Europe’s Fund Managers Fearful as AIFMD Details Are Firmed Up
As the dust begins to settle in Europe following the long-awaited publication by the European Commission of the more-detailed Level 2 text of the Alternative Investment Fund Managers Directive (AIFMD) just before Christmas, many market participants are now fearful of what is in store for the hedge fund and private equity spheres despite a sense of clarity beginning to descend on the process.
“Over the last 10 years, a variety of factors have inspired the wall of regulation facing fund managers,” said Mario Mantrisi, chief strategy and research officer at KNEIP, a service provider to the fund industry.
“Today a sea of acronyms ranging from Ucits, RDR [Retail Distribution Review] and AIFMD are forcing a major change in the way the fund management industry operates, impacting everyone from the smallest boutiques to the largest and most sophisticated investment firms. Fund managers in Europe are now coming to terms with the knowledge that heightened regulation is here to stay.”
The choice of regulation, rather than directive, in the case of the AIFMD Level 2 text, which sets out much of the final detail of how the directive will work in practice, means that it will not require transposition into member state law—individual countries will not be allowed to alter in any way the new standards—once the rest of the directive and the Level 2 text come into force in July.
Also, the European parliament and Council of Ministers, who now have three months to either oppose or agree to the European Commission’s final AIFMD Level 2 text, cannot now crucially amend the text, although it is thought highly unlikely that the Level 2 text will be opposed considering the amount of time that it has taken to get to this point.
“The final text of the regulation contains very few material developments from the texts widely leaked over the past months, and continues to pose some significant problems for the alternative investment fund sector and its suppliers,” said law firm Clifford Chance in a recent note.
The AIFMD is the European Union’s first attempt at governing the hedge fund and private equity sectors but when the AIFMD was first mooted back in 2009, the directive was heavily criticized for its potential to stifle Europe’s fund management industry. But, after endless arguments and negotiations, there is now little more than a year to implementation date and industry opinion has now turned to muted acceptance and a desire to work with authorities to make the best out of the situation.
“The publication of the Level 2 measures finally allows a three-year long painful legislative process to near completion,” said Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry (Alfi), a representative body of the Luxembourg investment fund community.
Saluzzi added: “[But] Alfi is confident that pragmatic solutions can be found within the given regulatory framework, to combine investor protection with well-established industry practices.”
The Alternative Investment Management Association (Aima), a London-based hedge fund lobby group, meanwhile, was happy to see the Level 2 text finally published but it too had concerns of its own.
“We are pleased that the text of the implementing measures of the AIFMD has been published,” said Andrew Baker, chief executive of Aima.
“This will enable the global industry to make its final preparations for implementing the Directive by July 2013. While we may not agree with all of the final provisions – notably on areas like depositaries and delegation—it is now important to look forward.”
Aside from London, which, along with New York, is the pre-eminent hedge fund location, Luxembourg, Ireland and up-and-coming Malta are all big alternative investment centers within the EU. They are up against so-called non-EU offshore European jurisdictions—known as ‘third countries’—such as Jersey and Guernsey who will, until at least 2018, continue to facilitate funds business as normal within the EU through national private placement regimes.
“The publication of these rules is long-awaited and should give EU member states and the wider funds industry with an interest in Europe something concrete to work with and therefore a degree of certainty as they prepare to introduce the directive in July 2013,” said Heather Bestwick, deputy chief executive of Jersey Finance, an agency for the island’s finance industry.
“There will now be a process of analyzing and digesting the rules, as EU member states finalize how the finer details of the directive can be implemented.”
Guernsey, for instance, is planning on operating two parallel regulatory regimes; one which is fully AIFMD compliant, while also maintaining existing regulations for those investors and managers not requiring an AIFMD fund.
“Guernsey is very well positioned regarding AIFMD,” said Fiona Le Poidevin, chief executive of Guernsey Finance, an agency for the island’s finance industry.
Neale Jehan, executive director at accountant KPMG in Guernsey and chairman of the technical committee of the Guernsey Investment Fund Association, a trade body, added: “As a non-EU jurisdiction with close proximity and business ties to the EU, it is essential that we seek to comply with AIFMD for those clients obliged to or who wish to take advantage of the regime in the coming years.
“However, we must recognize that we have clients whose business does not touch the EU at all in terms of management or marketing of funds and it is important that these clients have the choice to elect to fall under the AIFMD regime or remain outside, as is their right. In being able to offer both EU and non-EU solutions from one location, Guernsey will be ideally placed to serve the global fund industry.”
Others, though, are more fearful of what the AIFMD will bring.
“AIFMD is often billed as a hedge and private equity fund regulation,” said Julie Patterson, director of authorized funds and tax at the Investment Management Association, a London-based hedge fund lobby group.
“But it covers a very wide range of pooled investment vehicles, including non-Ucits retail funds, investment trust companies, VCTs, charity funds and pension fund pooling vehicles.
“Some of the detailed provisions in this regulation are out-of-sync or even conflict with other regulations that managers are required to follow and will impose additional costs for investors without conferring clear benefits.”
Patterson added: ““Both the directive and this [Level 2] regulation take effect from July, leaving national regulators and industry alike with an impossible-looking deadline. This is a disappointing outcome which arises out of a flawed process.”
The European Securities and Markets Authority, the pan-European regulator, has also launched two consultations on the AIFMD directive, with a closing date for responses of February 1. Esma’s guidelines and technical standards are expected to be finalized some time in the first half of 2013.
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.