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26th May 2016

FCA Consults on UCITS V Level 2 Regulation & SFTR

The FCA has entered into a new consultation, this time upon UCITS V Level 2 Regulation, Securities Financing Transaction Regulation (SFTR) and consequential changes to the Handbook.

Published as Consultation Paper CP16/14 on the 19th May 2016, the FCA requests that comments on the proposals be returned within two months, by 19th July 2016.

Purpose of the Consultation:

The adoption of the Undertakings for Collective Investment in Transferable Securities V Level 2 Regulation (UCITS V Level 2 Regulation) is time-tabled for 13 October 2016, thus the FCA is consulting upon:

• proposed changes to the Client Assets sourcebook (CASS); and
• proposed changes to the Collective Investment Schemes sourcebook (COLL);

In addition, in order to reflect certain measures in the Securities Financing Transactions Regulation (SFTR) the regulator is consulting on:

• minor changes to SYSC;
• consequential amendments in COLL; and
• consequential amendments in the Investment Funds sourcebook (FUND)

UCITS V

UCITS V was implemented on 18th March 2016. Unlike as has previously occurred, the new provisions under UCITS V amend and stand alongside the previous UCITS Directive (UCITS IV) provisions, rather than replace them entirely.

The aim of UCITS V is to increase the level of protection already offered to investors and to improve investor confidence with regards to UCITS - Undertakings in Collective Investment in Transferable Securities – which are regulated open-ended funds that are sold to retail customers throughout the EU.

Under UCITS V, rules on the responsibilities of depositaries are now enhanced and remuneration policy requirements for UCITS fund managers have been introduced.

UCITS V also aims to ensure that all EU regulators responsible for the supervision of UCITS funds and their managers have a common minimum set of powers available to investigate infringements of national laws transposing the UCITS Directives and to sanction any breaches.

UCITS V: Level 2 Regulation

Alongside the UCITS V Directive, the European Commission has now published the Level 2 Regulation on 24th March 2016. This Regulation is set to apply to firms from 13th October 2016.

Unlike the UCITS V Directive that was transposed into national legislation in March, the UCITS V Level 2 Regulation is an EU Regulation and will thus be directly applicable to firms without Member States having to transpose this into local regulation.

Since the regulation will apply directly, the FCA’s Consultation will look to ensure that provisions within the FCA Handbook are consistent with the Level 2 Regulation.

From this date, the regulation will introduce new requirements for depositaries and UCITS trustees (UCITS depositaries).

Amongst these will be:

• minimum terms of contract between a UCITS depositary and the management company;
• safekeeping, cash monitoring and detailed oversight requirements for UCITS depositaries;
• requirements for the UCITS depositary and the UCITS Management company to act independently;
• types of assets that the UCITS depositary must hold in custody and segregate from the depositary’s own assets; and
• measures to protect the UCITS assets should a third-party delegated custodian fail and become insolvent.

Unlike the UCITS V Directive that was transposed into national legislation in March, the UCITS V Level 2 Regulation is an EU Regulation and will thus be directly applicable to firms without Member States having to transpose this into local regulation.

Since the regulation will apply directly, the FCA’s Consultation will look to ensure that provisions within the FCA Handbook are consistent with the Level 2 Regulation.

Securities Financing Transactions Regulation (STFR)

The Securities Financing Transactions Regulation – or SFTR- is a separate EU Regulation that came into effect at the start of the year on 12th January 2016.

Being an EU Regulation like the UCITS V Level 2 Regulation, SFTR is also directly applicable to EU Member states rather than through transposed provisions in national legislation.

Since the SFTR introduced new requirements in relation to transparency of SFTs, total return swaps and the re-use of financial instruments received under collateral arrangements, the regulator is now looking to ‘copy out’ the relevant SFTR provisions into the COLL and FUND FCA sourcebooks. This should assist firms with maintaining compliance with the new SFTR disclosure requirements including:

• the requirement to disclose SFT information in a fund’s periodic reports to investors (applicable from 13 January 2017)
• the requirement to disclose SFT information in the funds’ pre-contractual documents to managers of funds constituted before 12 January 2016 (applicable from 13 July 2017);
• the requirement to disclose SFT information in the funds’ pre-contractual documents to managers of new funds constituted since 12 January 2016 (applicable from the point when the fund has been constituted)

Who are the changes likely to affect?

The consultation will most likely interest UCITS depositaries and UCITS management companies as well as other authorised funds and advisors in the UK fund management industry.

In addition the changes to SFTR are likely to interest full-scope alternative investment fund managers (AIFMs) and UCITS management companies whose business activities include total return swaps and securities financing transactions (SFTs).

Remember that any comments on the consultation should reach the regulator no later than 19th July 2016.

Further UCITS V Reading:

• UCITS V Summary of main changes
• UCITS V Implementation finalised for AIFMs
• Remuneration under UCITS V
• UCITS V Implementation

UCITS V Level 2 Regulation & SFTR