Introducing A New Regulatory Framework For Irish UCITS - Fund Management/ REITs

On 5 October 2015, The Central Bank of Ireland (the "Central Bank") issued a statutory instrument that will form the basis for a new Irish regulatory framework for UCITS.

The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "CB UCITS Regulations") shall replace the long established UCITS Notices which, along with the accompanying Central Bank Guidance Notes, will now fall away.

The CB UCITS Regulations will complement the main Irish regulations that implement the UCITS Directive (the UCITS Regulations¹). Both regulations will be supplemented by supporting regulatory guidance and Q&As (to be published by the Central Bank on specific UCITS issues in due course) and make up the complete UCITS regulatory framework.

This effectively marks a full overhaul of the regulatory rules for Irish UCITS.

Promoter Requirement Removed

While the main objective of this exercise was to simply recast the regulatory rules and put them on a statutory basis, the wide scale scope of the review and the long standing nature of the existing rules and guidance means that, inevitably, certain policy matters have been caught in the review and changed accordingly.

One of the most notable developments is the removal of the requirement for each UCITS to have a fund sponsor or "promoter" approved for such purposes by the Central Bank.

The Central Bank will therefore no longer scrutinise the regulatory status, financial resources and ownership structure of the entity that sponsors the UCITS. The management company (if any) and the service providers of the UCITS will still need to be regulated or cleared by the Central Bank to assume such functions.

This is a welcome development, particularly for fund managers considering establishing Irish UCITS. Going forward, fund sponsors can avoid what was, in some cases, a significant administrative hurdle to entering the market. This paves the way for more new managers to set up Irish UCITS structures.

Other Key Points to Note

We have highlighted a few of the other notable changes below:

Eligible markets to be assessed by UCITS themselves	Previously the Central Bank set out prescriptive criteria in order to determine whether markets were eligible for UCITS investment. This guidance falls away with the consequence that UCITS themselves are now in a position to assess the markets they wish to invest in and determine if they meet the UCITS eligibility criteria.
Second half-year unaudited accounts for UCITS management companies (and depositaries)	UCITS management companies and depositaries are required to submit half-yearly management accounts covering the first six months of the financial year and audited annual accounts. Additional half-yearly management accounts will now be required, covering the second six months of the financial year.
Related party transactions	Clarification has been provided that the Central Bank's related party transactions requirements will not apply to the services provided by such related parties specifically in their capacity as service providers to the UCITS.
Collateral rules	Conditions are set out for the receipt of collateral by a UCITS, in line with the changes to the ESMA Guidelines on ETFs and other UCITS issues² regarding collateral country diversification and issuer credit quality. This is the outcome of the Central Bank's July 2014 consultation in this area (CP84).
Depositary breach monitoring and reporting	New detailed rules will apply to depositaries regarding regulatory breaches by UCITS it acts as depositary for, covering: (i) recordkeeping; and (ii) notifications to the Central Bank.

Should you wish to analyse the changes and consider the implications in more detail, please refer to any of the contacts at the end of this update or your usual contact in the Maples and Calder Irish Funds group.

Why a statutory instrument?

This project was initiated by way of a public consultation issued by the Central Bank on 2 January 2014 ("CP77"). CP77 published the proposed new regulation in the form of a draft "UCITS Rulebook". The draft UCITS Rulebook was similar in form to the corresponding AIF Rulebook that is in place for alternative investment funds regulated under Ireland's AIFMD regime. However CP77 did make reference to issuing the new regulation "on a statutory basis".

It appears that, as the process evolved, the Central Bank determined it to be appropriate to use their powers under the Central Bank (Supervision and Enforcement) Act 2013 to issue the new regulation in the form of a statutory instrument – thus eliminating any doubt that may have existed that its terms have binding legal effect.

As a result, the regulatory rules governing the operation of Irish UCITS have shifted from being a set of administrative rules to legally binding legislation.

As an aside, it can be expected that the Central Bank will replicate this statutory instrument model in an AIFMD context in due course.

The CB UCITS Regulations also introduce the concept of a "responsible person" and many of the positive obligations within these Regulations are framed as the direct responsibility of the responsible person. Consequently, the failure to meet such obligations would constitute a direct breach of these Regulations by such responsible person.

For UCITS that use management companies, the management company shall be the responsible person. For self-managed UCITS, the UCITS itself will be the responsible person.

The above measures will have significant implications for UCITS from a compliance perspective, particularly in cases of regulatory breaches where enforcement proceedings are issued and/or regulatory sanctions are imposed.

What about derogations?

If a UCITS holds an existing derogation from any particular Central Bank requirement, it will need to assess whether this derogation now conflicts in any way with the CB UCITS Regulations, particularly as these are legally binding. In any such cases, the UCITS will need to determine whether to seek a Central Bank waiver of the relevant requirement in the CB UCITS Regulations; or whether the derogation may no longer be effective.

Timing

The CB Regulations were issued on 5 October 2015. They come into effect on 1 November 2015 and replace the UCITS Notices from that date.

There are some transitional provisions in the CB UCITS Regulations which means that certain requirements will not apply immediately and will be subject to a grandfathering period.

This revamp of the Irish regulatory framework for UCITS comes ahead of UCITS V³ - due for implementation into Irish law on or before 18 March 2016. Accordingly, more changes will need to be captured in a further review in early 2016.

Footnotes

1. European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011

2. ESMA/2014/937EN

3. UCITS V Directive 2014/91/EU

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.