The New Irish Regulatory Framework for UCITS – A Welcome Change?
On 5 October 2015, the Central Bank of Ireland (the "Central Bank") issued a regulation which forms the basis for a new Irish regulatory framework for UCITS. The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "CB UCITS Regulations") replace the long established UCITS Notices and the accompanying Central Bank Guidance Notes (together the "UCITS Guidelines"). This project was initiated by a Central Bank public consultation on 2 January 2014 (CP77).
The CB UCITS Regulations consolidate all of the requirements which the Central Bank imposes on UCITS, UCITS management companies and depositaries of UCITS and since 1 November 2015 they supplement existing legislative requirements, in particular, the main Irish regulations that implement the UCITS Directive 2009/65/EC, the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011.
The Central Bank issued the CB UCITS Regulations in the form of a statutory instrument using their powers under the Central Bank (Supervision and Enforcement) Act 2013. As a result, the regulatory rules governing the operation of Irish UCITS have shifted from being a set of administrative rules to legally binding legislation.
For the most part the rules in the CB UCITS Regulations are the same as the conditions set out in the UCITS Guidelines but a small number of policy changes are included, as discussed further below:
- Responsible person - the CB UCITS Regulations introduce the concept of a "responsible person" and many of the positive obligations in the CB UCITS Regulations are framed as the direct responsibility of the responsible person. Consequently, the failure to meet such obligations would constitute a direct breach of the CB UCITS Regulations by such responsible person. For UCITS that use management companies, the management company shall be the responsible person. For self-managed UCITS, the UCITS itself will be the responsible person. This will have significant implications for UCITS from a compliance perspective, particularly in cases of regulatory breaches where enforcement proceedings are issued and/or regulatory sanctions are imposed.
- Promoter requirement removed - one of the most notable developments is the removal of the requirement for each UCITS to have a fund sponsor or "promoter" approved for such purposes by the Central Bank. The Central Bank will therefore no longer scrutinise the regulatory status, financial resources and ownership structure of the entity that sponsors the UCITS. The management company (if any) and the service providers of the UCITS will still need to be regulated or cleared by the Central Bank to assume such functions. This is a welcome development, particularly for fund managers considering establishing Irish UCITS and paves the way for more Irish UCITS structures.
- Eligible markets to be assessed by UCITS themselves - previously the Central Bank set out prescriptive criteria in order to determine whether markets were eligible for UCITS investment. This guidance has fallen away with the consequence that UCITS themselves can now assess the markets they wish to invest in and determine if they meet the UCITS eligibility criteria.
- Second half-year unaudited accounts for UCITS management companies (and depositaries) - UCITS management companies and depositaries are required to submit half-yearly management accounts covering the first six months of the financial year and audited annual accounts. Additional half-yearly management accounts will now be required, covering the second six months of the financial year.
- Related party transactions - Clarification has been provided that the Central Bank's related party transactions requirements will not apply to the services provided by such related parties specifically in their capacity as service providers to the UCITS.
- Collateral rules - Conditions are set out for the receipt of collateral by a UCITS, in line with the changes to the ESMA Guidelines on ETFs and other UCITS issues (ESMA/2014/937EN) regarding collateral country diversification and issuer credit quality. This reflects the outcome of the Central Bank's July 2014 consultation in this area (CP84).
- Depositary breach monitoring and reporting - new detailed rules will apply to depositaries regarding regulatory breaches by UCITS it acts as depositary for, covering: (i) recordkeeping; and (ii) notifications to the Central Bank. Notably, non-material breaches that are unrectified for more than four weeks must now be notified to the Central Bank.
- Derogations - if a UCITS holds an existing derogation from any particular Central Bank requirement, it will need to assess whether this derogation now conflicts with the CB UCITS Regulations. In any such cases, the UCITS will need to determine whether to seek a Central Bank waiver of the relevant requirement in the CB UCITS Regulations; or whether the derogation may no longer be effective.
As indicated above, the CB UCITS Regulations came into effect on 1 November 2015 and replaced the UCITS Guidelines from that date. There are some transitional provisions which means that certain requirements do not apply immediately and are subject to a grandfathering period.
The consolidation into one key location of all regulatory requirements applicable to UCITS, UCITS management companies and depositaries of UCITS is certainly a welcome result of CB UCITS Regulations. However, fund managers should carefully consider the implications of this new framework and look to track its development.
Stephen Carty, Partner
Deirdre McIlvenna, Associate
Maples and Calder