The year 2017 was written into the Alternative Investment Fund Managers Directive as the date of review. That was no accident; it was to coincide with the UK’s six-month term as EU president.
The UK regulator played a big part in drawing up the directive, and the country has one of the largest financial services industries in Europe, so at the time – 2010 – the date made a lot of sense.
But then the UK voted to leave the EU and its future relationship with the remaining 27 member states became extremely uncertain. The presidency was the first key responsibility Britain dropped after the referendum.
The European Commission has since delayed a decision on whether to extend third-country passports to a group of non-EU member states that had received regulatory approval. Industry sources believe this is so the EU 27 can use the passport as leverage in its exit negotiations with the UK, whose fund managers will require one if they are to continue marketing their funds to European investors.
The commission has launched an assessment of the directive, but rather than a wholesale review, it is looking only at its effectiveness.
“The review might be pushed well back into 2018 and the commission is not under any pressure here. The Brexit negotiations might be one reason why this will take longer than expected,” Dörte Höppner, chief operating officerat Riverside Europe Fund, tells pfm.
When the review finally does take place, fund managers don’t expect the regulation to be overhauled – nor do they particularly want it to be. But there is one major sticking point – depositaries.
“We’ve yet to meet an LP that is in favor of depositaries,” Höppner says. “Back in 2010 the clause was inspired by the Madoff case [when Bernie Madoff operated a Ponzi scheme], but didn’t take into account how private equity works – funds aren’t trading.”
Industry sources, who agree the depositary function is not useful for private equity, are not expecting the requirement to be removed. But they do hope the review will clarify how regulations should work in practice.
Countries have been interpreting the regulation differently. The European Securities and Markets Authority, the EU watchdog, has been offering guidance on how countries should approach the requirements, which has helped, but more explicit definitions are needed.
“Nobody is at fault; it’s difficult to predict how regulation will pan out in reality,” Höppner says. “The use of leverage is one example – what is leverage? Are people interpreting leverage in the correct way? A clearer definition of marketing and pre-marketing was also an issue in the directive and needed clarifications. These are elements the industry is keen to have certainty about.”
Höppner is clear that whenever the review does happen, the industry must have its say.
“It’s important to get engaged and ensure the review works for the industry.” ?