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What you need to know about Investment Protection - Part 2
03 Dec 2017
Following what was mentioned in the first article published on the Sunday TImes on the 26th November, whereby the rules on the eligibility of assets a collective investment scheme may invest in, the diversification of these assets, liquidity and valuations as the factors which ensure that utmost protection is provided to the retail investor were analysed, this part will now focus on risk management and compliance, oversight and safekeeping and the information provided to the retail investors. 
The UCITS Directive places a lot of importance on risk management and compliance.  It should be noted that all investments involve at least some risk, however it is also important to note that a collective investment scheme which qualifies as UCITS will adhere to the level of risk it has told investors it will take.  The investment manager of the collective investment scheme needs to have in place the necessary procedures to measure the risk of the underlying assets of the collective investment scheme at all times.  The compliance function is to monitor compliance with the collective investment scheme’s investment policy and procedures, as well as with the UCITS investment and diversification rules on a daily basis.  Reports must be presented to the Board of Directors of the collective investment scheme on the scheme’s activities, including details of any remedial action taken to correct non-compliances.  The Directive further imposes timelines on the investment manager to correct non-compliances.  The risk management and compliance functions of the investment management company need to be independent of the asset management function.  This is to minimise any possibility of conflicts of interest, hence providing the investor with added protection.    

Furthermore, there is added supervision, checking and balancing at different levels in the structure of the collective investment scheme to ensure that the interests of investors are protected.  The investment manager of the UCITS collective investment scheme is primarily responsible for the oversight of the collective investment scheme’s activities and the safeguarding of investors’ interests.  An important role belongs to the depositary, who is entrusted with the assets of the collective investment scheme for safekeeping.  The depositary must at all times keep the assets of a collective investment scheme which qualifies as UCITS segregated from its own and the investment manager’s assets.  The Directive imposes strict regulations on the separation of the investment management company and the depository bank, both of which must act independently and solely in the interest of investors.
 
Furthermore, the depositary has additional important monitoring functions, and must ensure that the sale, issue, repurchase and cancellation of the shares of the collective investment scheme are carried out in accordance with the law and regulations.  It also oversees the collection and deployment of the scheme’s income from investments such as dividend and ensures that the Net Asset Value calculation is carried out according to the rules.
Finally, the UCITS Directive states that readily accessible, comprehensible and up-to-date information on the collective investment scheme must be available to all investors and potential investors.  This is one of the best kind of protection for investors, since it can prevent potential investors from buying shares of a collective investment scheme which is not appropriate for their needs or risk profile.  According to the UCITS rules, the collective investment scheme must publish a prospectus, annual and interim reports, and a Key Investor Information Document (“KIID”), which is a two page document providing  information on the collective investment scheme and which should be made available to all prospective investors prior to investing in any collective investment scheme which qualifies as a UCITS.  The KIID uses a measure known as the Synthetic Risk and Reward Indicator (“SRRI”) to show the collective investment scheme’s targeted risk/reward profile on a scale between 1 and 7, with 1 being the lowest level of risk and potential reward and 7 the highest level.  The KIID needs to be updated at least once a year.  The prospectus provides a broad description of the collective investment scheme’s investment goals and strategies, risks, valuation frequency and methodology, and the terms and conditions for buying or selling shares.  The annual and interim reports provide details of the collective investment scheme’s investments and performance and includes commentary from the investment manager about developments over the financial period and the depository.  These reports provide investors with the information to help them judge whether the collective investment scheme is being managed in the way they have been promised and whether it is still appropriate for their investment needs.  An independent audit of the accounts provides the assurance that the published numbers are accurate, hence providing the investors with peace of mind. 
All of the factors discussed above have been drafted to offer the utmost protection to the retail investor when purchasing shares in a collective investment scheme which qualifies as UCITS.  Retail investors should make use of all the tools available to them, through the prospectus and KIID, to ensure that they are making the right decision upon investment.  

Published on The Sunday Times 3rd December 2017
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