The Directive on Undertakings for Collective Investment in Transferable Securities (UCITS) aims to facilitate cross-border offerings of mutual funds. UCITS I, the initial directive introduced in 1985, laid the groundwork for a harmonised European market for investment funds, enabling funds authorised in one member state to be sold across the EU. Subsequent versions introduced significant enhancements, including simplified fund mergers, master-feeder structures, and improved investor disclosures.
UCITS V, introduced in 2014 by Directive 2014/91/EU, tackles gaps and challenges that have emerged from its previous iterations over time. In particular, it introduces stricter depositary rules, rigorous standards for fund depositaries, including their duties, liability, and the conditions under which custody functions can be delegated. It further requires that remuneration policies align employee interests with those of the investors, particularly in terms of risk management and long-term growth. A more comprehensive framework for penalties ensures that national authorities can impose effective and dissuasive sanctions for breaches of UCITS rules.
UCITS V is often juxtaposed with the Alternative Investment Fund Managers Directive (AIFMD). Introduced in 2011, AIFMD regulates the management and marketing of alternative investment funds (AIFs) within the EU. UCITS V is tailored towards mutual funds that invest in liquid assets, appealing to a wide range of retail investors. The AIFMD, on the other hand, governs funds dealing with less liquid and more complex assets aimed at sophisticated investors.
See here for an in-depth analysis of the AIFMD.
While the objectives and concerns of UCITS V and the AIFMD are similar – the first level of the AIFMD is word for word the same as that of the directive introducing UCITS IV –, each of them takes into account the characteristics of their respective assets and investors. UCITS V imposes more stringent liquidity and investment diversification rules, considering the protection of retail investors. AIFMD allows more flexibility in investment strategies and leverage, acknowledging the sophisticated nature of its investor base. Both emphasise the role of depositaries in fund management. However, AIFMD extends this concept by introducing additional liability for assets held in custody, reflecting the complexity and risk associated with alternative investments. While the two directives mandate robust remuneration policies, AIFMD goes further in imposing additional disclosure requirements related to the pay of key personnel, mirroring the higher risk profiles of AIF-managed funds.
UCITS V’s implementation marked a significant shift in the European financial services landscape, with both direct and indirect consequences. By tightening the regulatory noose around fund depositaries and remuneration policies, UCITS V significantly bolstered investor confidence. This trust is critical given the role of cross-border fund distribution in the EU market.
The enhanced regulatory framework brought about a degree of standardisation in fund management across Europe. However, it also escalated compliance costs, impacting smaller fund managers more acutely. This aspect has stirred debates about the balance between stringent regulation and market accessibility. UCITS V has led to market consolidation, whereby larger players found themselves at an advantage from being better equipped to absorb the heightened compliance costs. This dynamic hinders competition, with potential but yet unseen adverse effects on innovation in the sector.