UCITS V bill of law adopted in Luxembourg

Luxembourg, the world’s leading UCITS centre and distribution hub, has over $2.5 trillion in assets under management in UCITS investment funds. It was the first jurisdiction to adopt the first iteration of UCITS in 1985, which attracted a large number of non-EU investors to Luxembourg to use the Principality as their gateway to European investments. Where Swiss and American investors led the way, international investors have followed from Asia and Latin America, all looking to distribute and invest in, UCITS fund vehicles.

On 21 April 2016, the Luxembourg Parliament adopted into law the fifth iteration of the UCITS directive, UCITS V. This was conceived in the wake of the global financial crises to better protect retail investors. It has a lot in common with AIFMD, the directive aimed at better protecting professional investors. 

UCITS V, however, goes further than AIFMD. Retail investors, rightly, need a different protection model to their professional counterparts, owing to the different nature and philosophy of their investment portfolios.

With UCITS V imminently set to be adopted into Luxembourgish law following its adoption by parliament, fund managers and depositary banks operating in Luxembourg will be facing stringent new rules. These will not have come as a surprise, since UCITS V has been on the horizon for a while now. 

Depositary banks are facing the strict liability for the restitution of losses incurred by a fund arising from misadministration and malpractice within their chain of intermediaries. Depositary banks, in their role as cash flow monitors, overseers and safe keepers for UCITS fund vehicles, will need to carefully monitor the activity of the funds for which they are providing depositary services, lest they be on the hook for potentially expensive restitution claims.

The nature of UCITS funds makes them more risk averse than vehicles promoted to professional investors, but depositary banks must actively monitor their risks, which in most cases, are their clients’ risks. It is imperative for depositary banks to prove to their fund clients that they monitor the processes and risks in local markets, as well as their network of sub-custodians and infrastructures.

This is where UCITS V goes further than AIFMD, in making the depositary bank liable for any losses in the settlement function at the central securities depository (CSD), although there seems to be some ambiguity about this aspect and confusion amongst institutional investors, depositary banks and lawyers that Thomas Murray has spoken to.

The adoption of UCITS V into law is heralding a new era in market monitoring for depositary banks and fund managers. Fund managers, too, now need to perform ongoing due diligence and assessments of depositary banks – they need a working knowledge of how the bank can best protect them and their interests.

Thomas Murray has been involved in the area of post trade monitoring for over 20 years and provides risk assessments and due diligence tools to a global client base, helping its clients to monitor their risks and aid operational compliance with regulations and directives such as UCITS V. Thomas Murray provides the tools for fund managers and depositary banks to meet their monitoring obligations of markets, CSDs, prime brokers, transfer agents and global and sub-custodian banks.

For more information, visit: http://ds.thomasmurray.com/banks/aifmducits-v-wrapped-solution

Tags: UCITS VAIFMDLuxembourg