Getting ready for ELTIFs - HMTs regulations prepare for implementation

Update: On 12 November 2015, HM Treasury published its ELTIF Regulations 2015, which comes into force on 03 December 2015.

Introduction

The European Long term Investment Funds (ELTIF) Regulation (the Regulation) becomes effective on 09 December 2015. For a summary of the key provisions of the Regulation, see here.

Implementing the ELTIF regulation in the UK

By virtue of being an EU regulation (rather than a directive), the Regulation's provisions apply directly across all Member States without needing to be transposed into each country's law. Nevertheless, so that ELTIFs can fit within the existing UK financial services regime, certain amendments will have to be made to both primary and secondary UK legislation in time for these changes to take effect ahead of the 09 December deadline.

As a result, HM Treasury (HMT) has produced draft Regulations which make consequential changes to the Financial Services and Markets Act 2000 (FSMA), the Alternative Investment Fund Managers Regulations 2013 and several statutory instruments made under FSMA (such as the Financial Promotion Order and the Promotion of Collective Investment Schemes (Exemptions) Order.

Meanwhile, the FCA has already consulted on changes to its rules under Part 2 of CP15/27 see our summary here.

Why the Limited Partnership Act 1907 may cause difficulties for HMT

However, one aspect of the Regulation has thrown up an issue for the HMT in respect of the Limited Partnerships Act 1907 (the LPA) and caused HMT to reach out to industry for its views.

ELTIFs may, under certain circumstances, be marketed to retail investors. The Regulation requires that such investors should not face any liability or additional commitment beyond their original capital commitment, regardless of what legal form the fund takes.

Some UK AIFs are set up as limited partnerships (LPs) under the LPA. Investors participate as limited partners. Under the LPA, if a limited partner takes part in "the management of the partnership business", they become liable for the LP's debts and obligations incurred while they take part, in the same way as the general partner

Such a situation would breach the Regulation, so HMT is considering modifying the LPA by clarifying that retail investors are not participating in the management of the partnership business when they exercise their rights as investors under the ELTIF's rules or instruments of incorporation. This is the approach taken when Authorised Contractual Schemes were introduced in 2013.

What happens next?

Once HMT has determined whether or not (and if so, how) to amend the LPA, it will prepare a final version of its Order, which will need to be in force on or before 09 December 2015.

Following the end of its consultation under Part 2 of CP15/27 on 14 October 2015, the FCA should be in a position to put its final proposals before the November meeting of the FCA Board, so the changes can come into effect from 09 December 2015.

Finally, the European Securities and Markets Authority (ESMA) has concluded its consultation on Level 2 measures under the Regulation. ESMA now has to finalise its advice to the European Commission which, in turn, must formally adopt its Level 2 measures. It seems highly possible, then, that - as with UCITS V - the Regulation could come into effect on time but without all the necessary detail filled in.