2 minute read 28 Jul 2020

European Commission report assessing the application and the scope of the AIFMD

Authors
Kerry Nichol

EY Luxembourg Wealth & Asset Management Partner

Provider of wealth and asset management services. Connecting clients to EY globally. Team player.

Jean-Marc Cremer

EY Luxembourg Wealth and Asset Management Partner

Independent auditor of Wealth and Asset Management clients. Having strong knowledge of the investment fund industry and Luxembourg regulations. Passionate about gardening. Father of two boys.

2 minute read 28 Jul 2020

Background

Most provisions of the Alternative Investment Fund Managers Directive (AIFMD) have been applicable since mid-2013. The European Commission has been mandated to establish the degree to which the objectives pursued by the AIFMD have been achieved and report to, inter alia, any shortcomings impacting investors, alternative investment funds (AIFs) and their managers (AIFMs) as well as financial system stability.

Based on input from various sources and stakeholders, the European Commission provided a report to the European Parliament and the Council on 10 June 2020 including the results of the AIFMD framework assessment and possible areas for improvement.

Primary Change

The report recognizes the role of AIFMD in creating an internal EU market, reinforcing the regulatory and supervisory framework and enhancing transparency for both investors and supervisors on AIFM activities. The issues raised in the report mainly relate to distribution aspects, the depositary regime, reporting, supervision, valuation and remuneration rules.

Some responses to certain issues have already been implemented recently or are being subject to consultation processes while further legislative, regulatory or supervisory actions might be expected for the others, most probably by the first quarter 2021.

Key Points

Supervision
Shortcoming reported Legislative / regulatory action
Lack of clarity, harmonization of the NCAs’ [1] possibility to impose leverage limits or suspend redemptions in the  public interest
ESMA [2] consultation on guidance to assess leverage risk and operationalization of leverage limits under Art.25 of AIFMD
Lack of cooperation between NCAs in cases where suspensions of redemption have cross-border implications
May  be subject to further action
Valuation
Shortcoming reported Legislative / regulatory action
Combined use of internal and external valuers is excluded and there is uncertainty around the liability of external valuers, determined under national law
May be subject to further action
Depositary
Shortcoming reported Legislative / regulatory action
Lack of clarity in situations where AIFMs use tri-party collateral management
May be subject to further action
Lack of clarity where CSDs [3] act as custodians
May be subject to further action
Concentration risk due to the lack ofa depositary passport in smaller markets
May be subject to further action
Reporting
Shortcoming reported Legislative / regulatory action
Reporting overlaps with other sectorial law requirements
May be subject to further action
Missing data reporting on leveraged loans, CLOs[4] and indirect linkages between banks and non-banks
May be subject to further action
Adjustments may be required on leverage calculation methods
May be subject to further action
Lack of harmonization of forms, processes and central management of databases
May be subject to further action
Remuneration
Shortcoming reported Legislative / regulatory action
Lack of harmonization of remuneration rules with regimes provided in Banking legislation (smaller institutions and small variable amounts may be exempted from payment deferral [5])
Directive 2019/878, providing that AIFMs belonging to a corporate group in scope of CRD only have to apply AIFMD rules on remuneration
May be subject to further action
Distribution
Shortcoming reported Legislative / regulatory action
Efficiency of the EU AIFM impaired by national marketing rules, particularly detrimental for smaller AIFMs unable to bear compliance cost
Cross-border Fund Distribution package
Directive (EU) 2019/1160
Regulation (EU) 2019/1156
Limitation of AIFM passport to marketing to professional investors
Could be subject to further action
AIFs offered to retail investors predominantly through banks and insurance companies promoting mainly in-house funds
 
May  be subject to further action
Investors unable to access non-EU AIFs in member state without NPPR
May  be subject to further action
Un-level playing field created by NPPR between non-EU AIFMs subject to lighter requirements and EU AIFMs
May  be subject to further action
National barriers encountered by private equity fund managers who do not adhere to AIFMD or EuVECA [6] regulation
Regulation (EU) 2017/1991 opening up the use of the designation EuVECA  and expanding investment parameters
May  be subject to further action

The report confirms there was no evidence found that the AIFMD was not technology neutral or preventing the automation of operations or the application of innovative technologies. However further regulatory development or supervisory actions are not excluded to respond to new technological developments.

Practical considerations

The overall assessment and potential outcomes may present opportunities in the longer term:

  • to reduce overly burdensome requirements of the current framework, notably in terms of cross-border distribution and reporting
  • to foster cross-border distribution of AIFs to non-professional investors
  • to set more flexible remuneration rules
  • to enhance legal certainty around depositary, prime broker and CSD liability
  • to have a more robust valuation process

However, increased scrutiny and additional or revised reporting for supervisory purposes could generate additional compliance costs. 

Read European Commission Report

Summary

About this article

Authors
Kerry Nichol

EY Luxembourg Wealth & Asset Management Partner

Provider of wealth and asset management services. Connecting clients to EY globally. Team player.

Jean-Marc Cremer

EY Luxembourg Wealth and Asset Management Partner

Independent auditor of Wealth and Asset Management clients. Having strong knowledge of the investment fund industry and Luxembourg regulations. Passionate about gardening. Father of two boys.