Internal Market and Services Commissioner Michel Barnier said: "This agreement on the so-called UCITS V will bring significant improvements to the protection of UCITS investors when it comes to the safe-keeping of UCITS assets by the depositary. It will ensure that the abuses seen at the time of the Madoff scandal cannot be repeated. We must always remember that the UCITS framework is widely viewed as a gold standard for fund regulation globally, and it is important to maintain this. I would like to congratulate all parties who have worked tirelessly on this important consumer protection file. I would like to thank in particular the European Parliament – especially the rapporteur, Sven Giegold, and the shadow rapporteurs; and the Greek Presidency as well as the preceding Lithuanian and Cypriot presidencies for their hard work and commitment. This is an important achievement and will benefit consumers throughout Europe."

With these new rules, if the depositary becomes insolvent, UCITS assets will be protected through clear segregation rules and safeguards provided by the insolvency law of the Member States. Depositaries in the EU will be liable for any loss of UCITS assets held in custody. If something goes wrong with these UCITS assets, investors will be in a much better position to have the situation remedied. Importantly, UCITS investors will always have the right of redress directly against the depositary and will not have to rely on the management company's ability to accomplish this task.

In addition to this, a new harmonised framework of remuneration policies for all risk-takers involved in managing UCITS funds has been introduced so that remuneration practices do not encourage excessive risk-taking and instead promote sound and effective risk management.

Today’s agreement also strengthens the existing rules on sanctions to ensure effective cooperation between authorities and harmonises administrative sanctions in order to detect and deter breaches of UCITS provisions. Throughout the EU, UCITS managers and depositaries must be well supervised and, where necessary, properly sanctioned.

Key elements of the agreement reached today by the co-legislators:

(1) UCITS V strengthens the rules on eligible entities that can act as a depositary. Only national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure will be eligible as UCITS depositaries and will hold for safe-keeping all UCITS assets.

(2) 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 Member States.

(3) The depositary's liability has been strengthened. The depositary will be liable for any loss of UCITS assets held in custody. The UCITS investors will always have the right of redress directly against the depositary and will not have to rely on the management company's ability to accomplish this task.

(4) Remuneration policies for all risk takers involved in managing UCITS funds have been introduced so that remuneration practices do not encourage excessive risk-taking and instead promote sound and effective risk management. The transparency of the remuneration practices will be enhanced. The remuneration policies are in line with those in the Alternative Investment Fund Managers Directive (2011/61/EC).

(5) The agreement strengthens the existing regime to ensure effective and harmonised administrative sanctions. The use of criminal sanctions is framed so as to ensure the cooperation between authorities and the transparency of sanctions. A harmonised system of strengthened cooperation will improve the effective detection of breaches of UCITS rules.

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Further information

Welcoming the agreement, the President of the ECOFIN Yannis Stournaras said: “The agreement on the UCITS V Directive enhances investor confidence and protection by introducing additional safeguards as regards depositary functions, avoids excessive risk taking by establishing appropriate remuneration policies and harmonises at a European level administrative sanctions”.

Greens/Giegold - Deal improves investor protection against reckless risk-taking

“Today's deal will deliver greater protection for investors, as well as taking steps to reduce reckless risk taking in the investment fund sector. The revised legislation includes important provisions on remuneration that will ensure the interests of investors are better reconciled with those of fund managers. The new rules combine stricter liability provisions for depositories, with stronger sanctions. The strengthening of existing regulations, and a more European approach, will make it more difficult to circumvent the rules. The stricter rules on depositories will ensure fraudulent schemes, like the Madoff case, cannot occur in Europe. 

"The introduction of a procedure for secure access by whistleblowers to the European Securities and Markets Authority is a significant development. This will provide a formal route for insiders to report abuses without disclosing their identity."

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US fund groups caught out by European bonus rules

The Financial Times (subscription) reports that the proposal has caught US groups offguard by the strict bonus rules. The restrictions will create a legal and tax headache for fund companies and could deter US nationals in the US and Europe. 

The requirement for managers to receive half of their bonuses in units of the fund they manage is particularly problematic as US nationals cannot own shares of UCITS funds. US fund groups had hoped that they would be able to pay bonuses in shares of the parent company, but the agreement has ruled that out.

Declan O’Sullivan, a Dublin-based partner at law firm Dechert, said: “This will be troubling for US managers who are pretty much precluded from investing in UCITS. They could [receive bonuses via] a note or derivative linked to the performance of the fund, but this would be hugely complicated and an annoyance.”

Listed fund groups are also concerned that the rules incentivise staff to focus on fund performance alone rather than growth of the wider business, potentially damaging returns for shareholders, according to Tim Wright, a partner in the rewards practice of PwC, the professional services firm.