Global Custodian Spring 2019 | Page 13

[ U P D AT E ] Cross-border conflicts remain over AIFMD enforcement A REPORT CONDUCTED BY KPMG HIGHLIGHTS AREAS WHERE EU MEMBER STATES REMAIN CONFLICTED IN THE IMPLEMENTATION OF THE DIRECTIVE. U pon reading the first draft of the AIFMD (Alternative Investment Fund Managers Directive) nearly a decade ago, a number of European asset managers spoke openly about absconding to Switzerland in order to escape the regulation’s clutches. This mass exodus did not happen in the end, partly because subsequent rewrites of AIFMD erased or moderated some of the text’s more hostile provisions, placating the funds’ industry and convincing firms to stay put. While AIFMD was designed to bring more oversight into what had historically been an under-regulated area of financial services, the rules were also intended to promote greater cross-border distribution of AIFMs. On the latter point, AIFMD has failed, evidenced by European Commission (EC) data, showing 70% of investment firms are authorised to distribute in just their home market, and only 3% of alternative invest- ment funds (AIF) are registered to distribute in more than three countries. In 2017, consultancy KPMG was commis- sioned by the EC to produce a review of AIF- MD. Its findings – which were published in January 2019 – do not contain any startling revelations. The report is perfectly diplomatic and heaps a lot of praise on AIFMD for creat- ing a harmonised regulatory structure for investment funds, but it simultaneously apportions blame to member states for gold-plating the rules, a net result of which has been a reluctance by asset managers to market beyond a handful of countries inside the EU. A lot of member states are demanding ad- ditional reporting from asset managers over and above what is expected under AIFMD. Others have imposed tougher authorisation processes on asset managers irrespective of whether they meet the AIFMD’S AUM threshold for registration. The definition of what qualifies as marketing vis-a-vis pre-marketing is still unclear in many local jurisdictions, as are the approaches adopted by depositaries in certain countries towards their cash-flow monitoring and look-thru duties. “The KPMG report is very detailed and outlines to the EC what elements of AIFMD are working and which ones are not. Based on this report, the EC will pick and choose what it does next in terms of making chang- es to AIFMD. I do not expect there to be a revolution on AIFMD nor do I believe there will be a fully-fledged AIFMD II. Instead, the EC will most likely digest what KPMG has said and attempt to make the regulation better,” explained Marc-Andre Bechet, legal and tax director at ALFI (Association of the Luxembourg Fund Industry). In essence, KPMG’s findings indicate that AIFMD needs further standardisation if a cross-border distribution market is to properly flourish. To the EC’s credit, it has recognised some of these weaknesses exist but its response has been poor to date. In March 2018, the EC said it would ho- mogenise authorisation processes across member states although critics say its measures do not go far enough. The EC has also said it will create a standard taxonomy for pre-marketing, but its definition has been derided as being excessively strict, and is likely to deter smaller managers from reaching out to investors in new European markets. Bechet, however, accepted that while the pre-marketing requirements had frustrated some asset managers in the UK – where the regime is quite liberal – clarity was needed in other markets. “There was a lot of legal uncertainty in some markets about what pre-marketing exactly was, so the provisions announced by the EC are welcome,” he said. Firms are hoping AIFMD will undergo meaningful reform, either through the pas- sage of a second iteration of the Directive or via the ambitious – albeit slightly dormant – Capital Markets Union (CMU) programme. Bechet said further standardisation of AIFMD was possible, as are adjustments to the rule’s existing, under-fire leverage calculation methodologies. However, asset managers have been advised not to hold their breath for any wholesale changes in some of the other more contentious areas, chiefly remuneration limits. Spring 2019 globalcustodian.com 13