knowledge | 11 June 2019 |

Central Bank of Ireland UCITS Regulations Published

The Central Bank of Ireland (“CBI”) published revised regulations applicable to UCITS on Friday 31 May 2019.  The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1))(Undertakings for Collective Investment in Transferable Securities) Regulations 2019 (the “CBI UCITS Regulations 2019”) follow on from an earlier CBI consultation and replace the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1))(Undertakings for Collective Investment in Transferable Securities) Regulations 2015, as amended (the “CBI UCITS Regulations 2015”).

Background

The CBI UCITS Regulations 2015 consolidated requirements previously set out in the CBI’s UCITS Notices applicable to UCITS, UCITS management companies and UCITS depositaries. The CBI UCITS Regulations 2015 were subsequently amended on two occasions.

In April 2018, the CBI issued a consultation proposing to consolidate the requirements set out in the CBI UCITS Regulations 2015 and the subsequent amending regulations and to introduce a number of changes to those requirements (see our briefing here). 

Also in 2018, the CBI carried out a thematic review of UCITS performance fees, which examined the methodologies used to calculate performance fees to ascertain if they were in line with the CBI’s UCITS Performance Fees Guidance. Subsequently, all UCITS that charge performance fees were required to review their performance fee methodologies and report their findings to the CBI. As a result a total of €1.5m has been refunded to 636 shareholders and 12 risk mitigation programmes have issued across individual UCITS and fund service providers.

Following on from its thematic review, the CBI has now published the CBI UCITS Regulations 2019, which revoke the earlier CBI UCITS Regulations 2015 and related amendments. As compared with the earlier regulations, the 2019 Regulations:

  • introduce a number of new requirements that apply to UCITS Share Class Provisions;
  • codify the CBI’s Guidance on UCITS Performance Fees; and
  • make a number of other amendments arising from a review of the CBI UCITS Regulations 2015.

The CBI UCITS Regulations 2019 also take into account the EU’s Money Market Fund (“MMF”) Regulation 2017/1131, which came into force on 20 July 2017.   For the most part, the CBI UCITS Regulations 2019 apply from 27 May 2019, subject to certain exceptions.

On 6 June 2019, the CBI issued the 26th edition of the Central Bank UCITS Q&A (the “UCITS Q&A”), which includes new Q&A in relation to the CBI UCITS Regulations 2019 and which has been updated to account for the numbering of those regulations. The CBI has also published its feedback statement to its consultation on the CBI UCITS Regulations 2015.

UCITS Share Class Provisions

The CBI permits currency hedging at share class level whereby the costs/benefits of the hedge transaction is allocated to the share class, rather than to the pool of assets as a whole. While the CBI UCITS Regulations 2015 contained a number of requirements applicable to UCITS engaging in such currency hedging, the CBI UCITS Regulations 2019 impose a number of additional requirements in this respect.  These obligations largely reflect those set out in ESMA’s Opinion on UCITS Share Classes and the CBI’s own existing requirements.

The CBI UCITS Regulations 2019 also contain a new requirement in each of Schedules 7 and 8, according to which annual and half-yearly reports must include an up-to-date list of all share classes of the UCITS in issue during the reporting period and identify whether the relevant share class is hedged.

Performance Fees

The CBI’s approach to performance fees was previously set out in website guidance. Following on from a thematic review, this guidance is now set out in the CBI UCITS Regulations 2019, which provides that:

  1. performance fees must only be payable by the UCITS on achieving a new high net asset value over the life of the UCITS or the out-performance of an index - the CBI will clarify by way of guidance that this may be on either achieving a) a new high NAV per share or b) a new high NAV as adjusted for subscriptions and redemptions; 
  2. the calculation of the performance fee must not crystallise more than once per year– this is intended to align the CBI’s approach to the IOSCO Good Practices. The CBI will clarify by way of guidance that performance fees may crystallise upon an investor redemption;
  3. the performance fee must not be paid more than once per year;
  4. the responsible person must ensure that the calculation of the performance fee is verified by the depositary; and
  5. where a UCITS has multiple managers or advisers, the responsible person must ensure that the performance fee is only payable on the performance of that part of the portfolio for which the investment manager or adviser is responsible.

A UCITS which is authorised by the CBI prior to the commencement of the CBI UCITS Regulations 2019 must comply with requirements 2 and 3 within 18 months from the date those Regulations entered into force (ie, 27 November 2020 - or such later date as the CBI may specify).

The CBI UCITS Regulations 2019 also contain a new regulation which sets out prospectus disclosure obligations in relation to performance fees.

The Review of the CBI UCITS Regulations 2015

The table below sets out, on a non-exhaustive basis, a number of amendments made to the requirements set out in the CBI UCITS Regulations 2015 by the CBI UCITS Regulations 2019.

Annual Audited Report

A UCITS first annual audited report must: (a) include all sub-funds of the UCITS launched within the period to which the report relates; and (b) be published and submitted to the CBI within 4 months of its preparation and in any event not later than 4 months after the expiration of the 18 month period of the UCITS establishment or incorporation.

Redemptions

Where a UCITS temporarily suspends the repurchase or redemption of units in a UCITS, a responsible person must notify the CBI immediately upon the lifting of that temporary suspension. Where the temporary suspension has not been lifted within 21 working days of application, a responsible person must provide the CBI with an update on the temporary suspension at the expiration of the 21 working day period and each subsequent period of 21 working days where the temporary suspension continues to apply.

Designated Email Address

A responsible person must ensure that each UCITS authorised by the CBI establishes and maintains an email address for correspondence with the CBI, which is monitored daily. The CBI must be informed in writing promptly of any change to the relevant email address. According to the UCITS Q&A, this obligation applies at the umbrella level.

Accounts

The second set of half-yearly accounts must cover the full 12 months of the financial year and must be submitted within one month of the period end.

Structured UCITS

Where a UCITS charges an annual management fee calculated on the initial offer price per share of the UCITS, a responsible person must ensure that; (a) the UCITS is a structured UCITS which provides a pre-defined return to investors, and (b) the fee charged is a percentage of the initial offer price per share of the UCITS. 

Where a structured UCITS charges an annual management fee, a responsible person must ensure that the prospectus discloses the relevant fee paying arrangement and that the prospectus includes a risk warning informing investors that such fee is fixed and not subject to the performance of the UCITS.

A responsible person of a structured UCITS must also include in the UCITS’ prospectus a prominent risk warning informing investors who redeem their investment prior to maturity that they do not benefit from the pre-defined payoff and may suffer significant losses.

Minimum Capital Requirement Report

Regulation 100(1)(a) which states that a management company must hold its expenditure requirement in the form of eligible assets as defined in paragraph 4 of Schedule 9 now provides that for the purpose of Regulation 100(1)(a)(i), a reference to a depositary in paragraph 4 means a UCITS management company.


Next Steps

The CBI UCITS Regulations 2019 started to apply on 27 May 2019.  UCITS, UCITS management companies and depositaries will need to take steps to ensure that they comply with the relevant requirements immediately.

This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

Key contacts