The European Parliament and Council yesterday backed the European Commission's proposals to strengthen protection for consumers in the €6.3 billion UCITS sector, in a bid to restore consumer confidence in the wake of the financial crisis.
UCITS are investment funds which have been set up in accordance with a set of European directives and must comply with these directives. The European Commission describes UCITS as the main European framework covering collective investment schemes that are suitable for retail investors. UCITS funds which comply with the rules on, for example, eligible assets, issuer concentration or risk spreading are eligible for sale to professional and retail investors across the European Union. UCITS focus on transferable and relatively liquid assets and are regulated at EU level.
Under the new moves consumers will enjoy a right of action against the depositories charged with safeguarding their assets, should those assets go missing. Investors would also enjoy protection should the depositories themselves become insolvent, thanks to strict rules on segregation to be safeguarded by EU member states' insolvency laws.
Investment funds will also be required to revise their salary schemes to ensure that remuneration packages do not encourage employees to take excessive risks with UCITS assets.
EU Internal Market and Services Commissioner Michel Barnier made it clear that the moves are designed to secure investor confidence following the global financial crisis and high profile fraud cases such as that of Bernie Madoff who was sentenced to 150 years in prison in the US in 2009 after defrauding investors out of billions of dollars.
"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," said Barnier. "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. This is an important achievement and will benefit consumers throughout Europe."
Sven Giegold, the Green Party German MEP who led the European Parliament's response to the proposal, told EuropeanVoice: "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 stricter rules on depositories will ensure fraudulent schemes, like the Madoff case, cannot occur in Europe.”
The EU reforms follow concern around the globe about UCITS markets in the wake of the financial crisis.
In March last year the UK government and the now disbanded Financial Services Authority called on the European Commission to place constraints on the commission arrangements relating to UCITS funds. The two organisations also called for the UCITS reforms to ensure greater transparency from managers on the issue of the "distribution costs" they incur.
Barnier first presented the proposals in July last year, along with initiatives to increase the transparency of investment products and to boost consumer protection rules relating to insurance products including household and motor insurance.
The Commission yesterday outlined five elements of UCITS V agreed by the co-legislators on Wednesday.
Under the new moves only central banks, credit institutions and regulated firms believed to have sufficient capital and adequate infrastructure to hold UCITS assets in safe-keeping will be allowed to act as depositories for UCITS, under the new rules.
Each depository will be liable for any loss of assets which it holds. Investors will enjoy a right of redress directly against the depository should assets go missing, as opposed to relying on the management company to achieve this for them. Should the depository become insolvent, UCITS assets will be protected by clear segregation rules and safeguards provided by the insolvency law of member states.Employers must ensure that remuneration packages for all risk takers involved in UCITS management do not encourage excessive risk-taking and remuneration packages must be transparent.
UCITS managers will be subject to greater supervision and authorities will cooperate more closely to detect and deter breaches of UCITS rules and the implementation of sanctions.