This INDOS Financial article was first published in HFM Week and can be read here (subscription required).
A year has passed since the final implementation date of the Alternative Investment Fund Managers Directive (AIFMD). The general consensus among managers is that the Directive has been challenging but it has not proved as disastrous as some predicted.
Smaller alternative investment fund managers (AIFMs) have been able to avoid the bulk of AIFMD by registering as Small Authorised UK AIFMs. The majority of the remaining UK managers have become full scope AIFMs. Managers found registration to be a long and sometimes frustrating process as the UK Financial Conduct Authority (FCA) coped with the volume of applications. They breathed a sigh of relief upon submission and authorisation of their variation of permission (VOP) applications and then again following completion of their first Annex IV filing in January 2015. There has been some respite since but, feeling a sense of ‘regulatory fatigue’, many managers have been keen to get back to business as usual.
There is a general view that more work could be done to ensure ongoing compliance with AIFMD. While the past year has been difficult for managers, the authorisation and implementation effort to date may prove easier than fully adapting operations to meet regulatory expectations and broader fiduciary obligations.
For a number of managers the AIFMD ‘project’ has continued beyond authorisation. They can demonstrate how their day-to-day operations are continually adapting to comply with the new requirements. Some are revisiting decisions made on the grounds of expediency at the time of application such as the appointment of the depositary. Some managers are looking beyond the typical appointment of an affiliate of the administrator as they feel this has added little value to their overall business. For others, more work is required to tailor and effectively implement template AIFMD policies that compliance and legal firms provided as part of the authorisation process. There is a sense that there has been an increase in a ‘tick the box’ approach to compliance rather than a fundamental change to the way in which businesses are managed.
AIFMD is a complex piece of legislation and, despite being one year old, there are still a number of grey areas such as interpretations around marketing, leverage calculation rules, and some aspects of valuation. One area where more work could be done is around risk management. AIFMD requires managers to implement a clearly defined risk framework, including policies and procedures for managing and monitoring a broad range of risks within an organisation and a requirement that risk management and oversight be functionally and hierarchically separate from the front office which can be a challenge for smaller managers. Questions remain whether the new risk management requirements have been effectively implemented, and any perceived shortcomings could expose managers to regulatory scrutiny.
There has been very little, if any, additional regulatory focus on managers post AIFMD authorisation and managers have noted that many investors have shown little interest in AIFMD. This has undoubtedly contributed to the reduced ongoing focus on AIFMD post-authorisation.
The FCA confirmed under a freedom of information request earlier in 2015 that it was investigating 67 firms subject to the AIFMD for a range of alleged regulatory breaches which did not include AIFMD related transgressions. Some predict the level of regulatory focus will pick up later in 2015 and 2016 citing the FCA’s 2015/16 business plan which indicates there could be more scrutiny of the asset management sector as a whole, particularly through thematic reviews. The announcement to extend the UK Senior Managers regime to the asset management sector could be another warning sign.
We have seen other European regulators flex their muscles and issue fines to hedge fund managers for failing to comply with transaction reporting rules and this could be a sign of things to come in areas such as non-compliance with the AIFMD marketing rules.
Regulatory non-compliance is one of the biggest risks faced by managers. For now, the industry has some breathing space before further regulations such as the Markets in Financial Instruments Directive II (MiFID II) come into force. It may just be a matter of time before managers face more regulatory pressure around AIFMD compliance and managers would be wise to use this period to keep focussed on AIFMD and ensure they fully meet their ongoing obligations.