The FSA has published its consultation on the adoption of the Alternative Investment Fund Management Directive (AIFMD), even though the final European rules have not yet been released.
The AIFMD, which affects non-Ucits retail funds, charity funds and investment trusts, is in two parts. The first has already been passed at the EU level but the second is still being debated and the UK only has until 22 July to incorporate it into national law.
The timing is so tight the FSA has had to consult ahead of the release of the second part of the EU rules so its proposals may be subject to reversal as there is “little scope for discretion in how” the AIFMD is transposed into UK law, the FSA stated.
One of the key, unseen sections in level two is detail on the delegation of investment and risk responsibilities. The draft of part two effectively bans ‘substantial’ fund outsourcing, even in cases where a UK fund house delegates responsibility to its own investment arm. If it does, responsibility for the fund is brought into question and it may be forced to close.
To prevent this, investment groups likely face increased costs. Some may choose to remove external managers from affected funds while others may look to convert the funds to Ucits, which could impact their composition as the latter has different rules concerning weightings and holdings. Another option may be to set up a new legal entity within the group to take over responsibility for affected portfolios, which has cost implications.
In its consultation paper the FSA proposes judging what constitutes ‘substantial’ on a case-by-case, qualitative basis rather than using a quantitative, set percentage. Its CP makes it clear the FSA favours a flexible approach on the issue: “Delegation can enable experts in a particular field to market their services widely and raise standards, lowering costs and achieving economies of scale.”
However, no matter the FSA’s stance if the EU details, expected by Christmas, differ significantly the UK regulator will be forced to backtrack on its concession.
For more see page 16.