Regulation has ‘raised the bar’ in Europe

The AIFMD has created a gold standard in investor protection and stoked competition among jurisdictions, according to regulation experts from Société Générale.

The Alternative Investment Fund Managers Directive’s investor protection principles have become a benchmark since the regulation came into force in 2013, according to experts at Société Générale.

The principles have been so effective that they have been replicated in the fifth incarnation of Undertakings for Collective Investment in Transferable Securities Directive, the equivalent European regime that has been governing retail investment funds since 1985.

“AIFMD was a very successful regulation.,” Jean Pierre Gomez, head of regulatory and public affairs at Société Générale Securities Services in Luxembourg told pfm. “As an LP you were better protected than an investor investing in UCITS funds. It should have been the opposite.”

UCITS 5, he added, is a copy-cat of the AIFMD proving its principles were adequate in protecting investors.

The AIFMD’s strong investor protection principles have established the once-maligned legislation as brand.

“People complain about regulation, but regulation helps to build these brands. It’s very important, because regulation gives the investor some trust and confidence. That was the idea of all these regulations, protecting the investor,” Jean-Fran?ois Gillet, head of alternative investment funds services at SGSS, told pfm.

Friendly competition

The legislation has also prompted increased competition among domiciles, the pair said. AIFMD-compliant fund structures have been launched in numerous jurisdictions, including Guernsey, the British Virgin Islands and the Cayman Islands. The pair’s home domicile designed the Revolution in the Alternative Investment Fund which launched in 2015.

“The market place of Luxembourg consulted with the Luxembourg regulator saying 'Why, if we as asset managers are fully regulated by the AIFMD, do you want in addition, to introduce a fund vehicle that is supervised by the local regulator?’,” said Gomez.
The RAIF cuts out the supervision of the local regulator, but remains compliant with the AIMFD and still provides a number of guarantees for the investor. It also allows the country to compete with British Virgin Islands and Cayman structures.

“Post-2008, we had to react, we had to adapt, but now we're in a better position,” Gomez said. Luxembourg had two choices, he added.

“Either we say: 'Luxembourg is a banking economy, a quiet, opaque country.’ Or we say: ‘The world is changing, there's much more transparency required by the regulator and the LPs as well.’ We've said: ‘let's raise the bar, let's be better than other countries’,” he added.

Post-2008 regulation and structures that comply with them help to improve standards for alternative investment across the EU, Gillet said.

“The AIFMD started raising the bar, the RAIF is another structure that raises the bar, but [other regulations including the Markets in Financial Instruments Directive have also contributed], said Gillet, “We have no choice about these laws, they are there, with a good purpose,” he said.