Annex IV reporting - FCA proposes significant changes

What is the FCA proposing?

In a surprising and significant policy change, on 04 July 2016 the FCA proposed (in Chapter 10 of CP 16/17, “Quarterly Consultation Paper No. 13”) (the CP) a number of changes to its rules which would require Annex IV reporting:

• by above threshold non-EEA AIFMs:
  • in respect of the master fund as well as the feeder fund(s) where they (or another entity in the same fund management group) manage a non-EEA master AIF which is not marketed into the UK but has feeder funds which are either (a) non-EEA AIFs which are marketed into the UK or (b) EEA AIFs and
• by full scope UK AIFMs:
  • in respect of non-EEA AIFs which they manage, even if the AIF is not marketed into the EEA provided the AIFM would be subject to quarterly reporting for that AIF.

What’s the background to this change?

Article 24 of AIFMD requires above threshold AIFMs to report certain data to national regulators in the EEA in respect of the AIFs which they manage and market. Seeing a gap in the coverage, however, on 01 October 2013, the European Securities and Markets Authority (ESMA) published a non-binding Opinion, which recommended that national regulators should require non-EEA AIFMs to report information in respect not only of the feeder fund but also of the master fund in cases where:

• the master fund is a non-EEA AIF which is not itself marketed into the EEA
• it has a feeder AIF which is either
  • an EEA AIF, or
  • a non-EEA AIF which is marketed in the EEA
• both master and feeder AIFs are managed by the same AIFM.

Some European regulators followed ESMA’s Opinion. The FCA, however, chose not to do so, requiring only feeder fund level information from non-EEA AIFMs marketing feeders into the UK.

However, in a July 2016 update to Q&As on the Application of the AIFMD, ESMA reiterated its position.

The FCA has now decided not merely to follow ESMA’s stance but to go beyond it. Its proposals are are set out in the CP and potentially affect both above threshold non-EEA AIFMs and full scope UK AIFMs (see below).

I am a non-EEA AIFM marketing feeder AIFs into the UK - what does this mean for me?

For above threshold non-EEA AIFMs, the FCA is proposing to require master fund level reporting (in addition to feeder fund level reporting) for those AIFs fulfilling the criteria set out above. This additional reporting would be limited to those AIFMs which are subject to a quarterly reporting requirement (see the footnote below). Accordingly, AIFMs subject to half-yearly reporting would not be affected by the proposed change. The information would be reported on an amended Form AIF 002.

However, the FCA is gold plating ESMA’s requirement by extending this to the situation where the master and feeder AIFs are managed not only by the same AIFM but by an entity in the same fund management group as the AIFM.

I am a full scope UK AIFM - what does this mean for me?

Full scope UK AIFMs were already required, by the FCA’s rules to provide information at the master fund level in respect of feeder AIFs which they market into the EEA. They must also report what the FCA calls the "very limited information" on non-marketed non-EEA AIFs required by Article 24(1) and, where relevant, 24(4) of AIFMD.

However, the CP set out the FCA’s proposal to extend the reporting requirement to cover, in addition, all Article 24(2) information in respect of each non-EEA AIF which the AIFM manages - even if the AIF is not marketed anywhere in the EEA. Again, this requirement would only affect AIFMs subject to quarterly reporting in respect of that AIF.

What happens next?

The consultation period under CP 16/17 is open until 12 August 2016. The FCA would then review responses received and publish its final rules presumably in Q3 2016 or early Q4 2016.

If the rules come into effect in Q4 2016, the first quarterly Annex IV reports due under the new rules would (unless the FCA implements a grace period before the new rules apply) be the report in respect of Q4 2016, which would be required to be submitted to the FCA by the end of January 2017.

Two points should be noted:

• the FCA’s cost benefit analysis, set out in Chapter 10 of the CP, estimates the costs associated with the FCA’s proposed changes to amount to:
  • £0.55m to £0.85m for full scope UK AIFMs, and
  • £0.3m to £0.4m for non-EEA AIFMs.

Clearly, any response to the FCA which is able to quantify likely additional costs caused by its proposals would be of particular value to the regulator.

• The FCA also states, at paragraph 10.17, that it has suggested to ESMA that above threshold EEA AIFMs which manage EEA master AIFs which are not marketed into the EEA but which have feeder AIFs which are, should be required to report in respect of the master AIFs in the same way as non-EEA AIFMs must. ESMA is considering whether or not to amend its Q&As to take this point into account.

Footnote:

The frequency of reporting depends on the AUM being managed by the AIFM, calculated in accordance with the AIFMD. Note that (i) non-EU AIFMs need take into account only the AUM of AIFs marketed into the EEA, rather than of all AIFs which they manage when determining their reporting frequency and (ii) assets acquired through the use of leverage need to be included when calculating AUM for these purposes. So:
o AIFMs managing AIFs that are marketed in the EU with an aggregate AUM of over €1bn must report quarterly
o AIFMs managing AIFs that are marketed in the EU that individually have an AUM of more than €500m must report for those AIFs quarterly.
o Subject to the previous bullet point, AIFMs managing AIFs that are marketed in the EU with an aggregate AUM below Euro €1bn but above the AIFMD Article 3 thresholds, must report half yearly.
o Other AIFMs must report annually.