U.K. Goes Above and Beyond AIFMD Minimum Rules
It appears that the U.K. is going to adopt a tougher stance than the minimum requirements set out in the European Union’s Alternative Investment Fund Managers Directive (AIFMD), as member states are currently busy transposing the directive into national law ahead of the looming July deadline.
Earlier this month, the U.K. Treasury released a consultation on the AIFMD, the EU’s first attempt at governing the hedge fund and private equity sectors, which will close on February 27. The consultation includes draft U.K. implementing regulations.
“The position taken by the Treasury in its AIFMD consultation paper goes significantly beyond the minimum rules contained in the directive for small hedge fund managers,” said Brian Forrester, investment partner at financial consultant Deloitte.
“While the Treasury does not propose to apply the full directive to managers of unregulated collective investment schemes, it does propose to apply similar rules to those that are currently applicable to operators of retail investment funds. This will include requiring those firms to appoint a depositary.”
An earlier survey by Deloitte found that smaller hedge fund managers would be hardest hit by the directive as larger firms would more easily be able to find the resources to fulfill the strict new transparency and reporting requirements.
“Smaller hedge fund managers will be unhappy having to bear these costs, which the directive itself requires only of larger fund managers,” said Forrester.
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 six months 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.
And just before Christmas, after many months of delays, the European Commission finally published the more-detailed Level 2 implementing measures for the AIFMD. The Commission has chosen to issue it as a regulation, rather than a directive, meaning that individual countries will not—unlike the AIFMD itself—be allowed to alter in any way the new Level 2 standards.
Although the final Level 2 text, despite taking far longer than expected to be published, contains very few new shocks from the texts widely leaked over the past months.
“The AIFMD is the biggest [regulation] on the horizon for hedge funds,” said Mark Parsonson, executive director of U.K.-based fund of hedge funds manager Liongate Capital Management.
“A lot of these things have been pretty well telegraphed and the way the AIFMD has evolved, both parties have come together to achieve an outcome that was shaped in a more constructive way. To a large part, the engagement with regulators by parties such as Aima [the Alternative Investment Management Association, a London-based hedge fund lobby group] has delivered some improvements in many things that were of original concern. With the publication of the implementing measures the industry can now start to move forward.
“We are always on the side of appropriate regulation as this can benefit the industry as it makes us more attractive to institutional investors and they are at the end of the day, the stewards of long term capital that you really want as investors.”
The recent release of the Level 2 text now finally gives the hedge fund industry some clarity as to the measures they will have to take in order to be compliant with the new regulations.
But a recent survey from accountant KPMG found that a lot of the hedge fund industry is still woefully under-prepared for the changes. It discovered that nearly half of the hedge fund managers it surveyed had not taken any concrete steps to analyze the impacts the AIFMD will have on their businesses or to make changes to their operations despite the looming implementation deadline.
“We find this ‘wait and see’ approach among AIFMs quite alarming, considering the broad impact the AIFMD will have on their overall businesses,” said Charles Muller, head of KPMG’s European Centre of Excellence for Investment Management.
“With the compliance deadline looming large on the horizon, we feel this is really the last boarding call for fund managers to prepare for the legislation. Delaying their preparations any longer could have significant negative impacts on their operations, fundraising activities and long-term profitability.
“The arguments in favor of getting AIFMD preparations under way as early as possible are compelling. Those firms that have not already conducted an in-depth impact analysis of the AIFMD for their business would be well-advised to do so without delay, as the business implications are significant, the amount of work to be done is substantial and the timelines for preparation are becoming increasingly short.
“By embarking on this work now, AIFMs will position themselves to achieve compliance under the directive and maintain long-term profitability under these stringent new rules.”
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.