23 March 2018
The Financial Services Authority (‘FSA’) has released its second Consultation Paper (CP13/9) on the implementation of the alternative investment fund manager’s directive (‘AIFMD’) in the UK. The paper follows on from the FSA’s first Consultation Paper released in November last year and addresses some, but not all of the outstanding issues from the first consultation. A third and final Consultation Paper is expected in May 2013, which will address any remaining issues. Among other things some key issues in the FSA’s second Consultation Paper (CP13/9) includes details on:
- The transitional provisions confirming that the FSA and HM Treasury intend to permit UK AIFMs which manage or market AIFs in the UK to use the full 12 month transition period (to 22 July 2014);
- How the FSA proposes to give guidance about the scope of the AIFMD;
- Delegation and meaning of letterbox entity;
- The FSA’s approach to marketing under the AIFMD; and
- Consumer redress – compensation under the FOS and FSCS.
2. Transitional provisions
The FSA confirms that it proposes to permit UK firms to make full use of the 12 month transitional period. This will enable UK firms to continue to manage funds and market them in the UK and non-EEA countries during the period 22 July 2013 to 21 July 2014, which is welcome news.
UK firms which seek to market their funds in Europe will need to be authorised under the AIFMD in order to obtain the marketing passport for marketing in the EEA, so this will not assist all firms. The FSA’s proposed interpretation of “marketing,” means that some preliminary marketing can be carried out without authorisation, assuming that other Member States have the same approach, although this does not provide much assistance as there is still no clarity on whether all Member States will take the same view as the FSA.
The FSA proposes guidance on the definition of an alternative investment fund (‘AIF’), (incorporating draft guidance from ESMA – and indeed going further in some respects). The FSA gives examples of arrangements that are “not likely” to be considered AIFs, such as pension schemes, timeshare schemes and employee participation schemes.
With respect to carried interest, the FSA states that carried interest vehicles are generally not AIFs, on the basis that the employee participation scheme exclusion will apply (they also may be excluded on the grounds that participants making nominal capital contributions are not “investors” from whom capital is being raised in any meaningful sense). Joint ventures will not normally be caught under the definition of an AIF and the draft guidance sets out detailed guidance as to what might constitute a joint venture, along with practical factors to take into account when deciding whether a commercial venture is excluded as a commercial venture.
With respect to UK Real Estate Investment Trusts (‘REITS’), there is no presumption as to whether or not these are AIFs. The basic principles must be applied on a case-by-case basis. Family investment vehicles are also not generally considered AIFs.
To decide what undertakings are excluded as family investment vehicles, exempt family vehicles are likely to be those where:
- There is a family relationship between the investors.
- There is no raising of capital from investors outside the relationship.
- The money or assets to be invested and the relationship between the investors predate the relationship between the investors and the vehicle.
Exchange traded funds (and exchange traded products) are likely to be AIFs (unless they are UCITS). There is also further guidance on the extent of the ‘holding company exclusion’ under AIFMD, including confirmation that it is capable of extending to limited liability partnerships.
The FSA has added more detail on its original statements concerning delegation and the letterbox entity, mindful of the fact that the letterbox entity test has been the subject of considerable debate. These statements reveal that the FCA will undertake a ‘proportionate supervisory assessment’ that will be ‘more qualitative than quantitative’ and it will not make automatic assumptions based on a level of delegation over quantitative thresholds. Senior management and the governing body of the AIFM must exercise effective oversight and control over risk and portfolio management and must supervise any delegate actively and on an ongoing basis, which will apply even where the delegation is intra-group and irrespective of geographic location.
The FCA will further have regard to the objective reasons and commercial imperatives for delegation and it will have reference to specific, real-world operating models; and for as long as firms are relying on the twelve month transitional period from 22 July 2013, the FSA will not review or supervise existing delegation arrangements whether against the Directive’s delegation requirements generally, or the letterbox. From July 2014, the FCA will review existing and proposed arrangements of those firms wishing to be authorised or to vary their permissions from July 2013. Essentially, while each situation will be taken on its own merits, it is not the FSA’s stated intention to deem an AIFM a ‘letterbox entity’ simply because of the amount of Portfolio Management it has delegated. The FSA also confirms that a key determinant will be that AIFMs should retain responsibility for all activities it delegates/outsources and to make sure it has appropriate due diligence and ongoing supervisory processes in place to ensure the delegate is performing its functions to the standards necessary.
The Consultation Paper includes further detail in the new draft guidance concerning marketing under the AIFMD, whereby the FSA propose adding a new section in Chapter 8 of PERG which sets out useful guidance on several key issues. For example, the guidance clarifies that the meaning of ‘offering’ and ‘placement’ in the AIFMD is where a person ‘offers or places when he makes a unit or share of an AIF available for purchase by a potential investor’ (PERG 8.37G (1)) and while an offering includes situations where units or shares are made available to the general public, a placement includes situations where units or shares are only made available to certain investors. The FSA further considers that communications in relation to early drafts of documentation are not within the meaning of an offer or placement and, as there is no unit in an AIF made available for purchase, the AIFM cannot apply for (and does not need) permission to market the AIF at that stage, (PERG 8.37.5.G.(1)).
The FSA sets out the concept that indirect offering or placement should be interpreted broadly to include distribution of units or shares through a chain of intermediaries (the example is given of the purchase of shares or units by an underwriter or placement agent). In relation to private placement, a new section in FUND (10.5) describes relevant notifications and other applicable conditions under AIFMD. The FSA intends to provide further details on the forms and how to submit them before July 2013.
The FSA further gives its approach to a course of conduct which may constitute passive marketing. It is proposed that only communications which are solicited by the investor should be considered to have occurred at the initiative of the investor.
Finally, details are provided on the interaction between AIFMD marketing and the UK financial promotions regime which reveals that that it may be possible to market an AIF without making a financial promotion. No changes were made to the financial promotions regime as a result of the AIFMD so any person marketing an AIF will need to consider whether they are also making a financial promotion.
6. Consumer Redress
Chapter 5 of the Consultation Paper sets out the FSA’s proposals for an appropriate degree of consumer redress by defining the types of AIFM and depositary within the scope of the Financial Ombudsman Scheme (‘FOS’) or the Financial Services Compensation Scheme (‘FSCS’). The FSA does not intend to extend protection under the FOS or FSCS to investment companies or depositaries of UCIS (excluding common investment funds (‘CIFs’) and common deposit funds (‘CDFs’)) and investment companies., though it does propose to extend protection to investors in both CIFs and CDFs.
With respect to cross-border activities, the FSA considers options for extending the scope of the FOS and the FSCS and proposes that the FOS should be extended to cover EEA AIFM managing FCA-authorised funds from an establishment outside of the UK (for example, EEA AIFM managing an FCA-authorised AIF on a cross-border services passport). The FSA also proposes that the FSCS should cover cross-border fund management where the fund is an FCA-authorised fund. Therefore, EEA AIFMs managing UK-domiciled UCIS from a branch in the UK will also be required to pay FOS levies. Currently, the FOS levy for fund managers is £250 per year and the FSCS levy for fund managers is based on their annual eligible income.
Firms are invited to respond to the FSA’s Consultation Paper by 10 May 2013 and this will be followed by a full policy statement which will be published in June 2013. If you have any further queries on the FSA’s second Consultation Paper or the AIFMD, please contact a member of the team.