Brussels, 26 January 2008
The UCITS regulatory framework has proved very resilient during the current crisis. However, the depositaries of 4 UCITS funds (from a population of 30'000 funds) entrusted fund assets, worth 1.6bn€ to Madoff entities and those assets have not yet been recovered. On the 12th January, Mme Lagarde, the Minister for finance and economy in France addressed a letter to Commissioner McCreevv highlighting the diverging approaches that Member states have taken on the role and liability of UCITS funds' depositaries. This situation could imply intolerable differences in investor protection depending on the domicile of fund depositaries. This matter was also discussed by EU Finance Ministers at ECOFIN Council on 20th January. On the occasion of the ECOFIN Council, Commissioner McCreevy explained the steps that the Commission will take to respond to these concerns.
Commissioner McCreevy stated: Responsibility of an independent depositary for safe-keeping of fund assets is a cornerstone of the UCITS regulatory framework. The Directive clearly assigns responsibility for asset safe-keeping to the depositary and liability in the event of wrongdoing or negligent performance of its duties. IThe Commission will take the lead in ensuring that the principles enshrined in the Directive are upheld – starting with a review of how Member States give concrete expression to these provision to identify any practices or provisions that might blur the basic responsibilities foreseen in the Directive. On the basis of that review, the Commission will take the lead in bringing forward any actions needed to codify depositary responsibilities.
The UCITS regulatory framework has proved very resilient during the current crisis. Despite very difficult market conditions, asset illiquidity and investor redemptions, no more than a handful of funds have been forced to suspend trading or close. The regulatory safeguards embedded in the regulatory model have been instrumental in helping UCITS funds to weather this crisis.
However, some UCITS funds have been caught in the turbulence following the Madoff scandal. The depositaries of 4 UCITS funds (from a population of 30'000 funds) entrusted fund assets, worth 1.6bn€ to Madoff entities and those assets have not yet been recovered. Losses have been incurred by investors and other funds across the EU that invested in these funds. The Member States supervising these depositaries have stated that the responsibility and liability of the depositaries set out in the UCITS Directive are faithfully implemented in their law. Procedures are underway in those countries to determine the liability of the fund depositaries for loss of assets.
The incident has nevertheless revealed differences in the way that the requirements of the Directive are given expression in national law. It has revealed different expectations as to whether the depositary is required to keep assets under its control so as to be able to return them to investors, or whether its responsibilities are confined to monitoring the security of the assets. It also suggests differences as to where the burden of proof lies in establishing responsibility and liability.
Position of the European Commission
The Commission considers that the Directive clearly establishes the basic responsibilities and liabilities of the depositary. It clearly assigns responsibility for safe-keeping fund assets to the depositary and imposes liability on the depositary in the event of wrongdoing or negligent performance of its duties. Determination of liability and its extent must be established in accordance with the relevant national civil law.
The Commission notes that it is premature to conclude that investors in the UCITS funds concerned will not be indemnified for losses incurred under the law of the Member States where the depositaries concerned were domiciled. However, given that the depositary is a critical component of the UCITS regulatory system, the Commission is determined to ensure that national laws and practices transcribing depositary responsibilities and liabilities do not blur the responsibilities and liabilities enshrined in the Directive.
To this end, the Commission shall, along with CESR, review the manner in which Member States have implemented the relevant provisions of the Directive, and evaluate how responsibilities and liabilities of depositaries are defined having regard to national civil law. This review will be driven by the objective of identifying any practices or provisions which dilute the basic responsibilities and liabilities of the Directive. It will seek to clarify the responsibilities of UCITS depositaries for safe-keeping, and the modalities by which depositaries can exercise those responsibilities (including use of sub-custodians).
To the extent that this review identifies practices or outcomes that are not consistent with the over-arching principles of the Directive, it will take the necessary steps to correct shortcomings. At this stage, a number of options could be envisaged – ranging from legally binding clarification of the responsibilities implied by asset safe-keeping supported by convergence of national practice, to more far-reaching legislative harmonisation.