FSA Consultation Paper on AIFMD implementation
Key highlights and impact
On Wednesday 14 November the Financial Services Authority (FSA) issued a Consultation Paper (CP12/32) on the proposed rules and guidance for transposing the Alternative Investment Fund Managers Directive (AIFMD) into UK law. It is the first of two instalments and takes important policy positions on a wide variety of areas that will impact how the Directive applies in the UK to managers of traditional investment funds, hedge funds, investment trusts, private equity, infrastructure & real estate.
You may remember that the FSA published a Discussion Paper (DP12/1) in January which set out their preliminary thoughts. This CP expands on the DP but ultimately the FSA, as with the rest of the industry, are still awaiting the final level 2 regulations from the European Commission. These are anticipated shortly.
The FSA expects HM Treasury to publish a paper regarding their policy position on the application of the AIFMD to small (i.e. sub-threshold) AIFMs in January of next year, with the next instalment of the CP from the FSA due in February.
We are very pleased that the FSA has referenced our AIFMD Survey when seeking to quantify the cost / benefit of a number of policy areas.
This note highlights some of the key policy positions contained within the FSA paper and is divided into two key sections: the first is broadly based on the chapters of the CP and the second looks at the impact on specific types of AIFMs. Please note, that in many areas the FSA reiterates aspects of the ESMA advice.
FSA policy position by CP chapter
Authorisation / Handbook / Fees
- The FSA doesn’t expect to be in a position to receive AIFM applications or Variation of Permissions (VoP) before 22 July 2013
- HM Treasury will decide upon the application of the AIFMD to smaller AIFMs (paper to be published in January 2013)
- FSA confirmed that firms seeking authorisation between 22 July 2013 and 22 July 2014, who meet the definition of an AIFM, must be fully compliant at the point of authorisation
- The FSA will create a new section of the Handbook, entitled FUND, containing requirements for AIFs and UCITS funds, and the companies that manage them
- The FSA will consult on applicable fee blocks for AIFMs in due course as it will need to make changes to blocks A7 & A9, although this will not affect the fee arrangements in 2013-2014 for firms in those fee blocks as at 1 April 2013.
Interaction with MiFID / UCITS
- The FSA reiterates key points from the Directive regarding the interaction of UCITS / MiFID / AIFMD and the different combinations of firms and the capital / authorisation requirements of each – there is considerable detail here which can be found in chapters 4 & 5
- The key new point made by the FSA is their view that MiFID activities of AIFMs should be passportable in the EU, however the FSA recognises that this view is not shared by fellow competent authorities in Europe.
- We have set out below implications for various types of investment manager. In general, firms should be aware that the FSA’s view on who is the AIFM could be at odds with current understanding
- In their second instalment, the FSA will explain in more detail the AIFMD’s 'regulatory perimeter', i.e. which firms will need to seek authorisation as an AIFM – where this is not already clear
- Investment managers structured as limited partnerships subject to the law of England and Wales will not be able to become AIFMs. This is because limited partnerships subject to the laws of England and Wales, unlike some other jurisdictions, do not have separate legal personality.
- When the AIFM appoints an External Valuer (EV) HM Treasury doesn’t intend to require the EV to be an authorised person.
Capital / Professional Indemnity Insurance
- The FSA does not intend to give firms the option of using contractual guarantees in lieu of regulatory capital - Article 9(6) allowed a Member State to let an AIFM provide up to 50% of the additional own funds required under Article 9(3) with a guarantee from a credit institution or insurance undertaking
- The FSA noted that they expect the level 2 regulation will also allow them to ask a firm to hold additional own funds if they are not satisfied the current level is sufficient to cover appropriately professional liability risk – they have not commented on the extent to which they will use this discretion
- New reporting forms will be required for different categories of manager and page 37 of the CP explains this in more detail.
- The FSA has in general reiterated much of the ESMA advice but has said that it will consult on how the transparency provisions (annual report, disclosure to investors) of the AIFM interact with current requirements for NURS and QIS in their second instalment.
Operating conditions & management requirements
(fair treatment of investors, conflicts of interest, compliance function, internal audit, risk management, valuation, liquidity management, leverage, interest in securitisation provisions)
- The rules for these areas will be set out in the level 2 regulation and as such the FSA has minimal discretion here. Therefore, the CP reiterates much the ESMA advice and makes reference to proportionality and the eventual publication of the level 2 regulation.
You can find Deloitte’s Q&A on this here
- The FSA makes clear that the definition of marketing within the Directive is different from the current definition of a financial promotion. The FSA intend to transpose that definition into the Handbook but have not at this stage issued additional guidance in this area
- The FSA is not proposing to increase the private placement obligations above those within the Directive.
- More detail on how the FSA is proposing to implement the remuneration aspect of AIFMD can be found on our website.
FSA policy position by AIFM type
Investment managers of UCITS
- The FSA reiterates that much of the AIFMD rules are currently applicable to UCITS management companies and that if they currently manage AIFs they will be subject to the same authorisation or VoP processes as any other AIFM.
Investment managers of NURS & QIS
- Both regimes will continue, but the AIFMs of these AIFs will need to comply with the additional areas of the Directive
- Where existing rules are 'stricter' these will still apply
- It is difficult to read between the lines and understand if the FSA expect the Sole Authorised Corporate Director or investment manager to be the AIFM, but it appears to suggest both are a possibility.
- The FSA recognised that the extent to which investment trusts can delegate activities to investment managers will be decided at level 2 (which has not been published)
- They expect the Directive to apply to investment managers of 'internally managed AIFs'; we assume this means 'indirectly' but this has not been made clear
- They also expect the 'internally managed AIF' will not appoint an external manager and would need to have employees or staff to assist with investment management decisions, i.e. not just one executive director
- The FSA confirmed that internally managed AIFs will need to hold €300,000 of own funds initially, and on an on-going basis (i.e. not the higher expense or % of assets requirements).
Hedge fund managers
- The FSA expects that most of these investment managers will be AIFMs
- Previously, some hedge fund structures meant that UK investment managers didn’t need permission for 'establishing, operating or winding up an unregulated collective investment scheme'. However, the FSA has made it clear that the scope of the AIFM is wider than this and may capture some firms that only have the permission to 'manage investments'
- In relation to leverage, the FSA has not made any definitive statements over and above the ESMA advice
- HM Treasury will consult in due course on the treatment of non-UK funds (other than EEA UCITS) that can be promoted to the general public.
Private equity managers
- In common with hedge funds, previously some private equity structures meant that UK investment managers didn’t need permission for 'establishing, operating or winding up an unregulated collective investment scheme'. However, the FSA has made it clear that the scope of the AIFM is wider than this and may capture some firms that only have the permission to 'manage investments'
- The FSA has opened the door for administrators to act as depositaries to certain private equity funds. They have set a minimum capital requirement for these firms which may limit the number of firms providing these services
- The FSA will be the competent authority for Articles 26-30 i.e. those relating to 'asset striping' and the disclosures required when taking significant stakes in companies.
Infrastructure & real estate managers
- No view has been taken on the definition of joint ventures and we will need to wait for the ESMA view on this
- In addition the FSA hasn’t taken a view on how the AIFM applies to real estate investment companies or the distinction between 'corporate' or 'fund management' activities
- The FSA has opened the door for administrators to provide depositary services to certain real estate funds, they have set a minimum capital requirement for these firms which may limit the number of firms providing these services.
The next significant event in the life of the AIFMD should be the publication of the level 2 regulation; we are keeping a watchful eye on developments and will have further updates as required.