Brussels, 31st March 2004
Investment funds: Commission proposes plan to bring national rules on UCITS depositaries closer into line
The European Commission has set out a step-by-step approach to reducing differences in national rules on the depositaries used to safeguard assets on behalf of investors in collective investment funds (UCITS), such as unit trusts, common funds and SICAVs. Implementing this approach over the next two years, in cooperation with national regulators, will make easier the cross-border operation of UCITS or "undertakings for collective investment in transferable securities" in full. The four main areas for action are: prevention of conflicts of interests, clarifying depositaries' liability, convergence of national prudential requirements and enhancing transparency and investor information. At the end of the two-year period, the Commission will if necessary propose further action, including possible legislative measures if needed. UCITS are established in all Member States and their total assets amount to around four thousand billion euros.
Internal Market Commissioner Frits Bolkestein said: "Sound and cost-effective functioning of the EU depositary system for UCITS is a crucial safeguard for investors and for the worldwide reputation of the EU's fund management industry. So we need to make sure it is regulated in the right way and to fix any aspects which are not functioning well. Both investors and the industry will benefit from the approach we have planned."
The Commission's Communication on UCITS depositaries follows a mandate from the EU's Council of Finance Ministers in June 2001. The Commission's approach outlined in the Communication is based on an extensive survey, including an Internet consultation in autumn 2002 (see IP/02/1270), of diverse national regulations which hinder the development of the Internal Market in this field. The survey identified several striking discrepancies in national regulations, which contribute to the current market fragmentation: UCITS depositaries are purely domestic institutions in nearly 95% of cases. The Internet consultation flagged up significant gaps on, for example, minimum capital requirements, legal duties or the scope of liability for depositaries. A true Internal Market for depositary services will require convergence of these rules. In order to appoint depositaries based in other Member States, domestic fund managers and supervisors will want clarity on the resources of depositaries and on their obligations, whilst investors will need improved standards of information.
The Commission is therefore proposing close cooperation with EU regulators, covering four fields over the next two years.
Better prevention of conflicts of interests
Conflicts of interest arise when investors' interests are not at the heart of the depositary's or the fund manager's behaviour. The Commission survey revealed evidence of diverging approaches and it has therefore suggested action to boost convergence of national rules in this field. This includes the list of the functions that fund managers can outsource to depositaries and, conversely, the list of depositary activities which may be outsourced.
Clarifying the extent of the depositary's liability
Discrepancies in the level and scope of depositaries' liability constitute huge obstacles to ensuring a high level of investor protection throughout the EU and developing cross-border opportunities for depositaries. The Commission has identified as a key objective ensuring a common interpretation of the principal duty of depositaries which is to keep assets safe - and of the specific control duties assigned to them.
Convergence of prudential requirements
The prudential rules which must be applied to set up and operate a depositary differ considerably between Member States, since there are no common EU definitions of eligible institutions. The Commission proposes to foster convergence of these rules, and in particular of capital requirements, by identifying a specific group of relevant supervised institutions.
Enhancing transparency and investor information
In order to help create pressure to remove discrepancies in regulations, the Commission has identified the following areas for enhanced public information standards: the organisation of depositaries' tasks; measures taken against conflicts of interest; depositaries' liability; and the costs of their services.
In 2005 and 2006, the Commission will inform the public on progress in regulators' work to foster convergence in UCITS depositary rules. It will prepare, where necessary and after consultation, further measures to encourage the cross-border development of EU depositaries.
The depositary is in charge of safely holding the assets of a collective investment fund as well as protecting investors' interests by seeking to ensure that fund managers comply with their regulatory and statutory duties. Without the depositary, it would be far easier for dishonest fund managers to cheat investors on the transactions made or even run away with the fund assets.
Together with the fund and its manager, the UCITS depositary is the third fundamental pillar of the UCITS' framework, which was set up by Directive 85/611/EEC.
The EU adopted in 2001 two further Directives on UCITS (see IP/01/1728). The first Directive removes barriers to cross-border marketing of units of collective investment funds by widening the scope of assets in which they can invest. The second Directive gives management companies a "European passport" to operate throughout the Union and widens the activities which they are allowed to undertake as non-core services. It also aims to set a level playing field with "self-managed investment companies" which have not designated a management company. Lastly, it introduces the concept of a simplified prospectus which will provide more accessible, comprehensive information to strengthen investor protection.
In order for investors to get full benefit from these Directives, it is essential that depositaries function as effectively as possible and do not present practical obstacles to cross-border investment. But EU legislation so far contains very few principles and duties for depositaries. What is more, in implementing those few European rules in national law, Member States have often added a broader list of tasks and organisational rules, which differ from Member State to Member State for the estimated 550 UCITS depositaries across the 15 current EU countries.
The full text of the Commission's Communication is available at: