneur@deloitte.lu Benjamin Collette Partner - Global Investment Management Consulting Leader bcollette@deloitte.lu Johnny Yip Partner - Investment Funds & Hedge Funds Leader jyiplanyan@deloitte.lu Advisory & Consulting Lou Kiesch Partner - Regulatory Strategy lkiesch@deloitte.lu Audit Tax Laurent Fedrigo Partner - Audit lafedrigo@deloitte.lu Emmanuelle Miette Partner - Audit emiette@deloitte.lu Pierre-Jean Estagerie Partner - Tax pjestagerie@deloitte.lu Eric Centi Partner - Tax ecenti@deloitte.lu Simon Ramos Partner - Regulatory Strategy siramos@deloitte.lu Laurent Berliner Partner - EMEA Financial Services Industry Enterprise Risk Services Leader lberliner@deloitte.lu Xavier Zaegel Partner - Capital Markets - Financial Risk Leader xzaegel@deloitte.lu Deloitte Luxembourg 560, rue de Neudorf L-2220 Luxembourg Grand Duchy of Luxembourg Tel: Fax: Deloitte is a multidisciplinary service organisation which is subject to certain regulatory and professional restrictions on the types of services we can provide to our clients, particularly where an audit relationship exists, as independence issues and other conflicts of interest may arise. Any services we commit to deliver to you will comply fully with applicable restrictions. Due to the constant changes and amendments to Luxembourg legislation, Deloitte cannot assume any liability for the content of this leaflet. It shall only serve as general information and shall not replace the need to consult your Deloitte adviser. About Deloitte Touche Tohmatsu Limited: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte s approximately 210,000 professionals are committed to becoming the standard of excellence Deloitte General Services Designed and produced by MarCom at Deloitte Luxembourg