On Tuesday, as part of its financial rule making spree, the European Parliament approved three key financial services measures:

  • a proposed directive amending the directive relating to undertakings for collective investment in transferable securities (UCITS V)
  • a proposal to amend and extend the Markets in Financial Instrument Directive (MiFID 2), and
  • a proposed regulation on key information documents for investment products (the PRIIPs regulation)

UCITS V deals with depositaries, remuneration and sanctions.  It designates the entities that may be appointed as depositaries, defines their tasks and duties and clarifies depositary liability.  UCITS V seeks to ensure that remuneration policies are aligned with sound and effective risk management.  While remuneration may comprise both fixed and variable components, between 40 – 60% of the variable component must be deferred and at least 50% paid in shares of the UCITS concerned.  Application of the remuneration requirements is subject to the principle of proportionality. Member States must impose administrative sanctions for certain infringements of the UCITS regulatory requirements and UCITS V specifies the maximum penalties that should apply. Member States may impose criminal sanctions instead of administrative sanctions.

MiFID 2 comprises a regulation backed up by a directive.  The proposed regulation limits the use of waivers on disclosure requirements, provides for non-discriminatory access to trading venues and central counterparties for all financial instruments and requires derivatives to be traded on organised venues.  The proposed directive amends the existing rules on the authorisation and organisational requirements for providers of investment services and on investor protection.  It also introduces a ban on inducements for independent financial advisers. While to date, UCITS have all been classified as non-complex instruments, MiFID 2 introduces the exception of "structured UCITS", which are to be treated as complex products. This means that investment firms selling these UCITS will be obliged to request information from a client about his knowledge and experience, in order to assess the appropriateness of these instruments to him.

The proposed PRIIPs regulation focuses on packaged retail investment and insurance products, which can be broadly categorised into investment funds, insurance-based investment products and retail structured products. It requires manufacturers of these products to draw up a key information document which can be no longer than 3 pages in length and must be written in simple language.  The proposed regulation sets out the required form and content of the document, which in certain cases must contain a comprehension alert stating, "You are about to purchase a product that is not simple and may be difficult to understand."  

What Next?

Now that they have been approved by the Parliament, each of the three measures must be formally approved by the Council and published in the Official Journal which is expected to occur in the second quarter of 2014. The measures will enter into force 20 days after their publication.  Member States must then transpose the UCITS V and MiFID 2 directives into national law, within 18 and 24 months respectively. The MiFID 2 regulation will apply, for the most part, 30 months after it enters into force although some provisions will be immediately applicable. 

For its part, the PRIIPs Regulation will apply 24 months after its entry into force. However, those managing or selling funds falling within the scope of that Regulation will benefit from a five year transitional period if they are UCITS or are subject to national laws which require them to provide a document with the same format and content as the UCITS Key Investor Information.

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