What is the role of the UK Depositary?
Every UK authorised fund must appoint a Depositary. UK authorised funds include UK UCITS, Non-UCITS Retail Schemes (NURS) and Qualified Investor Schemes (QIS). The Authorised Fund Manager (AFM) is responsible for managing and operating authorised funds whereas the Depositary has a separate role, and for this reason must be independent of the AFM.
The Depositary has an important role in investor protection and is responsible for the safekeeping of the fund’s assets. This requirement means that the assets of the fund are always held separately from those of the AFM, thereby keeping them safe should the AFM go insolvent. This separation, or “ring-fencing” of the management of the fund's assets from their ownership is the most fundamental element of investor protection provided by authorised funds. It is important to note that while this prevents the assets themselves being lost, it does not protect investors from any negative investment performance of those assets, such as market losses, credit downgrades, etc.
The Depositary also has oversight responsibilities of the manager’s operations and monitoring the fund’s cash flows, specified in the Collective Investment Schemes Sourcebook (COLL) and (for NURS and QIS only) the Investment Funds Sourcebook (FUND) of the FCA Handbook. The oversight responsibilities include ensuring the AFM of the fund is investing the assets of the fund in line with the rules and the fund’s investment objective. The Depositary is not responsible for making investment decisions, or for performing the operation and administration functions of the fund – this is the role of the AFM.
In the UK, the depositary of an authorised fund must be structurally independent from the AFM, which means they cannot be part of the same corporate group as the AFM. This is a higher standard than most EU countries, which only require a Depositary to be functionally independent, which means they can be part of the same group as the manager but must have different management and supervisory boards.
Depositaries of authorised funds are generally, by market choice, subsidiaries or divisions within large banking groups (although regulation does not require them to be so). In practice they represent a significant resource of professional, well-qualified people, supported by significant IT, processing and specialist resources.
Alternative Investment Funds: Full scope
A UK alternative investment fund (AIF) that is managed by a full scope Alternative Investment Fund Manager (AIFM) must appoint a Depositary. A full scope AIFM is one with over €500m of AIF assets under management, or over €100m of AIF assets under management if these employ leverage. AIFs are not authorised funds, and most AIFs (except for Investment Trusts) are therefore available to professional investors only.
Depositaries of AIFs must be independent of the AIFM. Similar to an authorised fund, a full scope AIF depositary is responsible for safekeeping of the AIF’s assets in accordance with the AIFMD, monitoring the cash flows of the fund and has oversight of the AIFM’s activities as specified in the Investment Funds Sourcebook (FUND).
Alternative Investment Funds: Depositary-lite
Non-EEA AIFs managed by non-EEA AIFMs marketed into the EU are subject to national private placement regimes (NPPRs). While the AIFMD (Article 42) does not require these to have a Depositary, each country can set it’s own conditions for allowing a non-EEA AIF to be marketed through its NPPR, and many require non-EEA AIFs to have an entity that provides some of the Depositary functions, such as cash monitoring. Non-EEA AIFs managed by EEA AIFMs that are marketed into the EU under Article 36 of AIFMD will require a similar Depositary to be appointed.
Firms that provide these services are known as depositary-lite firms, or depo-lite. Depositary-lite firms are authorised but do not need all the permissions required by full Depositaries. A number of DATA’s Affiliate members provide depositary-lite services to non-EEA AIFs.