​Checking the Tyres – Reviewing UCITS and AIFMD

Checking the Tyres – Reviewing UCITS and AIFMD

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The EU’s review of AIFMD and UCITS offers potential opportunities and pitfalls for the asset management industry.

This year, the regulatory frameworks that govern EU investment funds, Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD), will be reviewed by EU policymakers. These reviews offer potential opportunities and pitfalls for the asset management industry.

Cross-Border Distribution Issues

A major policy initiative in the EU is the ongoing work on the Capital Markets Union (CMU) project. The CMU’s objective is to strengthen the EU’s capital markets to encourage more cross-border activity.

As part of the CMU work, the European Commission has been looking for ways to encourage more cross-border sales of UCITS and AIFMD funds. Despite its global success, there are still challenges in selling UCITS across the EU due to a number of local barriers. These include fees imposed by local regulators, additional national requirements around selling financial products, and local paying agent requests to process subscriptions and redemptions.

AIFMD funds face these challenges and more. For example, the local language requirements for documentation, such as applications or prospectuses, vary by country. A further complication is that the timeline for passport approvals is not uniform.

The cumulative effect of these rules is additional costs for investors and less efficient distribution across the EU for both UCITS and AIFMD funds.

For asset managers, the focus on improving cross-border distribution will be welcome. The question is how quickly action can be taken. For UCITS funds, it is a matter of fine-tuning certain elements. On the AIFMD front, removing the barriers to distribution requires heavier lifting, which may entail changes to the primary legislation.

UCITS Substance Rules

One of the potential flashpoints in the UCITS review is the substance requirements in the framework. Currently, the UCITS framework does not contain substance rules. Instead, the substance requirements are determined by the local regulators, which decide the appropriate level of governance and oversight for the UCITS funds they authorize. In practice, this has led to a lot of asset management activities, including portfolio management, being delegated to authorized managers in countries outside of the fund domicile.

However, there are some EU policymakers who would like to see this changed and have the UCITS rules incorporate third-country provisions. These provisions would govern what activity can be conducted in non-EU countries, and what must be done within the EU. The catalyst for this push is the UK’s decision to leave the EU. A large percentage of the assets held in UCITS funds are managed from London. Some policymakers think that once the UK exits the EU it should no longer be able to be a major asset management hub for European funds.

Any changes to the UCITS substance rules could have a significant impact on the global asset management ecosystem. UCITS funds have become a truly global product without third-country provisions. UCITS funds domiciled in Ireland or Luxembourg are just as likely to be managed in New York or Hong Kong as they are in London or Paris. The industry is concerned that any changes made to restrict the UK’s ability to manage UCITS may have unintended global ramifications.

Closing the MiFID Loophole

In the run up to the implementation of Markets in Financial Instruments Directive (MiFID) 2, a number of high-profile hedge funds exchanged their MiFID authorization for an AIFMD authorization. By changing to the AIFMD license, hedge funds can avoid MiFID 2’s detailed transaction reporting and annual public trading execution disclosures. This move did not go unnoticed by policymakers. Markus Ferber, the chief architect of MiFID 2, has noted that he expects the differences between AIFMD and MiFID 2 to be closed as quickly as possible.

Given one of the key policy goals of regulators is to reduce so-called regulatory arbitrage, the use of AIFMD to avoid MiFID 2 reporting requirements is likely to be short lived.

Marathon, not a Sprint

The process of changing the AIFMD and UCITS rules will not be quick. A key factor in any timeline is what elements can be enacted tactically, without amending the primary legislation. For example, removing some of the UCITS distribution barriers probably will not require legislative changes.

However, closing the AIFMD-MiFID loophole or creating a third-country regime for UCITS would require alterations to the regulatory frameworks. These reviews ultimately may lead to AIFMD 2 and UCITS 6, which would be multi-year efforts.

Given the potential impact of some of the proposals, this extended timeframe will certainly be welcomed by the industry. Since it is only the beginning of the review process, asset managers should be engaged from the outset to ensure their voices are heard as new proposals are drafted.  


Sean Tuffy, Citi Custody & Fund Services EMEA

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