Investing in UCITS funds (Undertakings for Collective Investment in Transferable Securities) should now be even more secure thanks to new rules that took effect on 18 March. The rules focus primarily on remuneration of asset managers, keeping assets safe and improving sanctions. Here, Ewa Kozlowska-Sugar, asset management legal expert at the European Commission, explains what these rules are about, what they mean for investors and asset managers and how they will contribute to safer EU capital markets.

Keeping assets safe

UCITS funds now have some € 9 trillion of assets under management and account for around 75% of all collective investments by small investors in Europe. One third of investors in UCITS are retail clients. However, even the remaining two thirds held by institutional investors, such as pension and insurance companies, are ultimately invested for the benefit of the general public. UCITS funds offer EU investors safe and easy access to savings in shares, bonds and other similar types of financial instruments from around the world. These assets are then held, not by the fund itself, but by separate and specialised companies (usually banks) known as depositaries. Depositaries have to maintain control over these assets and protect them, even if they are kept in accounts in non-EU banks. Depositaries are also responsible for making sure fund managers' activities are in line with all relevant rules. This role as an independent watchdog ensures that managers act in the best interest of funds and their investors.

The standard of protection of these assets has now been harmonised across the EU by setting uniform requirements for depositaries and their liability towards investors for any assets that are lost. If something goes wrong and assets held by the depositary – or any other institution involved in the investment chain – are lost, the depositary must replace them as soon as possible with assets of the same type or value. The new rules should see small investors' confidence boosted by a ban on the use of their assets for any other purpose than the UCITS investors' benefit. For example, an intermediary will not be allowed to temporarily use assets belonging to UCITS for the purpose of its own transactions.

Remuneration policies and sanctions

The rules also set out clear and transparent remuneration or pay policy standards that must be applied to UCITS managers. Basically, the aim is to avoid managers taking excessive risks that are not in the investors' interests.

The amended rules harmonise the minimum administrative penalties that can be applied for breaches of UCITS rules by depositaries or fund managers. Small investors will now know that supervisors apply the same minimum standards for enforcing UCITS rules as in other financial services regulations. Member States will also have to set up reliable mechanisms to make it easier to report infringements of the new rules. The European Securities and Markets Authority (ESMA) will set up secure communication channels, which must guarantee full confidentiality and data protection for whistle-blowers.

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