With the exception of some reporting obligations that will only be applicable starting in April 2027, UCITS and UCITS management companies have less than a year to complete the required actions to comply with the new rules. This two part article shall delve into the upcoming changes to the UCITS regime commonly referred to as UCITS VI.
Extending the range of information
UCITS VI clarifies and expands the scope of the program of operations or business plan that a Management Company “ManCO”) files with the competent national authority as part of its approval process. This is being undertaken in order to further harmonise regulatory practices throughout the European Union (“EU”) and to align with what is necessary for Alternative Investment Fund Managers (“AIFMs”). The need that the ManCO have at least two full-time employees with EU domiciles is set on a statutory basis by UCITS VI. In its 2017 supervisory convergence opinion, ESMA first proposed this criterion. This is something which Malta had already adopted as part of its regime and therefore it is well in line with such a requirement.
Additionally, the business plan needs to include information about the technical and human resources that the ManCO shall use to run its operations, as well as details about the individuals who carry out the ManCO’s operations. Included in this is a description of those individuals’ roles, titles, seniority, reporting structures, duties both inside and outside the management business, and the amount of time allotted to them. This information is already expected to be submitted as part of the efforts in Malta by the Malta Financial Services Authority (“MFSA”) through the application form when one intends to apply for a licence with the MFSA.
UCITS VI also adds a requirement that the business plan include details about the ManCO’s plans to adhere to its Sustainable Finance Disclosure Regulation (“SFDR”) commitments.
According to Article 6(3) of the UCITS Directive, the ManCO must also disclose the arrangements made for the delegation and sub-delegation to third parties of UCITS portfolio management, administration, and distribution, as well as of investment management services and non-core activities. Along with a description of the technological and human resources used by the management business to carry out daily portfolio management or risk management responsibilities and to oversee the delegation, this also contains the identity, location, and competent supervisory authority of the delegated service provider. Such information shall be provided to the relevant supervisory authority and will also include a summary of the regular due diligence procedures that the ManCO performs on its delegates.
Before making any significant changes to its business plan, a UCITS ManCO must notify the appropriate national competent authority. This is something which is not new for Malta since the MFSA has always requested to be kept abreast of any changes to the business model of any licenced entity.
An important consideration for management companies is to determine whether their policies, procedures, and program of activities need to be changed in light of UCITS VI’s expanded reach.
Conduct, Conflicts of Interest & Costs
UCITS VI, also looks into the fact that a ManCO that is in charge of, or plans to manage UCITS at a third party’s request, must consider any conflicts of interest that may arise. This includes situations in which the management business assigns portfolio management or other services to the third-party initiator, or in which the UCITS uses the third-party initiator’s name. The ManCO must provide thorough justifications and supporting documentation to the regulator in its home state to demonstrate how it avoids conflicts of interest and, in cases where they cannot be avoided, how it protects the interests of the UCITS and its investors.
For the purpose of UCITS and its investors, management firms must act with the appropriate expertise, caution, and vigilance.
Another topic covered by this new directive is the avoidance of unnecessary costs. Different EU member states have different market and supervisory policies, and there is no universally accepted definition of disparate expenses. The EU’s retail investment strategy aims to address the problem of undue costs by requiring fund managers to set up a sound pricing process that includes the:
- identification;
- analysis; and
- review of costs charged;
directly or indirectly, to investment funds or their unitholders. It also introduces a requirement to compensate investors where undue costs have been charged.
Additional Services offered by Management Companies
Member States may permit ManCOs to offer services beyond UCITS management. Receiving and transmitting orders pertaining to financial instruments is one of the additional non-core operations added by UCITS VI. Another non-core function offered to management companies is the administration of benchmarks in compliance with the Benchmark Regulation.
UCITS VI clarifies that non-core services cannot be offered without portfolio management services, as was previously the case. Last but not least, UCITS VI makes it clear that any additional function or activity that the ManCO already offers as a non-core service may be approved, so long as any possible conflicts of interest resulting from offering that function or activity to third parties are adequately managed.
In the second part of this article shall continue to delve into the upcoming changes as are being introduced by UCITS VI. We shall look into New Regulatory Reporting, Liquidity Management Tools, and Delegation Arrangements.
Nicholas Warren
Head of Risk & Regulatory Compliance (Advisory)
Nicholas began his career at the Malta Financial Services Authority and has over 20 years’ experience in financial services and regulatory affairs. He leads the financial services arm at ARQ Group, supporting clients with the licensing of entities and ongoing regulatory and operational compliance.
His focus areas include investment services, funds, banking and EMIs. Over his career, he has built strong expertise in strategic management and operations. Nicholas is qualified in Banking & Finance, holds the ACCA qualification, and a master’s degree in Business Administration specialising in strategic planning. He also holds certificates in Islamic Finance.
