AIFMD updates

Firms should monitor our website for updates on AIFMD.

AIFMD: Additional Alternative Investment Fund (AIF) data items request

On 22 August 2014 we issued a direct communication to a subset of firms under AIFMD with a request for additional mandatory information to supplement the AIF schedule. (Note: If you did not receive this communication, please ignore the following instruction).

We asked for this information to be returned by 5 September 2014 but have yet to receive all responses. Failure to provide the required data may affect the ability of firms to correctly submit returns via Gabriel at the end of their reporting period, as per the reporting obligations listed in the directive.

Irrespective of whether firms are a quarterly, half yearly or annual reporters, we need this information as soon as possible. If you have yet to return your data, please ensure you do so by the close of 12 September 2014.

Please contact AIFMDAuthorisations@fca.org.uk if you have any queries or are likely to experience problems responding within this timeframe.

Changes to Handbook affecting UCITS managers, AIFMs and Article 36 custodians

We have finalised changes to the Handbook affecting UCITS managers, AIFMs and Article 36 custodians. This work is a result of our consultation in March 2014 (CP14/4, chapter 2) and, with respect to the change in number one below, September 2013 (CP13/9, chapter 15).

We received seven responses from trade associations, law firms and compliance consultancies. Respondents agreed with the majority of proposals in our consultation. We have briefly summarised the comments received, our responses and the consequential changes to the guidance in the Handbook Notice. The main changes are:

  1. Incorporation of amendments to the Financial Services and Markets Act 2000 (Gibraltar) Order 2001, which allows AIFMs to passport between the UK and Gibraltar
  2. Incorporation of the ESMA AIFMD key concepts guidelines and the ESMA AIFMD reporting guidelines and opinion
  3. Guidance on AIFMD Reporting by AIFMs on their AIF portfolios
  4. New rules for AIFMs and UCITS managers around risk management systems related to credit ratings
  5. Clarification on how AIF portfolios are valued and how that valuation affects regulatory capital requirements
  6. Clarification to requirements governing Article 36 custodians
  7. Further detail on certain AIFMD remuneration requirements
  8. Modification of the AIFMD notification forms and
  9. Additional minor consequential changes as a result of AIFMD.

Handbook Notice 13 was published on 1 July 2014 with the instrument updating the Handbook.

AIFs in the form of limited partnerships

We have been asked by various stakeholders how they should determine where an AIF in the form of a limited partnership is established. Specific enquiries on AIFs include:

  • a Guernsey limited partnership with its registered office in Guernsey and its principal place of business in the UK, and
  • a UK limited partnership with its principal place of business on Guernsey

The Glossary definition of 'established' means, for an AIF, being 'authorised or registered' in a given country or, if the AIF is not authorised or registered, 'having its registered office' in a given country. So, for an AIF that is not authorised or registered anywhere in the EEA and that has a registered office, we consider its place of establishment to be the country or territory where that office is located. An AIF is not authorised or registered unless it is authorised or registered as a fund, which would not be met, for example, by a registration at Companies House. In the first example mentioned above of a Guernsey limited partnership, the AIF has its registered office in Guernsey and is in our view a non-EEA AIF.

A UK limited partnership does not have a registered office as such but is required to register its principal place of business and we regard that as the equivalent of a registered office for these purposes. Accordingly, in the second example above, the AIF is in our view also established in Guernsey and is therefore a non-EEA AIF.

Where there is no registered office, the location of the head office of the AIF is relevant in determining its place of establishment.

These views reflect our understanding of the effect of the AIFM Regulations 2013 (SI 2013/1773).

Alternative Investment Fund Managers Order 2014

The Treasury has now made and laid before Parliament the Alternative Investment Fund Managers Order 2014 and the Alternative Investment Fund Managers (Amendment) Order 2014. Find out what this means for you if you’re an AIFM.

This makes changes to the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in the UK, including:

  • Transitional period for AIFMs
  • Gibraltar-based firms
  • UK registered firm managing an AIF from outside the EEA
  • Insurance mediation activities
  • Grandfathered AIFs

Transitional period for AIFMs 

AIFMs applying for a variation of permission will not be required to be authorised by 22 July 2014, provided they have submitted a completed application by then. The extension of the transitional provision will not apply to firms applying for a new authorisation. So UK firms may consider deferring their application until the end of the transitional year, but if they do must keep in mind the potential consequences.

  • We encourage firms to apply as soon as possible. This is because UK 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. However, firms will not be required to comply with the marketing provisions until they are authorised.
  • Will not be entitled to passport their activities into other EEA member states until the firm receives authorisation and the relevant notification is processed. Please note that an existing MiFID firm will not be able to continue using its MiFID passports if it has applied to be authorised as a full scope AIFM. It will need to wait until it is authorised to be able to exercise passport rights in relation to the MiFID activities in article 6(4) AIFMD.
  • May be at risk of business interruption if their application is materially incomplete or deficient and, as a result, authorisation cannot be granted.

Firms wishing to market their non-EEA AIFs in the UK via the Small Third Country or Article 42 regimes will need to have submitted a notification by 22 July 2014. Those firms submitting an Article 36 notification should do so only once they are authorised as an AIFM.

Gibraltar-based firms 

Gibraltar-based firms can carry on cross-border activities with the UK when managing and marketing of AIFs, equivalent to the entitlements to carry on cross-border activities afforded to EEA AIFMs under the AIFMD.

UK registered firm managing an AIF from outside the EEA 

Where a firm registered in the UK manages an AIF from a branch outside the EEA and the AIF is registered in, or marketed in, an EEA state, the management activity is to be regulated as if it were in the UK.

Insurance mediation activities 

From 22 July 2014, a firm carrying on insurance mediation activities within the scope of Directive 2002/92/EC on insurance mediation will not have an exemption for them. Where a firm has permission to carry on the regulated activity of managing an AIF or managing a UCITS fund, the firm is exempted from requiring permission for any other regulated activity that it may carry on in connection with or for the purpose of such management.

If your firm has applied for permission to carry on the new regulated activities of managing an AIF or managing a UCITS and wants permission to carry on insurance mediation activities tell us before 22 July 2014. This will allow your firm to obtain the necessary permissions, or have them added to its application if this has not yet been determined, without you needing to apply for a variation of permission.

Grandfathered AIFs 

The transitional provisions for grandfathered AIFs have been amended.  Managers of such AIFs need not apply for the permission of managing an AIF to manage the grandfathered AIF and will need a separate set of permissions, depending on the activities undertaken, to manage those AIFs.  However, if the AIFM has been given a Part 4A permission to manage an AIF and had other permissions removed as part of this process, the manager is treated as if the permissions had not been removed in respect of the grandfathered AIF.

Direction to recognised funds under s.277A

The Alternative Investment Fund Managers Regulations 2013 allow us to direct new compliance requirements for funds that are recognised under s.272 of FSMA (‘recognised funds’).  

Recognised schemes are schemes managed outside the UK, but that can be promoted to retail investors in the UK as a result of being recognised by the FCA.  However, such schemes must also comply with the AIFMD marketing provisions.

Under s.277A FSMA, we have directed operators to complete and send us an annual compliance certificate relating to the recognised fund under management.  

This certification would prove that the fund continues to comply with equivalent requirements to UK authorised funds and gives adequate protection to UK investors.  This ensures that if we amend our rules, the recognised fund will maintain equivalence.

The 277A Certificate must be sent to us no later than one month following the publication of the annual report and accounts of the fund or, if that publication is delayed, the last day on which it would have complied with applicable regulation, whichever is earlier (its due date).  The operator must initially comply with this direction for any financial year for which the due date falls after 31 August 2014.

We have sent a copy of our final direction under s277A to the operators of recognised funds.

Completing an application: additional activities 

When completing Section 2.5 of the Variation of Permissions (VoP) for full scope AIFMs, 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 change - as published in Handbook Notice 8 - 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 finalised 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 8.

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.

Policy Statement 13/10                                           

We published Policy Statement 13/10 on CRD IV for investment firms in December 2013.

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 an explanatory note on what we need on AIFM depositary arrangements.

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.