STANDARDS for depositaries, which oversee regulated mutual funds in Europe, are set to be tightened through new legislation in the wake of the Madoff affair, senior officials in Brussels announced yesterday.

Charlie McCreevy, European Union internal market commissioner, said he planned to clarify and strengthen the provisions of the so-called UCITS (Undertakings for Collective Investment in Transferable Securities) rules that govern the cross-border marketing of European investment funds, “particularly as regards the liability of depositaries”.

The move stems from the bitter experience of investors who, when they tried to discover what had happened to money put into European funds that invested with Bernard Madoff, found that the way in which that oversight role has been interpreted varied from country to country. In particular, some fund depositories had outsourced parts of their custodial task, allowing Mr Madoff to serve as both investment manager and sub-custodian of those same funds.

In its controversial proposed legislation to regulate the hedge fund sector, Brussels has already said that depositaries should be credit institutions which are based, authorised and supervised in the EU; that there should be clear provisions on the extent to which they can delegate their task; and that there should be strict conditions under which assets can be entrusted to depositaries outside the EU.

Yesterday, Mr McCreevy said the UCITS regime should, at least, adopt similar standards and that it would be inappropriate to have a less stringent regime for retail investors, who are the main customers of UCITS funds, than for professional investors – who put money into hedge funds.