AIFMD Review - European Commission Report published

On 10 June 2020, the European Commission published the much anticipated Report on its review of AIFMD.

The 11 page Report, though, raises at least as many questions as it answers and the funds industry is likely to have to wait until early Q3, when the Commission is due to publish a detailed consultation paper, before it can properly assess the direction of travel of the review and what amendments to AIFMD it might lead to - not least on the issue of the future of the NPPR regime for non-EU AIFMs.

Even so, the Report does give some glimpses into which areas of the AIFMD regime the Commission considers have been (or have not been) successful.

Background

Article 69 of AIFMD requires the Commission to review the application and the scope of AIFMD. This entails assessing the Directive's impact on investors, AIFs, AIFMs in the EU and in third countries in order to establish how far AIFMD's objectives have been achieved.

The Report sets out the Commission's conclusions following this review.

If appropriate, the Commission must then make proposals including possible amendments to AIFMD or the Level 2 Delegated Regulation under it.

To assist with this work, KPMG was commissioned to conduct a survey of the industry, looking at whether the specific rules of AIFMD are effective and coherent. The Commission has also consulted with a range of other bodies, including ESMA and the ESRB, and held a series of consultations and meetings with stakeholders, NCAs and industry associations in order to help it form its views.

What happens next?

In September 2020, the Commission is expected to publish a detailed consultation paper, which should give a better idea of its thinking on the various issues.

If the Commission decides to propose changes to the existing legislation (at Level 1 and / or Level 2), these are unlikely to be published until mid-2021.

What do we learn from the Report?

In short, not as much as many had hoped - the Commission is still making its mind up whether any proposals are needed, including amendments to AIFMD.

In several areas, the Report notes suggestions or concerns that were raised by those consulted and confirms that the Commission was assessing its position, without giving any idea as to the Commission's current view.

However, the Commission does note

on marketing and the marketing passport:

• the efficacy of the AIFM passport regime is impaired by gold-plating, differences in national marketing rules and varying interpretations of AIFMD across Member States

• NPPRs have been an important factor in developing the AIF market in the EU, given the fact that the AIFM passport regime has not been activated for non-EU AIFMs or AIFs

• however, because NPPRs differ among Member States and non-EU AIFMs need implement only a very limited number of the AIFMD requirements, the Commission concludes that an un-level playing field exists between EU and non-EU AIFMs

• as was already well known, significant differences exist between different Member States as to the appropriate way of dealing with NPPRs - some Member States would like to see further harmonisation of the different regimes while other feel that activating the AIFMD passport for non-EU AIFMs and/or AIFs, followed by phasing-out NPPRs altogether, would be a better solution

• the Commission did not assess how the AIFMD third country passport is functioning as it has not yet been activated and there is no market information to draw on

• smaller AIFMs which cannot comply with all the requirements of AIFMD are prevented from raising capital in other Member States or must overcome significant barriers to market access

• limiting the AIFM passport to cover marketing only to professional investors restricts cross-border activities of AIFMs as other investors "can only be approached under varying (and often restrictive) national rules" - this may (or may not) flag the possibility of changes to allow for passport access for semi-professional investors

• figures demonstrate increased sales of AIFs in the EU with greater participation of retail investors in several Member States - this may possibly lead to moves to harmonise rules on marketing to retail;

on leverage:

• in principle, the existing gross and commitment methods for calculating leverage are judged to be appropriate

• however, some adjustments may be called for, following work by the FSB and IOSCO in this area

• the ESRB recommends that there should be further harmonisation of the tool-kit for financial stability purposes available to NCAs under AIFMD, including the possibility of imposing leverage limits on an AIFM

• this includes a recommendation to clarify the respective roles of NCAs and their cooperation where suspension of redemptions has cross-border implications;

on remuneration:

• the Report notes that existing remuneration guidelines, including those under AIFMD have proved to be effective

• however, some have called for AIFMD remuneration rules to align with those under CRD V

• recent amendments to the CRD require AIFMs which are in the same corporate group to apply remuneration rules under AIFMD rather than being subject to a series of different rules;

on depositaries and transparency rules:

• the AIFMD depositary regime is functioning well, although the lack of a depositary passport is at odds with the spirit of the single market

• there are also fears of concentration risk, where a single depositary could hold the assets of all AIFs established in a Member State

• there may be issues with the binary nature of the valuation rules as well as uncertainty around the liability of external valuers

• however, there was insufficient evidence to suggest which disclosure provisions of AIFMD should be amended

• disclosure rules have largely achieved the objective of enabling investors to make informed investment decisions - the Commission's analysis did not identify which elements could be superfluous (given that some professional investors request information different from that prescribed by AIFMD)

• the Commission's work related to the Capital Markets Union CMU is focusing on improving the distribution of investment products in the EU and reviewing disclosure requirements - the outcome of this work will also impact third country AIFs and AIFMs;

on other concerns and possible future work:

• no evidence was found to suggest that AIFMD AuM thresholds, above which the activities of AIFMs may pose significant systemic risk, should be adjusted

• an "observable trend of expanding non-bank lending" raises financial stability concerns

• several stakeholders have asked the Commission to reassess the case for setting common standards for loan-originating AIFs

• transparency requirements when a private equity fund acquires a controlling stake in a private company and the provisions against asset-stripping are "not overtly burdensome" but the Commission was unable to establish their added value because of the lack of available data

• there is also insufficient evidence to determine AIFMD's impact on investing in developing countries (although the Commission agrees that AIFMD does not appear to hinder such investments) - the Commission is still assessing the need for further proposals for change here

• "other issues raised in this report could possibly require further action at Union level to deepen the EU market for AIFs and respond to technological developments ensuring that the AIFMD legal framework is fit for purpose";

on other work taken by the EU:

• the Report draws attention to a number of other recent relevant legislative steps taken by the EU in the asset management sector, including:

  • the Cross-Border Fund Distribution of Investment Funds - this was adopted, among other reasons, to increase transparency in relation to regulatory fees charged by NCAs for processing AIF notifications and national marketing rules

  • asset segregation requirements where custody of assets is delegated to a third party- these have been rationalised by recent amendments to the AIFMD Level 2 Delegated Regulation

  • amendments to the CRD - these provide that AIFMs belonging to the same corporate group or conglomerate will have to apply AIFMD rules on remuneration

  • the ESG Sustainable Finance Disclosure Regulation - this will ensure coherence across different EU regulatory frameworks

  • recently amendments to the EuVECA Regulation - these opened up the use of the designations 'EuVECA' to managers of collective investment undertakings authorised under AIFMD and expanded investment parameters.