AIFMD review moves into the next stage

The European Commission has launched (22 October 2020) the much-anticipated public consultation on the review of the Alternative Investment Fund Managers Directive (AIFMD).

Although the primary focus of the consultation is on suggested areas of "improvement" and harmonisation on detail within AIFMD, as expected, it seems that the Commission has taken on board certain of the recommendations posed by the European Securities and Markets Authority (ESMA) in its letter to the Commission in August 2020.

From a UK perspective, issues around delegation to third countries, in particular, are likely to provoke industry response bearing in mind that (as things currently stand) the UK will be a "third country" when the transition period ends at 11pm on 31 December 2020.

The online questionnaire isn't for the faint hearted – with 102 broad questions covering a range of topics, the Commission has asked for well-substantiated, evidence- and data-backed answers and proposals from stakeholders by 29 January 2021.

Background to the review

• 10 January 2019: KPMG's report to the Commission was published providing and assessing evidence for the Commission’s review of the AIFMD.
• 10 June 2020: the Commission submitted its report to the European Parliament and the Council on Alternative Investment Fund Managers on the scope and the application of the AIFMD. The report concluded that while the directive has contributed to the creation of the EU alternative investment fund (AIF) market, provided a high-level protection to investors and facilitated monitoring of risks to financial stability, there are a number of areas where the legal framework could be improved.
• 18 August 2020: ESMA sent a letter to the Commission in which it listed 19 areas where it thinks the AIFMD could be improved and which it thinks the Commission should take into account as part of its review.

Areas of focus

• AIFM Passport: The consultation focuses on improving the utility of the alternative investment fund manager (AIFM) passport and the overall competitiveness of the EU AIF industry. It seeks views from stakeholders on the scope of the AIFM licence, its potential extension to smaller AIFMs and level playing field concerns in relation to the regulation of other financial intermediaries, like Markets in Financial Instruments Directive firms, credit institutions or UCITS (undertakings for collective investment in transferable securities) managers that provide similar services.
• Investor protection: The Commission raises questions on investor access that take into account the differences between retail and professional investors, also in the context of a potential EU law pre-calibration of an AIF that would be suitable for marketing to retail investors. There is also a focus on the adequacy of disclosure requirements, the alleged ambiguities in the depositary regime, and the lack of the depositary passport. Stakeholders are also invited to comment on potential improvements to the AIFMD rules on valuation.
• International issues: The Commission seeks views on how best to achieve the equitable treatment of non-EU AIFs and securing a wider choice of AIFs for investors while, at the same time, ensuring that EU AIFMs are not exposed to unfair competition or are otherwise disadvantaged. The Commission also considers the interaction between the EU market and international partners in the area governed by the AIFMD, in particular on the appropriateness of the AIFMD third-country passport regime and delegation rules.Specifically on delegation, the Commission asks whether the delegation rules are sufficiently clear to prevent the creation of letter-box entities in the EU, and whether the rules are appropriate to ensure effective risk management. The Commission also asks whether the delegation rules should be complemented with quantitative criteria, a list of core or critical functions that would be always performed internally and may not be delegated to third parties or any other requirements. These questions are consistent with the recommendations posed by ESMA in its August 2020 letter.
• Financial stability: The Commission seeks views on how to ensure local regulators and AIFMs have the tools necessary to effectively mitigate and deal with systemic risks. It requests specific input regarding improvements to the supervisory reporting template provided in Commission Delegated Regulation (EU) No 231/2013, with a particular focus on the increased activities of AIFs in the credit market. The consultation suggests the potential for more centralised supervisory reporting and improved information sharing among the relevant supervisors. A revised supervisory setup and cooperation measures among the competent authorities are another focus of this consultation.
• Investment in private companies: The Commission seeks views on potential improvements and comments on the effectiveness of the current rules on investment in private companies.
• Sustainability: In this section, the Commission addresses how the alternative investment sector can participate effectively in the areas of sustainable finance and environmental, social and governance goals.
• UCITS regime: The Commission considers proposing a single licence for AIF and UCITS managers, harmonised metrics for the leverage calculation, and the reporting on the use of liquidity management tools.

Next steps

The deadline for responding to the consultation is 29 January 2021. If the Commission proposes to make changes to the existing legislation (at Level 1 and/ or Level 2), these are unlikely to be published until mid-2021. Any draft legislation will then likely be negotiated further at EU level and, once finalised, be subject to an implementation period. The upshot being that we may have to wait some time until we have visibility of the final changes – and possibly a number of years before those changes actually come into effect.