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Guest Opinion: AIFMD Is Born But Who Is Rejoicing?

Jon Wilson

Cordium

30 July 2013

The new European Union regime for regulating hedge funds, private equity funds and other so-called alternative investments is here although there hasn’t been a great deal of celebration. Several stories carried by this publication suggest the industry is uncertain how the rules will work, with many firms not fully prepared. To make sense of it all, Jon Wilson, director of projects at Cordium, the consultants on regulatory compliance, takes a look.

So “Transposition Day” - the date by which European Union governments must have implemented AIFMD into national member state law - has come and gone. 22 July 2013 stands to be remembered for other things - a future British King was born on the hottest day of the year - rather than the day European politicians saved investors and markets from the alternative investment management industry. Thanks to the 12 months transitional period, interpreted helpfully for alternative managers by HM Treasury, the AIFMD has not spoiled the summer for many UK alternative investment managers.

Anticipation of AIFMD has already sparked a lot of conversation, consultation and, it must be said, confusion. The European Securities and Markets Authority has been slow in providing key guidance, and as a knock-on effect, the Financial Conduct Authority, the UK regulator, has only been able to publish near-final rules in June. There are plenty of provisions and details still awaiting clarification, notably the FCA’s approach to implementing ESMA’s remuneration guidance. All this leads to the question - when will the industry be ready for this life-changing event?

At Cordium’s recent AIFMD seminar we ran a flash poll of attendees that confirmed two points we have also heard from speaking to clients and organisations elsewhere. The first relates to the timing of applications to the FCA for AIMFD registration - around half saying Q1 2014, and the rest evenly split between Q3 and Q4 this year and Q2 2014.

We consider it important that firms are ready to apply in Q1 of 2014 at the latest - in spite of the fact the transitional provisions allow for applications for authorisation to be made right up until 22 July 2014. Though the period for processing applications is three months, applicant firms should consider the risk that a bottleneck could develop with the regulator as the absolute deadline for applications approaches. Our advice is to not apply at the eleventh hour. Although the regulator has a statutory commitment to process applications within three months, any applications deemed incomplete can be delayed a further three months. The FCA has drafted in additional resources to assist with the expected influx of registrations but firms should avoid the last minute panic. It is not worth the risk.

However, being ready to apply in Q1 2014 means beginning preparations now, especially in certain key areas, the most prominent of which is the need to begin engaging with depositories or a depository service provider -yet only half of those we polled had begun this process.

The second interesting result from the poll regarded how prepared firms themselves think that they are. A majority seem confident that their processes are there or thereabouts; around two thirds believe their operational risk management structures already meet AIFMD standards, and three quarters felt confident with regard to their market, credit and liquidity risk management arrangements. This suggests a sound base to build from but the AIFMD is about more than saying firms meet standards; it is also about demonstrating this to be the case, to a wider array of external agents, including independent depositaries and the regulator. It also requires meeting more onerous and higher standards of reporting. Yet the majority of our poll respondents stated that they had not yet identified how their firms will undertake the “systematic” reporting requirements introduced by AIFMD, despite this likely presenting an operational challenge that may take months in terms of planning and development for some managers and strategies.

One of the lessons learned from recent regulatory intervention against the banks and wealth management community is that firms cannot take false comfort in the quality of their governance, systems and controls and operational procedures. It is not enough for firms to think they are doing the right thing.

The AIFMD has now been born. Start planning now for when it crawls.