AIFMD review – European Commission public consultation

Given the European Commission's ongoing efforts to establish a capital markets union (CMU), on 22 October 2020, the European Commission (EC) published the much anticipated public consultation on AIFMD review.

Background

Article 69 of AIFMD requires the EC 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 public consultation is the next stage of the EC's formal review of AIFMD and follows the EC's report to the European Parliament and Council. The report concludes that the AIFMD has contributed to the creation of the EU AIF market, provided a high-level protection to investors and facilitated monitoring of risks to financial stability and it identifies areas in the legal framework that could be improved.

The Consultation also follows the recent intervention by ESMA with its letter to the Commission in which it raised numerous concerns around areas of both the AIFMD and the UCITS Directive that required in its view "harmonisation" and/or "clarification". The most incendiary aspect of the ESMA letter and of the Commission's consultation surrounds the area of delegation of asset management under both AIFMD and UCITS where both regimes have relied historically on a significant degree of outsourcing of investment decision-making to the UK and to other "third countries" such as the US.

To read our article on the Commission's report click here.

To read our article on ESMA's recommendations to the EC click here. You can also access our video and slides here and here.

Although the primary focus of the consultation is on suggested areas of "improvement" and harmonisation on areas of detail within AIFMD, there will be concerns around the specific direction of travel on delegation in particular and the possibly political dimension to an increased focus on delegation to third countries with the backdrop of Brexit.

The specific questions related to UCITS are more high level although there is also an open question about the possible introduction of elements of AIFMD Level 2 rules on delegation to UCITS which reflects concerns raised in ESMA's letter and which will be of concern to many in the industry. The consultation perhaps represents a step on the path towards a combined approach to the regulation of asset management in the EU under a single legislative framework.

What happens next?

The consultation period will end on 29 January 2021.

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.

Areas focus in the questionnaire

Questions on AIFM passport focus on:

• the scope of the licence;
• the extension of the licence to smaller AIFMs; and
• clarification of the ability to provide "ancillary services" under article 6 of AIFMD.

Questions on investor protection focus on:

• Investor access;
• the possibility of the creation of a passport for retail AIFs;
• the adequacy of disclosure requirements;
• whether there is a need for clarification of the AIFMD rules on prime brokers;
• the ambiguities in the depositary regime and lack of a depositary passport; and
• the AIFMD valuation rules.

Questions on international issues focus on:

• the role of the national private placement regimes in creating an "uneven playing field" between EU and non-EU AiFMs;
• whether the delegation rules are sufficient to prevent letter-box entities and to ensure effective risk management;
• specifically whether quantitative criteria or lists of core or critical functions should be applied in delegation; and
• whether AIFMD standards should apply to delegates irrespective of location to avoid regulatory arbitrage.

Questions on financial stability focus on:

• the tools NCA and AIFMs have available to mitigate and deal with systemic risks;
• the supervisory reporting template; and
• the revised supervisory setup and cooperation measures among the competent authorities.

Questions on investment in private companies focus on:

• general improvements and potential enhancements to the current rules.

Questions on sustainability focus on:

• how AIFs can participate in areas of responsible investing.

Questions on UCITS focus on:

• the possibility of a single licence for AIF and UCITS managers;
• whether (and which) elements of the Level 2 rules on delegation in AIFMD should be applied to UCITS;
• harmonised metrics for leverage calculation; and
• reporting on the use of liquidity management tools.