The FCA has published Consultation Paper 16/14: UCITS V Level 2 Regulation, SFTR and consequential changes to the Handbook (CP16/14).

The UCITS V legislative package includes a ‘Level 1 Directive’, which amends the existing UCITS Directive, and a ‘Level 2 Regulation’, which sets out additional, detailed requirements for UCITS management companies and depositaries. The Level 1 Directive was transposed into national law on 18 March 2016. The Level 1 Directive was designed primarily to increase investor protection and improve investor confidence in UCITS, by enhancing the rules on the depositaries’ responsibilities and introducing remuneration policy requirements for management companies.

The FCA’s final rules and guidance transposing the changes from the Level 1 Directive can be found in Policy Statement 16/2: Implementation of the UCITS V Directive. The rules and guidance took effect on 18 March 2016.

The UCITS V Level 2 Regulation applies to firms from 13 October 2016. The Regulation introduces new requirements for UCITS depositaries. The requirements include safekeeping requirements for UCITS depositaries, requirements for the UCITS management company and the depositary to act independently, and steps to protect the UCITS assets if a third party delegated custodian becomes insolvent.

The UCITS V Level 2 Regulation is directly applicable and does not need transposing by Member States. However, in CP16/14 the FCA proposes certain amendments to its rules and guidance to ensure consistency with the Level 2 measures.

In particular the FCA’s proposals include:

  • amendments to the Client Assets sourcebook (CASS) 6.6 which apply to UCITS depositaries. The FCA proposes to dis-apply certain CASS rules and guidance to ensure consistency with the requirements under the UCITS V Level 2 Regulation;
  • new guidance in the Collective Investment Schemes sourcebook (COLL) 6.9 to signpost the conditions for meeting the independence requirements introduced by the Level 2 Regulation; and
  • a minor amendment to Senior Management Arrangements, Systems and Controls(SYSC)  2.9R(1) which sets out the circumstances where a UCITS management company  must appoint a remuneration committee.

In CP16/14 the FCA also proposes to copy out into COLL and the Investment Funds sourcebook (FUND) the relevant provisions from the Securities Financing Transactions Regulation (SFTR) to help firms comply with the new disclosure requirements. The SFTR contains other provisions that are directly applicable for managers of UCITS and alternative investment funds but these are not considered in CP16/14.

The deadline for comments on CP16/14 is 19 July 2016. The FCA intends to publish a Policy Statement in Q3 2016.

View FCA consults on UCITS Level 2 Regulation and certain requirements under SFT Regulation, 19 May 2016