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AIFMD latest news

We encourage firms to monitor our website for the latest information on AIFMD.

Update on applications during the transitional period 

As you are aware, the implementation of the AIFMD is subject to a one-year transitional period that ends on 22 July 2014.  Under the proposed amendments to the transitional provisions announced by the Treasury on 19 December 2013, firms managing AIFs entitled to the benefit of the transitional period who submit their application without sufficient time for the FCA to determine that application by 22 July 2014 will be able to continue managing AIFs until the FCA has determined the application. Based on the Treasury’s announcement, AIFMs will not be required to be authorised by 22 July 2014, but they must submit a complete application by 22 July 2014.

You might therefore consider deferring your application until the end of the transitional year, but if you do you must keep in mind the potential consequences.

Firms without the necessary authorisation on 22 July 2014:

  • Must be fully compliant with all relevant AIFMD requirements from 22 July 2014, including, where necessary, engaging the services of a depositary.
  • Will not be entitled to passport their activities into other EEA member states until the firm receives authorisation and the relevant notification is processed.
  • May be at risk of business interruption if their application is materially incomplete or deficient and, as a result, authorisation cannot be granted.

Given these potential consequences we would strongly encourage firms to submit their applications as soon as possible; ideally no later than 22 April 2014.

March QCP 

As part of our latest Quarterly Consultation Paper, we are consulting on the following changes to the Handbook affecting AIFMs, UCITS management companies and Article 36 custodians:

  • Incorporation of the ESMA AIFMD key concepts guidelines, the ESMA AIFMD reporting guidelines and the European Commission’s delegated regulation on types of AIFM,
  • Guidance on AIFMD Reporting,
  • New rules for AIFMs and UCITS managers around risk management systems related to credit ratings,
  • Changes to prudential requirements for firms trading derivatives,
  • Clarification to requirements governing Article 36 custodians,
  • Changes to AIFMD remuneration requirements,
  • New AIFMD notification forms, and
  • Additional minor changes.

The consultation period is open until 6 May 2014. Stakeholders wishing to respond to the consultation should send comments to the contacts detailed at the front of the consultation paper.

We expect to complete this work, subject to comments from respondents, in mid-2014, with a view to updating the Handbook before 22 July 2014.

Update on FCA applications for AIFMD 

We have received a positive response to our request for early applications. During January 2014 alone we received 103 full-scope and 95 small authorisations applications.

The FCA has a large team of case officers dedicated to assessing these applications with several employees from within the Authorisations and Supervisory Divisions supporting an all-hands-on-deck approach to ensuring applicant firms will be able to meet the Directive deadline of 22 July 2014.

 

Firms

Prior to September 2013

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Full scope (New Authorisation)

12

2

0

2

9

16

4

Full scope (VoP)

18

1

7

3

24

103

25

Small Auth (New Authorisation)

35

1

2

3

5

3

1

Small Auth (VoP)

4

6

13

13

24

95

25

 

Completing an application - Additional activities 

When completing Section 2.5 of the Variation of Permissions (VoP) form, firms should only select additional ancillary activities where they are necessary for the activities that the firm intends to carry out, and can be referenced back to their regulatory business plan. These additional activities do not need to be selected if the firm is only managing AIFs and/or UCITS.

AIFMD capital – “additional own funds” Article 9( 3) 

Following representations from a number of firms, we have been considering our interpretation of the definition of “funds under management” for the purposes of Article 9(3) AIFMD. This definition is used to calculate the amount of “additional own funds” a manager must hold once the value of the portfolio of AIFs exceeds EUR 250m. This requirement is reflected in Chapter 11 of IPRU(INV).

We have decided that the current requirement can lead to disproportionate outcomes in certain circumstances. We will therefore consult on amending the requirement in a quarterly consultation paper later this year. The proposed change will allow for derivatives to be valued at their market value rather than requiring them to be converted to their underlying positions when calculating the value of portfolios.

So that firms do not have to wait for the rule change in order to progress with their applications for authorisation as an AIFM, we have made available a "modification by consent", to allow individual AIFMs to take advantage of the proposed change. Firms that wish to benefit from this will need to follow the instructions detailed in our modification by consent  and state in their applications that they have been granted the modification.

We continue to encourage firms to submit applications in good time and hope that this update will facilitate this.

This modification by consent may also be used by UCITS management companies that are subject to IPRU(INV) 11.

Update on Article 6(4) 

Last year we published a statement on the passporting of services authorised under Article 6(4) of AIFMD (the so-called 'MiFID services'). We explained that the European Commission did not share our view that a passport exists for such services under AIFMD, and that consequently some Host States might refuse our passport notification for the provision of MiFID services by a UK full-scope UK AIFM.

Recently, EU negotiations on the proposed revision of the Markets in Financial Instruments Directive ('MIFID 2') reached an agreement to introduce an amendment to Article 33 of AIFMD. This amendment will make it explicit that the right to passport an AIFM’s services in other Member States extends to any services it provides under Article 6(4) and that Article 33 provides the mechanism for the AIFM to do so by requesting its Home State Regulator to issue a notification to that effect.

Some Member States may have already implemented into their national law the original view of the European Commission services that there is no passport under the AIFMD for the MiFID services, in which case it is likely to take them some time to change the law and begin accepting the passporting of MiFID services. However, we understand that the Commission's revised view is that a notification for a full-scope UK AIFM to provide MiFID services in another Member State should be accepted by the Host State regulator.

Guidance on the AIFM remuneration code 

We have finalised our guidance on the AIFM remuneration code.  We have implemented this by making changes to the SYSC 19B and FUND 3.3.5 chapters of our Handbook, and we have introduced a link in SYSC 19B to a non-Handbook document that contains our guidance on the application of proportionality to firms and other aspects of the Remuneration Code.  

This work is a result of our consultation, which closed in November 2013.  We received 15 responses, mostly from industry trade bodies, law firms and large investment managers.  

The respondents overwhelmingly welcomed our initiative to provide guidance on the AIFMD remuneration regime and largely agreed with the content, but also suggested some changes. We have briefly summarised the comments received, our responses and the consequential changes to the guidance in the Handbook Notice.

AIFMs will need to comply with the relevant remuneration rules in the AIFMD and its implementing measures, such as the ESMA guidelines on sound remuneration policies under the AIFMD.  Our guidance will provide more certainty for firms transitioning to the AIFMD regime, and may help them to apply to become authorised in good time.

Statement regarding HMT’s AIFMD transitional arrangements update 

We are aware of the Treasury’s announcement regarding their intention to make changes to the transitional arrangements in The Alternative Investment Fund Managers Regulation 2013. We will make further announcements when it is clear what the particular details of these changes are and how they might impact our implementation of AIFMD. In the meantime we continue to encourage firms to submit their applications in line with the timelines stated on our website.

PS 13/10 

On 13 December, we published Policy Statement 13/10. We would like to draw firms’ attention to Annex 3: Prudential classification for UK investment fund managers which has been updated since it was published in PS 13/5: Implementation of the AIFMD. The table provides clarifications as a result of consequential amendments to the prudential requirements for Collective Portfolio Management (CPM) firms and Collective Portfolio Management Investment (CPMI) firms.  

Information required from AIFMs on depositary arrangements 

We have received a number of queries relating to depositary arrangements and the Variation of Permission form. To assist firms with this we have published a guidance note.

The use of proportionality in applying Article 15(1) 

We have received a number of queries regarding how AIFMs can comply in a proportionate way with the AIFMD’s requirement, under Article 15, for hierarchical and functional segregation of a firm’s risk management function.

We will review compliance with this requirement in accordance with the principle of proportionality set out in Article 15(1) of the AIFMD and Article 42(3) of the AIFMD level 2 regulations (231/2013). It follows that there is scope for AIFMs to devise effective risk management functions that comply with the separation requirements of Article 15(1), subject to the principle of proportionality.

The principle of proportionality is intended to ensure that regulatory measures go no further than required to achieve a stated objective. The second paragraph of Article 15(1) suggests that the objective is to ensure an AIFM has specific safeguards against conflicts of interest, to allow for the independent performance of risk-management activities.

We understand that achieving functional and hierarchical separation may be disproportionate for some firms, taking into account their size, internal organisation and the nature, scale and complexity of their business (or possibly other factors – to the extent the firm regards such factors as relevant).

However, to satisfy the requirements of Article 15, an AIFM must be able to demonstrate that it has specific safeguards against conflicts of interest that allow for the independent performance of risk-management activities. Those safeguards must, as a minimum, comply with Article 43 of the AIFMD level 2 regulations. We will review and assess the safeguards implemented by the firm to ensure that conflicts of interest do not compromise that independence.

If an applicant firm wants to comply with Article 15(1) other than through functional and hierarchical separation, and on the basis of proportionality, then it should describe briefly in the notes to the application form the specific safeguards that achieve the desired objective. If necessary, we will follow up with a request for more information or assurances.

Update on timings for AIFM full-scope applications 

We have had a number of queries about a firm’s ability to request a specific timeframe for its authorisation or variation of permission. We would therefore, like to provide the following clarification.

Firms have a legal right to have their complete full-scope AIFM application determined within three months (or exceptionally six months), and we will try to process applications as quickly as possible.

As with other forms of FCA authorisation, where a firm has specific requirements in relation to the timing of that authorisation, we will, where possible, accommodate the firm’s request.  However, firms should be aware that authorisation within a short timeframe is not always possible.  

Where a firm’s desired authorisation date is more than three months after the date it intends to submit a complete application, it should request a deferral of determination beyond the normal three month statutory time limit. It is important that the application makes it clear a deferral is being requested and provides the reasons for this. Applicants seeking to defer determination beyond the 3 month statutory time limit may request an authorisation date as late as 21 July 2014 (even if that date is more than 6 months after the date of submitting a completed application). Firms are also reminded that AIFMs managing AIFs must hold the correct Part 4A permissions from and after 22 July 2014.

Firms wishing to defer should provide the preferred authorisation date, along with the reasons for requesting it, in section 1.2 in the VoP form (headed ‘Timings for this application’). Once we have reviewed the application, we will contact you to discuss whether the requested timescales are achievable.

Depositary update 

We are aware that a number of firms are currently preparing applications for authorisation or variation of permission to carry out the function of acting as depositary or trustee of an Alternative Investment Fund (AIF). Some of those firms may be considering structures where services will be provided to the depositary by other operating units or entities in the same commercial group, or by unconnected persons under an arms’ length contract.

We would like to draw the attention of applicants to the rules on delegation by a depositary; it is vital these rules are followed in order for us to process an application effectively and efficiently.  

FUND 3.11.26R specifies that a depositary must not delegate its functions to third parties, except for the safekeeping of assets which may be delegated under a number of conditions.  We consider that a ‘third party’ should be understood to mean any party that is not part of the same legal entity as the applicant. The performance of any depositary functions detailed in the Directive itself, or in Articles 85 to 97 inclusive of the AIFMD Level 2 Regulation, is subject to this rule.

Applicants should also refer to Recital 42 of the Directive, which is not reproduced in our Handbook.  It includes the statement that “Delegation of supporting tasks that are linked to [the] depositary tasks, such as administrative or technical functions performed by the depositary as a part of its depositary tasks, is not subject to the specific limitations and requirements set out in this Directive”.

However, if applicants intend to outsource any administrative or technical functions, they should take note of the provisions of SYSC 8 in our Handbook. Rules in SYSC 8 are binding on firms that are (or will be) common platform firms, but have the status of guidance for all other firms.

We do not propose to issue a comprehensive list of functions that would be considered purely administrative or technical. These will depend on context and the proposed structure of each depositary’s operations.  In each case, the applicant must be able to satisfy the FCA that it will have the necessary technical and human resources to perform the core depositary functions of cash monitoring, safekeeping (if it is to be carried out by the depositary without delegation to any third party) and oversight.

An EEA firm that establishes a branch in another Member State, under rights conferred by a single market directive, is not carrying out delegation when providing the services permitted under that directive at or from the office of its branch. However, the points raised above in relation to SYSC 8 would apply to any such arrangement.

Passporting arrangements 

ESMA recently published an opinion that recognises the right of firms to be able to exercise passport rights in Member States that have not yet transposed the directive, assuming the firms’ own home Member State (e.g. the UK) has transposed the AIFMD.

UK firms should be able to exercise passporting rights in all EEA states with the exception of Norway, Liechtenstein and Iceland.  UK firms will be able to exercise AIFMD passporting rights in these jurisdictions when the EEA Agreement, to which Norway, Liechtenstein and Iceland are signatories, has been updated to include the AIFMD within its scope. Similarly, UK firms will be able to exercise passport rights in Norway, Liechtenstein and Iceland pursuant to the EuSEF and EuVECA regulations, when the EEA Agreement has been updated to include these regulations within its scope.

Applications during the transitional period 

Firms that are able to take advantage of the transitional provisions set out in Regulation 72 of the AIFMD UK Regulation will need to be authorised or registered to continue the activity of managing an AIF from 22 July 2014.

Firms already managing AIFs

Firms that were already managing AIFs before 22 July 2013 may be able to benefit from the transitional provisions set out in Regulation 72 of the AIFMD UK Regulation.  Such firms may, until 21 July 2014, manage an AIF without being either authorised with the Part 4A permission of managing an AIF, or registered as a small registered UK AIFM.  

If they intend to continue those activities after that date, they must submit an application to be authorised or registered before 22 July 2014.  Similar provisions apply to firms requiring authorisation to act as trustee or depositary of an AIF.

The transitional period gives relevant firms sufficient time to ensure that their management or depositary activities comply with our rules, which includes holding the necessary authorisation or registration. 

Application deadlines

We advise firms seeking an authorisation or a variation of permission under AIFMD (including small authorised UK AIFMs and depositaries) to apply no later than 22 January 2014 in case we need a full six months to determine the application.

Firms that need to be authorised as full-scope UK AIFMs or need to be registered, should submit a complete application no later than 22 April 2014. We will normally determine an application for authorisation as a full-scope UK AIFM within three months, as provided for under Regulation 5(5) of the AIFMD UK Regulation.  However, we strongly encourage firms to apply as soon as possible. 

What if I miss the deadline?

From 22 July 2014, the activity of managing an AIF may not be carried on by any person who is neither authorised to perform that activity nor registered. An authorised person, who carries on a regulated activity without the relevant Part 4A permission, will be in breach of section 20 of FSMA. If we receive applications after 22 April 2014, we would not be obliged to determine them before 22 July 2014.

If a firm believes that it will not be able to meet the deadlines/targets outlined above, please contact us as soon as possible.

AIFMD transposed 

On the 22 July 2013 UK law implementing the Alternative Investment Fund Managers Directive (AIFMD) came into force. It creates a tighter regulatory framework for alternative investment fund managers including managers of hedge funds, private equity firms and investment trusts.

Policy Statement 

On 28 June 2013 we published our Policy Statement setting out our rules for implementing the Alternative Investment Fund Managers Directive (AIFMD), and providing our response to the feedback to our Consultation Papers. The rules will take effect from 22 July 2013.