“We are not talking about something incremental, it is a move away from a principles-based approach to regulation, to one where we have a series of more specific recommendations and guidelines,” noted Alan Picone, a partner, risk advisory and regulatory transformation, at KPMG in Luxembourg. He was commentating on the far-reaching nature of the suggestions for AIFMD reform made by Esma, the leading EU regulator of the fund industry.
Norman Finster, an advisory associate partner with EY Luxembourg, agrees: “This will not result in a quick fix, but a rather substantial revision, as other directives like Ucits and Mifid are also impacted. I am pretty certain that much of what is covered in the Esma letter will be reflected in the new legal texts which will emerge from the European Commission, which is already looking into many of these points.”
Experience, Brexit, covid
The proposals take account of how AIFMD has operated in its near ten years of existence; it is also a response to Brexit and the pandemic. The suggestions came in the form of a letter from Esma to the European Commission sent on 18 August. It highlights no fewer than 19 areas for potential reform of varying levels of complexity and significance. Of course, these moves are of particular interest to Luxembourg, a specialist in navigating the complexities of fund regulations.
To a large extent, much of this text is about Esma seeking greater oversight of risk which could threaten the stability of the financial system. For example, increasing numbers of debt funds are performing a role once handled almost exclusively by banks, namely lending money. Often this systemic risk monitoring is carried out
at the national level, but Esma would like a clearer European perspective.
While Brexit is not specifically mentioned in the letter, various remarks regarding AIFM substance appear to have some link. In other words, Esma wants to ensure that UK fund managers can’t circumvent the barriers to operations in the EU which could be put in place next year.
This threat has been an ongoing concern for EU policymakers and regulators in recent years. There were concerns that these worries could be translated into an erosion of the pan-European, cross-border organisation of funds which has served the industry and Luxembourg so well.
In particular, there has been a concern that “letterbox” fund entities could be used to bypass Brexit barriers. “This is something that Luxembourg, for example, has tackled with local regulation--namely CSSF circular 18/698--while other member states are lagging in this regard,” Picone said. Esma sees the potential for these rules to not be applied with equal strictness across the EU, and so is keen to see clearer, pan-European standards.
Risk and liquidity
Esma has also learned valuable lessons from the pandemic about topics such as risk management and liquidity. It would like this experience put into practice formally, both for alternative funds, but also for Ucits (retail funds). Indeed, a major theme of these suggestions is increased harmonisation of processes and reporting between the two regimes. The stated goal is to reduce complexity and increase the application of best practice.
These reforms could be handled in a limited number of texts or proposed through several directives and regulations. It would appear that 2021 is the most likely date for publication of the first draft text. Picone noted: “For people thinking the regulatory cycle might have reached its peak, this is certainly not the case, as the review process by Esma is about operationalising the principles that have been outlined in the previous regulations.”