There are three broad themes to the letter, says Alan Picone at KPMG in Luxembourg: “Regulatory harmonisation to ensure all member states apply high levels of oversight; clear rules on how fund organisations delegate activities cross-border; and a series of thematic topics including risk management, liquidity, leverage, the role of depositaries, the use of digital tools and more.”
The first suggestion is eye catching, talking of the “harmonisation of AIFMD and Ucits regimes”. The details are perhaps somewhat less revolutionary, but there is a desire for Ucits to match the “granularity” of AIFMD regarding risk and liquidity. “AIFMD introduced comprehensive, harmonised reporting for alternative investment funds across the EU, but we don’t have this at the same level for Ucits. A recommendation has therefore been made to introduce harmonised reporting,” noted Norman Finster, an advisory associate partner at EY Luxembourg.
Esma is also calling for greater clarification of regulation for certain products and activities. For example, this relates to when giving investment advice on assets that do not qualify under Mifid rules, such as real estate. Similarly, for loan origination, the pan-EU regulator is seeking a specific framework within AIFMD. “This would be particularly helpful for the EU effort to promote a capital markets union and provide greater legal certainty for loan funds which could be seen as playing a greater role in the post-covid-19 environment,” Finster noted.
Experience from the pandemic has also influenced Esma’s thinking. “The covid crisis revealed the potential for systemic leverage and liquidity risks to materialise for Ucits. To ensure strong systemic-risk overview, the alignment between these two frameworks needs monitoring at the Esma level,” Finster said.
Delegation of asset management functions cross-border are dealt with in depth in the letter, which relates to previous comments by Esma in relation to Brexit. “Further legal clarifications on the maximum extent of delegation would be helpful to ensure supervisory convergence and ensure authorised AIFMs and Ucits management companies maintain sufficient substance in the EU,” says the letter. “There are concerns about the risk of regulatory arbitrage when delegating AIFM functions to entities not being directly subject to the AIFMD or Ucits directive,” Finster added.
The letter goes on to mention what is seen as increased use of staff being seconded within groups to EU entities on a short-term basis. “This raises questions whether those secondment arrangements are in line with the substance and delegation rules,” says the letter. For so-called “white label” service providers which allow asset managers quick access to EU markets, the letter asks the commission to consider whether these structures should be “permissible”.
Esma also sees “a lack of clarity in the precise responsibilities of home and host supervisors in some cross-border marketing, management and delegation cases.” To counter this, the letter suggests both greater harmonisation of rules and clearer definitions of responsibilities for European and national regulatory bodies.
Reducing complexity and giving greater clarity are themes that run throughout the letter. Translating these admirable goals into practical reality is now in the hands of the European Commission.