Asset management quarterly - Europe

Developments and market trends in Europe

Publication October 2016


Quarterly update

Author Richard Sheen

Our last quarterly update was published just before the Brexit vote on June 23. Understandably, in the immediate aftermath of the vote there was a considerable mood of uncertainty which somewhat stabilised in late July and August following the change of prime minister and the release of some, arguably, better than expected economic indicators.

The UK funds sector suffered record asset outflows in July, with UK domiciled funds experiencing £4.7 billion of redemptions during the month. Property funds were particularly badly hit with some initiating the relatively rare step of suspending redemption requests or instituting value adjustments (although a number of these funds have reopened, most recently Henderson’s property fund). Needless to say that the market uncertainty in the run up to the referendum and the relative shock of the result dampened investor demand for new products with the IPO market particularly badly affected. Private equity fundraising has, however, continued with a number of recent secondaries and buyout fund launches.

As the dust has settled, managers have begun to plan for the different Brexit scenarios. Whilst the shape and timing of the exit negotiations and the type of Brexit that ultimately takes place remain unclear, managers are beginning to assess the impact upon their businesses with anecdotal evidence suggesting that some are contingency planning for the “worse-case” scenario of the loss of EU passporting rights and restrictions on free movement of people.

The implication of this is that some UK‑based managers are re-assessing the location of both their operations and the domicile of their fund ranges. M&G, for example, is reported as considering moving certain of its funds to Dublin and Luxembourg and Aberdeen Asset Management is reportedly considering beefing up its staff headcount in Luxembourg. Other fund managers are on record, however, as considering that there will be little or modest impact on their business. Certainly, jurisdictions such as Luxembourg appear to be actively courting UK-based managers who are in the course of considering their future options. Much depends on the type of manager, asset classes, fund locations and the existing and target investor base. See our recent briefing Brexit and the effect on asset and wealth management and also the article on the Brexit impact for real estate fund managers by Michael Newell on page 14 of this publication.

It remains to be seen whether Brexit planning will be a contributory factor in the expected further wave of M&A activity and asset manager consolidation. Recently we have seen US-based manager HarbourVest launch a bid for UK private equity manager SVG Capital and continued speculation concerning the appetite of US and Canadian buyers for European managers given the weakness of sterling and given that recurring management fee revenue and asset diversification presents an attractive prospect during this period of low interest rates and weaker growth. Other current deals include the on-going auction of Pioneer Investments by UniCredit and the potential London listing of Premier Asset Management.

There was some secondary fundraising activity in August and there are reportedly some new IPOs being lined up. Whether this is an indication of the relative stability that crept back into the market or pent-up investor demand for products (particularly those offering yield) remains to be seen, but investment banks and brokers in the sector appear to be in a relatively confident move at this precise moment.

Asset managers have continued to adapt to the impact of regulatory and technological change with some managers specifically starting to address the opportunities and challenges presented by the growing fintech sector, and in particular the adaptation of the blockchain technology to the asset management space with the potential for faster clearing and settlement, costs reduction and disintermediation of platforms and brokers. The market is also assessing the impact of robo-advice, particularly in the context of retail investment into exchange traded funds and as a driver for growth in these types of funds.

Finally, some managers are also taking the time to consider how they reward their employees and whether bonuses also represent the optimal remuneration structure.

How good are your AML systems and controls?

Author Simon Lovegrove

Given that the FCA has announced that anti-money laundering/counter-terrorist financing will be a key priority this year we re-examine an earlier thematic review as the regulator will be unsympathetic to those asset managers who have not taken on board its earlier findings.

In late 2017, the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) regime will come under the spotlight as it will be reviewed by the Financial Action Task Force (FATF), the global inter-governmental body that sets standards for combating financial crime and related threats. In addition, before the FATF’s review the UK will be required to implement the EU’s Fourth Anti-Money Laundering Directive (4MLD) by June 2017.

“Financial crime and AML is one of the seven priority areas the FCA has set out in its latest annual Business Plan.”

It is therefore unsurprising that in light of this international activity and in order to maintain the UK’s reputation as a key financial centre (particular after the referendum vote to leave the EU) financial crime and AML is one of the seven priority areas the FCA has set out in its latest annual Business Plan. In terms of on-going AML supervisory activity there is an element of “business as usual” in the sense that the FCA will continue with its due diligence on firms and individuals applying for authorisation and its proactive supervisory assessments of firms whose business models present a higher inherent risk of money laundering. However, the regulator is also planning to roll out a new financial crime annual data return that will allow it to focus its supervision on “the right firms” which are expected to be those that are subject to the Money Laundering Regulations 2007, including dual regulated investment firms. More importantly, the regulator warns that where it finds firms with material weaknesses in their money laundering controls, it will use its enforcement powers to send a “deterrent message” to the relevant industry.

“The regulator warns that where it finds firms with material weaknesses in their money laundering controls, it will use its enforcement powers to send a “deterrent message” to the relevant industry.”

In the asset management sector there are some areas where the risk of money laundering is heightened. For example, the selling of investment products, particularly where third parties are employed to raise money; the dealings that firms have with clients, both at the take-on and on an on-going basis; and the search for information to obtain a competitive advantage. In October 2013 the FCA published a thematic review on AML/CTF and anti-bribery and corruption (ABC) systems and controls for asset management and platform firms. During the thematic review the FCA found a number of weaknesses in the firms it sampled and set out the following examples of good and poor practice.

Governance, culture and management information

Examples of good practice Examples of poor practice
Senior management roles and responsibilities are clearly defined. There is limited senior management involvement and challenge in AML and ABC compliance activities.
There is a clear organisational structure that meets on a regular basis to discuss risks, including money laundering and bribery and corruption risks. Management information in relation to money laundering and bribery and corruption risks is not collated.
Risk-based quality assurance work is carried out by the firm on a rolling basis. Money laundering and bribery and corruption risks are dealt with only on a reactive basis.
The firm regularly assesses and evaluates emerging regulatory and industry developments and the impact(s) this may have on its business. Money laundering reporting officer reports and other management information are not submitted in a timely manner.
The firm takes into account staff compliance with AML and ABC obligations in remuneration and staff incentive structures. There is limited quality assurance activity carried out to review the effectiveness of AML and ABC systems and controls.
The firm has defined breach and escalation procedures.  
The firm implements senior management approval procedures in relation to the acceptance (or continuation) of higher risk business relationships.  

Risk assessments

Examples of good practice Examples of poor practice
Risk assessments are used to assess the money laundering and bribery and corruption risks and undertaken regularly. Limited or no activity is undertaken to identify and assess money laundering and bribery and corruption risks in a firm.
Processes are in place for undertaking risk assessments including collaborative engagement with front-line business personnel, and adequate senior management sign-off, review, and challenge (including sufficient engagement at board-level). Risk assessment activity is ad hoc and it is not proactively undertaken to inform senior management and/or the design and implementation of AML and ABC policies and procedures in a firm.
  Risk assessment activity is not dynamic to ensure firms are capturing money laundering and bribery and corruption risks.
  Risk assessments do not include an overall assessment of money laundering and bribery and corruption risks for a firm.
  ABC risk assessments were carried out as a one-off exercise.

Specific AML controls

Examples of good practice Examples of poor practice
Ensuring AML policies and procedures reflect the legal and regulatory framework, and communicated to staff in the firm. Failure to ensure that AML policies and procedures reflect the legal and regulatory environment and are up to date.
Ensuring customer identification and verification procedures are in place, including detailed operational processes for customer take on. Failure to conduct enhanced due diligence for high risk/politically exposed person customers.
A customer risk classification framework is applied consistently to assess customer risks at the time of on-boarding, and on an on-going basis. Failure to identify and verify beneficial ownership, source of funds, and source of wealth.
Identification and verification information for customers is periodically reviewed and “refreshed”, on a risk-sensitive basis. Transaction monitoring governance arrangements are not clearly defined (for example, in relation to the investigation and review of transaction monitoring alerts).
The firm has defined senior management approval procedures for accepting new (or continuing existing) business relationships which pose a high risk of money laundering.  
A clearly articulated definition of a PEP (and any relevant sub-categories) which is well understood by relevant staff.  

Specific ABC controls

Examples of good practice Examples of poor practice
ABC policies and procedures are documented and kept up to date. ABC policies and procedures are not tailored to the business.
ABC policies and procedures will vary from firm to firm however they must address relevant areas of bribery and corruption risks (either in a standalone document, or as part of separate policies). ABC policies and procedures do not address other areas of bribery and corruption risk but focuses on one area only e.g. gifts and entertainment.
Gifts and entertainment policies and procedures clearly define the approval process; include clear instructions for escalation, definitions and guidelines for staff to follow. Firms do not maintain a list of third party relationships and rely on informal means to assess the risk.
The rationale for using agents or introducers to generate new business is documented, and monitored through review and assessment on a continuing basis. A firm using intermediaries fails to satisfy itself that those businesses have adequate controls to detect and prevent where staff have used bribery to generate business.
The firm implements robust operational controls to monitor, review, and approve third party payments. Gifts and entertainment activity is not consistently monitored by senior management.

Training and awareness

Examples of good practice Examples of poor practice
AML and ABC training is delivered to all staff, including senior management. Senior management does not sign off or engage in training.
There is enhanced training for senior management and staff in key AML or ABC roles. New employees do not receive new joiner training promptly after joining a firm.
Training is tailored and includes practical examples relevant to the firm’s business activities. The firm does not extend its AML and ABC staff training requirements to overseas employees who perform functions on behalf of the firm’s UK customers.
The content of the AML and ABC training is periodically reviewed and refreshed. Training is a one-off exercise. ABC training material does not include training guidelines in relation to gifts and entertainment limits and pre-approval procedures.
Staff records setting out what training was completed and when and using those results to test staff understanding and quality of the training. Ensuring training covers how to escalate matters and/or report potential suspicions. The effectiveness of AML and ABC training is not monitored or assessed by a firm.
  Training records are not maintained, and staffs are not encouraged to ensure they meet their training obligations.

Fines for AML failures can be significant. For example, in 2014 the FCA fined Standard Chartered Bank plc £7.6 million for failures in its AML controls. Whilst this case covered AML failings covering commercial banking activity it was generally felt in the market that all regulated firms should take note of the FCA’s statement that failings will be considered particularly serious where firms have not sufficiently heeded guidance published by the regulator.

Individuals within regulated firms can also be fined for AML failures. For example in May 2012 the FSA (the predecessor of the FCA) fined Habib Bank AG Zurich £525,000 for failure to take reasonable care to establish and maintain adequate AML systems and controls and fined its money laundering reporting officer £17,500 for failure to take reasonable steps to ensure that Habib complied with relevant AML requirements.

Senior management responsibility for firm’s AML requirements have also been taken to a new level with the introduction of the new individual accountability regime on March 7, 2016. A key feature of the new rules, which currently apply to banks and dual regulated investment firms, is a senior managers’ regime that focuses on the most senior individuals who hold key roles. In particular these individuals will have a statement of responsibilities which set out the areas for which they are personally accountable. Among those individuals who have been designated by the FCA as a senior manager is the money laundering reporting officer. The UK Government has also introduced a “duty of responsibility” which means that senior managers are required to take the steps that it is reasonable for a person in that position to take to prevent a regulatory breach from occurring. The UK Government has said that it intends to extend the individual accountability regime to all regulated firms during 2018.

As AML and ABC are high on the regulatory agenda asset managers may wish to consider the following steps

  • Conduct a well-documented review of AML and ABC systems and controls and give sufficient attention to any findings keeping in mind the FCA’s 2013 thematic review.
  • During the review process and thereafter any challenge or detailed discussion at board or governance committee level should be accurately reflected in the minutes.
  • Existing AML and ABC training should be assessed, asking whether more tailored material could be produced that focuses on the risks specific to the business.
  • Internal documentation and training will need to be updated at some stage in light of the 4MLD.

What UK real estate fund managers need to know about the United Kingdom’s vote to leave the European Union

Author Mike Newell

The United Kingdom has voted to leave the European Union. Assuming this proceeds, and depending on what arrangements might be negotiated, there are likely to be consequences for UK real estate fund managers and for the financial services industry as a whole. We expect that whilst the departure process will take several years, fund managers will already be assessing the risks and opportunities that the UK’s exit may bring.

In this article, we identify some of the key areas that UK real estate fund managers will be considering and monitoring closely over the coming weeks and months.

What access will UK managers continue to have to the single market post Brexit?

The shape of regulation that will apply to UK real estate fund managers after Brexit will depend on the nature of the UK’s relationship with the EU including the key issues of access to EU markets and the continued ability to distribute products to European investors. Whilst it is thought that the clearest way in which this could be achieved would be to adopt the “Norwegian model” through the UK acceding to the European Economic Area (EEA) Agreement (which would retain single market access), whether this would be acceptable from a political perspective is not yet fully clear, since this model is generally understood to require free movement of people and significant financial contributions to the EU’s budget, opposition to which were features of the pro-Brexit campaign.

of EEA membership, the model could be some sort of bespoke arrangement for the UK accessing the single market, whether through a series of sector-specific treaties (the so-called “Swiss model”), a more extensive free trade agreement (the so-called “Canadian model”) or some sort of special affiliate status negotiated for the UK adapted from the current EEA arrangements. If, however, the UK is treated as a third country under EU financial services legislation and if UK investment firms wanted to continue to provide investment services or products to clients in the EU, UK rules will need to be deemed equivalent by the European Commission. The paragraphs that follow consider the position if the UK does not conclude any such arrangement and is considered a “third country” under EU financial services legislation.

What is the impact on distribution under the AIFM Directive?

Assuming the UK does not accede to the EEA Agreement or negotiate an arrangement with equivalent access, the UK will become a “third country” for the purposes of the AIFMD. As such, UK based AIFMs will lose their right to manage funds based in other EEA domiciles and their right to market UK domiciled AIFs to investors in other EEA signatory states using the AIFMD marketing passport. UK managers and funds would be able to take advantage of private placement regimes in electing EEA signatory states on the same basis as US or Channel Island based funds and/or managers, for example, although such private placement regimes may be abolished after 2018.

Should the European Commission decide to introduce a passport regime for third country AIFMs or AIFs, then it is likely that the UK should be in a position to demonstrate that it has a suitably equivalent regulatory regime and be able to access this arrangement. However, the introduction of such a regime is uncertain and possibly less likely following Brexit (not least as the UK was one of, it not, its main proponent in negotiations under AIFMD).

A more likely post Brexit scenario for UK real estate fund managers is that those managers who wish to distribute more widely to EU investors than can be readily accessed through private placement regimes will need to set up a fund domicile and distribution platform in a suitable EU member state, for example in Ireland or Luxembourg, with an AIFM established in such jurisdiction, in some cases, delegating portfolio management back to operations in the UK.

Of course, setting up a fund domicile and distribution platform in another EU member state could raise a number of UK tax issues, particularly where business functions, and/or people, are transferred out of the UK. In addition, to the extent that certain services are delegated back to the UK, this will raise transfer pricing and VAT issues, which will need to be explored.

Delegation rules

Given the likely need for UK fund management firms to rely on delegated arrangements from EU distribution hubs and platforms as discussed above, a further concern will be potential changes to the delegation rules that currently enable AIFMs to delegate to a UK based investment manager. This will depend on whether the post-Brexit UK regime would be deemed to be sufficiently equivalent to enable delegation by EU firms to UK investment managers, which we consider on balance to be the more likely scenario, although changes to those rules could be made that are less favourable than at present. For example, the EU might pass more stringent rules in relation to the remuneration regime that must apply to the delegated third country manager, including bonus caps, which is something the UK has resisted strongly to date but which it may be unable to influence so strongly in future. However, the delegation model could also be adversely affected by changes in the tax regimes of different EU member states. There may be changes to delegation rules enabling AIFMs to delegate to a UK based investment manager.

When considering the restructuring of EU management companies, to the extent there is delegation of portfolio management by an EU entity to, say, a UK management company, the substance of the EU management company will be an important focus of the EU and national Member State regulators. There is already a supervisory focus on whether some EU management companies are simply “letter box entities” and this is likely to intensify in a post-Brexit world.

Overall impact

The overall impact of Brexit (as far as can be seen as this stage) is likely to depend upon on the nature of the fund manager and the scope and scale of its activities. It is quite possible that smaller managers not requiring significant access to EU distribution (for example, those for whom access to the EU market through third country private placement regimes is sufficient) will be able to flourish in the future UK regulatory regime and that it may become significantly more cost-effective for start-up managers to launch than at present. However, the burden is likely to increase for those managers that do need to establish a hub in Dublin or Luxembourg, for example, even if using a third party provider or platform, as they will be subject to two different regimes.

It may be that larger fund managers with existing European operations (in jurisdictions such as Luxembourg and Ireland) will see little impact upon their ability to distribute products throughout the EU, since they are for the most part probably distributing AIFs from non-UK jurisdictions already. However, the position for fund managers which are subsidiaries or divisions of banks (or other financial institutions such as insurance companies) may become more complicated by reason of developments outside the fund management area, in particular if they are considering a reactive restructuring of their operations, including potential relocation of parts of their business.

HMRC consults on introducing new penalties for “defeated” tax avoidance

Author Andrew Roycroft

HMRC is consulting on new legislation to impose additional penalties on those who use, and those who “enable” the use of, certain forms of tax avoidance. The proposals include imposing on taxpayers the burden of proving that they acted with reasonable care when engaging in certain forms of tax planning, and will see tax-geared penalties imposed on others who assist in implementing such tax planning. There is much for businesses to comment on, including the definition of what types of tax planning these penalties will apply to and how to ensure that those who assist in a tax-motivated transaction without being aware of the tax avoidance are not subject to penalties.

A recent trend in HMRC’s approach to tackling tax avoidance is to increase the sanctions for engaging in activity which goes beyond legitimate tax planning and strays into unacceptable forms of tax avoidance.

Follower Notices and Accelerated Payment Notice (APNs)

In 2014 Parliament granted HMRC powers to issue Follower Notices and APNs.

These raise the stakes for those involved in disputes with HMRC in two ways. Follower Notices impose a penalty, of up to 50 per cent of the disputed tax, if the taxpayer does not settle the dispute (i.e. concede) within 90 days. This power should only be used where the dispute is sufficiently similar to a prior case which HMRC have won against another taxpayer, such as where several taxpayers have entered into the same “marketed” tax avoidance scheme.

If HMRC wins against one taxpayer, it expects others who have implemented a similar arrangement to concede promptly, and a Follower Notice gives it the power to penalise a taxpayer who proceeds in such a situation but either loses in court or concedes late in the day. If the taxpayer succeeds, the 50 per cent penalty does not apply, but the threat of this can be a powerful incentive to settle.

APNs require taxpayers to pay the disputed tax upfront, rather than when the dispute is resolved (for example, by a court decision). Again, they are only intended to be used in avoidance cases, which is defined as cases where a Follower Notice has been issued, where the dispute relates to a scheme which has been notified under the Disclosure of Tax Avoidance Scheme (DOTAS) rules or has been the subject of a counteraction notice under the General Anti-Abuse Rule (GAAR).

New penalties for “Defeated Tax Avoidance”?

The latest development occurred on 17 August, when HMRC issued a consultation document entitled Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document. The two main proposals relate to the penalties which can be imposed in relation to certain “defeated tax avoidance” arrangements.

One proposal is to reverse the burden of proof for taxpayers who use such arrangements. Currently, HMRC can only impose a penalty if the taxpayer’s actions have been careless (i.e. the taxpayer failed to take reasonable care), and HMRC’s concern is that it bears the burden of proving that the taxpayer was careless. Doing so can be difficult where the taxpayer has relied on advice, and HMRC is particularly concerned about mass marketed schemes where generic advice on the arrangement is provided to taxpayers (for example, a QC opinion). In response to this, HMRC is seeking views on whether a taxpayer should be required to prove it has taken reasonable care, if the taxpayer is to be spared a penalty in cases of “defeated tax avoidance”. Another option is to specify, in legislation, certain conduct which does not constitute reasonable care in relation to defeated tax avoidance arrangements, such as

  • Relying on advice addressed to a third party, or without reference to the taxpayer’s specific circumstances.
  • Relying on advice commissioned on the basis of incomplete or leading facts.
  • Relying on advice commissioned or funded by a party with a direct financial interest in selling the scheme or not provided by a disinterested party.
  • Relying on material produced by parties without the relevant tax or legal expertise/experience to advise on complicated tax avoidance arrangements.

A second significant proposal is for HMRC to have a new power to impose a penalty (of up to 100 per cent of the tax in a defeated tax avoidance case) on the “enablers” of such tax avoidance. This is not limited to those who design, promote and market such schemes. HMRC’s proposal is to define an “enabler” as anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements could not be implemented. As such, it extends beyond tax advisers and persons who “market” tax avoidance schemes. It is acknowledged by HMRC that, if such a wide definition is to be used, there will need to be safeguards to ensure that those who are unwittingly party to enabling the avoidance in question are not subject to penalties, and this is one of the many aspects of the proposals which HMRC is seeking views on.

In addition to consulting on the definition of “enablers” who will be the subject of the new penalty, whether a tax-geared penalty is appropriate and how to apply it in mass-marketed schemes, another key aspect of the proposals which HMRC is seeking views on is what constitutes “defeated tax avoidance”.

This is critical as it is the trigger for both of the main proposals, being the means of identifying what forms of tax planning are unacceptable avoidance. At this stage, the proposal is for it to be cases where the taxpayer is defeated in any one of the following situations

  • The arrangement has been counteracted by the GAAR.
  • Where the taxpayer has been given a Follower Notice.
  • An arrangement which is notifiable under the DOTAS rules (or the equivalent VAT regime).
  • The arrangement has been the subject of targeted avoidance-related rules or unallowable purpose tests within a specific piece of legislation or regime. This latter category is potentially the most significant, given the volume of such rules/tests in the UK’s tax regime.

The deadline for providing comments to HMRC is October 12, 2016.


Luxembourg RAIF and Corporate Act overhaul

Author Florence Stainier at Arendt & Medernach

Recently the law on reserved alternative investment funds came into force, representing one of the most significant developments for the Luxembourg fund structuring toolbox. In addition, there has been a major overhaul of Luxembourg company law with the coming into force of the law modernising the law of 10 August 1915 on commercial companies.

Recent Luxembourg legal developments include the flexible new Luxembourg RAIF regime and the Luxembourg Corporate Act overhaul.

On August 1, 2016, the law on reserved alternative investment funds (RAIF) came into force.

The RAIF or FIAR (fonds d’investissement alternatif réservé) represents the most significant advance for the Luxembourg fund structuring toolbox available to well-informed investors.

The RAIF offers alternative investment fund managers (AIFMs) a very attractive funds product structuring solution for the implementation of all types of alternative (non-UCITS) investment strategies. The RAIF can invest in any asset class (i.e. private equity, real estate, hedge, infrastructure, debt acquisition and loan origination, as well as listed securities of any type) and can be closed-ended or open-ended, leveraged or unleveraged.

In addition to having no limitation with regard to eligible assets or investment policies, the RAIF combines the legal and tax features and flexibilities of the existing Luxembourg alternatives fund regimes: it can be structured in typical Luxembourg corporate, partnership or contractual forms and it may opt for a variable capital structure as well as for an umbrella structure.

“The RAIF also benefits from the EU AIFM passport.”

However, unlike most other available alternative funds, the RAIF is not subject to supervision or regulation by the Luxembourg supervisory authority, which significantly shortens time-to- market. Besides its non-regulated feature, the RAIF also benefits from the EU AIFM passport which makes it one of the most attractive alternative products across Europe.

“Unlike most other available alternative funds, the RAIF is not subject to supervision or regulation by the Luxembourg supervisory authority, which significantly shortens time-to-market.”

On August 23, 2016, the law modernising the law of August 10, 1915 on commercial companies (the 1915 Law) came into force.

The modernised company law is the first major overhaul of Luxembourg company law and offers increased flexibility while remaining consistent with the core principles of the 1915 Law, namely “contractual freedom for shareholders” and “security for third parties”.

“Regarding structuring of shareholdings, key amendments include the overhaul of non-voting shares regime to make it more flexible.”

This modernisation provides legal certainty and structuring opportunities alike. Regarding structuring of shareholdings, key amendments include the overhaul of non-voting shares regime to make it more flexible by lifting most restrictions and limitations, the wider flexibility of voting agreements, the suspension of voting rights and new rules concerning transfer of shares. The possibility has also been given to issue bonus shares and, under certain conditions, shares below par value.

In addition, key amendments also affect corporate governance with the simplification and harmonisation of the procedures for convening general meetings of shareholders or the possibility for the board of directors or managers to transfer the seat of the company within the Grand Duchy of Luxembourg. Real flexibility in structuring management arrangements is also achieved.

The reform has also formalised a simplified liquidation procedure, for all companies with a sole shareholder, which is characterised by dissolution without liquidation as no liquidator needs to be appointed.

Finally, the new company law also introduces a new form of company, the Société par Actions Simplifiées, characterised by its great contractual freedom, in particular with regard to corporate governance rules which can be freely determined by the shareholders.

These new features will no doubt add further flexibility to investment funds set up as investment companies.


State of play on the application of the AIFMD marketing passport to non-EU AIFMs and AIFs

The marketing passport under the AIFMD may be extended to non-EU AIFMs and AIFs once the European Commission has adopted the relevant delegated act following receipt of positive advice and an opinion from ESMA. To date, ESMA has published the opinion and advice on two sets of jurisdictions but has suggested that the Commission may wish wait until the European Supervisory Authority has delivered positive advice “on a sufficient number of non-EU countries” before setting in motion the legislative procedures for extending the passport to AIFMs of non-EU AIFs.

Currently, non-EU alternative investment fund managers (AIFMs) and alternative investment funds (AIFs) must comply with national private placement regimes (NPPR) of each EU Member State where they are marketing to investors in that country. The EU Alternative Investment Fund Managers Directive (AIFMD) stipulates certain minimum requirements that must be met on an initial and on-going basis, and in some cases AIFMs and AIFs may need to comply with additional (often onerous) requirements imposed by the relevant Member State. A marketing passport is automatically available to authorised EU AIFMs managing EU AIFs and the AIFMD provides for a possible extension of it to non-EU AIFMs and AIFs which would mean those AIFs could be freely marketed to professional investors across the EU without being subject to any additional requirements imposed by the relevant Member State. Any extension to the marketing passport to some jurisdictions could lead to the elimination of the NPPRs in some key Member States.

The process for extending the marketing passport will be triggered by the European Commission (Commission) adopting a delegated act after having received positive advice and an opinion from the European Securities and Markets Authority (ESMA). To date, ESMA has published the opinion and advice on two sets of jurisdictions in July 2015 and 2016 and suggested that the Commission may wish wait until ESMA has delivered positive advice “on a sufficient number of non-EU countries” before setting in motion the legislative procedures for extending the passport to AIFMs of non-EU AIFs. The Commission has not adopted the delegated act and indicated in December 2015 that it would take a decision “when a sufficient number of countries have been appropriately assessed.”

ESMA’s first set of advice was focused on the application of the passport to six non-EU countries (Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States). It concluded that the marketing passport could be extended to Guernsey and Jersey, and Switzerland once certain changes were made to its domestic legislation. ESMA did not reach a definitive view on Hong Kong, Singapore and the United States and concluded that the delay in the implementation of the AIFMD and transposition in some Member States made it difficult to definitively assess the functioning of the passport and of the NPPRs.

In its latest advice in July 2016, ESMA set out the results of its assessment of 12 non-EU jurisdictions, including Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland, and the United States. For each country, ESMA assessed whether there were significant obstacles regarding investor protection, competition, market disruption and the monitoring of systemic risk which would impede the application of the AIFMD passport. ESMA concluded that

  • The marketing passport could be extended to Canada, Guernsey, Japan, Jersey, Switzerland, Hong Kong and Singapore, although the latter two jurisdictions have regimes limiting the access of UCITS to retail investors in their territories.
  • There are no significant obstacles regarding market disruption and competition impeding the extension of the passport to Australia, provided that certain regulatory reliefs are extended to all Member States by Australia’s corporate regulator.
  • In relation to the United States, there were no significant obstacles regarding investor protection and the monitoring of systemic risk. There is no significant obstacle for funds marketed by managers to professional investors that do not involve any public offering. However, ESMA considers there to be a competition risk between EU and non-EU AIFMs in the case of funds marketed by managers to professional investors which involve a public offering and it suggested a number of options for further consideration to mitigate this risk.
  • It could not give definitive advice with respect to the criteria on investor protection and effectiveness of enforcement for Bermuda and the Cayman Islands as both jurisdictions are currently implementing new regimes.
  • The absence of an AIFMD-like regime makes it difficult to assess whether the investor protection criterion is met for the Isle of Man.

ESMA’s latest advice is being considered by the Commission, the European Parliament and the Council of the EU and it is anticipated that assessments of other batches of non-EU countries will follow. If ESMA’s suggestion to defer taking any action until further countries have been positively assessed, however, the status quo would be maintained for the near to medium term.

EU/UK regulatory roundup

Keeping track of what is going on in the regulatory world is proving to be a challenge. We have a blog,, that tracks global regulatory developments and subscription is free. The following highlight some of the key EU and UK regulatory developments that have recently been reported in the asset management sector.

Academics and experts give evidence on Brexit and financial services

August 31, 2016
The House of Lords’ EU Financial Affairs Sub-Committee has started an inquiry into Brexit and financial services in the UK. The inquiry begins with two evidence sessions focussing on the consequences of the referendum result for financial services and potential future arrangements.

Minutes of the FCA MiFID II implementation roundtable: August 2016

August 31, 2016
The FCA has published the minutes of its MiFID II implementation roundtable held on 3 August 3, 2016. Among other things the minutes note: (i) the deadline set for the European Securities and Markets Authority (ESMA) to provide draft regulatory technical standards (RTS) on package transactions is set for the end of February 2017; (ii) on investor protection, significant progress has been made on draft guidelines on product governance and an initial 26 Q&As covering best execution, suitability and appropriateness, taping and independent investment advice. Publication is expected at some point after the summer; and (iii) a third FCA consultation paper on conduct of business is expected at the end of September. The FCA plans to release one policy statement across the various FCA consultations on MiFID II and hopes to publish it a few months in advance of the transposition deadline.

IOSCO good practice for CIS fees and expenses seeks to enhance market efficiency

August 25, 2016
The International Organization of Securities Commissions (IOSCO) has published its final report on good practice for fees and expenses of collective investment schemes. Annex 4 of the report contains a summary table showing the examples of good practice from the earlier 2004 report alongside the revised and expanded examples.

IOSCO consults on good practices for termination of investment funds

August 18, 2016
IOSCO has published a consultation report on the good practices for termination of investment funds. The purpose of the consultation report is to obtain feedback from stakeholders on a proposed set of good practices on the voluntary termination process for collective investment schemes and other fund structures such as commodity, real estate and hedge funds. The consultation deadline is October 17, 2016.

Delay in publication of FCA interim report on asset management market study

August 3, 2016
In November 2015, the FCA published the terms of reference for its asset management market study. The aim of the study will be to understand whether competition is working effectively to enable investors to get value for money when purchasing asset management services. The FCA has now announced that it will publish the interim report in Q4 2016. The interim report which the FCA is in the process of finalising, will set out those areas that the regulator believes raise concerns and those where no or few problems have been found. The FCA expects to publish the final report in early 2017.

Benchmarks Regulation published in the OJ

June 29, 2016
The Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds has been published in the Official Journal of the EU (OJ). The Benchmarks Regulation enters into force on the day following that of its publication in the OJ. Most of its provisions apply from January 1, 2018

ESMA advice on application of AIFMD marketing passport

July 19, 2016
ESMA has published advice in relation to the application of the passport under the Alternative Investment Fund Managers’ Directive (AIFMD) to non-EU alternative investment fund managers and alternative investment funds (AIFs) in twelve countries: Australia; Bermuda; Canada; Cayman Islands; Guernsey; Hong Kong; Japan; Jersey; Isle of Man; Singapore; Switzerland; and United States.

ESMA has also published an updated questions and answers document on the application of the AIFMD. The updated document includes a new question and answer on the impact of the Regulation on over-the-counter derivatives, central counterparties and trade repositories on the AIFMD framework, regarding the valuation of centrally cleared over-the-counter derivatives by AIF managers.

ESMA Call for Evidence on asset segregation and custody services under AIFMD and UCITS V

July 15, 2016
ESMA has published a Call for Evidence on asset segregation and custody services under the AIFMD and the UCITS Directive. ESMA first consulted on asset segregation under the AIFMD in December 2014. The deadline for responding to the Call for Evidence is September 23, 2016.

FCA guidance on fund suspensions

July 8, 2016
The FCA has updated its website with guidance on fund suspensions. This is a result of some asset managers experiencing higher than normal levels of redemption requests from investors in their funds, following the result of the UK referendum on membership of the EU. The guidance reminds fund managers of their obligations to investors and outlines the FCA’s expectations regarding the suspension of dealings in their funds. Fund managers have a duty to act in the best interests of all investors, and therefore, they must consider how to ensure the on-going fair treatment of all investors in their funds in the context of the current market conditions.


As part of the Capital Markets Union initiative, the European Commission is consulting on regulatory barriers to the cross border distribution of funds between EU countries. This is the first stage of the Commission’s work in this area and will lead to a further action plan of legislation and other initiatives to dismantle these barriers.

On June 2, 2016, the European Commission launched a public consultation on cross-border distribution of investment funds. The consultation is part of the Commission’s on-going capital markets union initiative and seeks to gather evidence on the barriers fund managers face when offering their products to investors in another EU member state.

Various existing pieces of EU legislation provide for the distribution of funds throughout the EU and the Commission notes the significant growth of the European fund management industry since the first UCITS Directive (Directive 85/611/CEE) entered into force in 1985. The original UCITS marketing passport is now accompanied by a similar marketing mechanism in the Alternative Investment Fund Managers Directive (AIFMD). Rather than replicate or expand the scope the passporting rights under AIFMD or UCITS, the consultation looks to address other regulatory barriers that prevent fund managers from effectively marketing their funds across national borders.

The scope of the consultation is broad both in terms of the range of issues and the types of funds it covers. The focus is not just on UCITS funds but also AIFs, ELTIFs, EuVECAs and EuSEFs. The issues identified by the Commission as potential barriers are equally broad.

Differences in marketing requirements between Member States are identified as a potential problem. EU funds marketed cross-border are usually required to comply with national requirements set by host Member States. Differences in these requirements can lead to significant costs for fund managers. The Commission asks for evidence of the costs related to researching and complying with each EU Member State’s financial promotion and consumer protection regime, and providing appropriate materials on an on-going basis.

The Commission is also aware of differences in the regulatory fees imposed by home and host Member States. Respondents are invited to comment on both the fees themselves and any additional costs associated with administering the fees.

The consultation also addresses the need to balance national consumer protection requirements with market access. While specific national requirements may be designed to ensure it is easier for investors to subscribe, redeem and receive related payments from funds, and that they receive the correct information to support them in doing so, variations in requirements between jurisdictions create a significant barrier for foreign fund managers. The Commission intends to assess whether consumer protection concerns really justify the existence of all of these rules.

Despite the EU’s limited ability to interfere in national tax regimes, the Commission understand that differences in national regimes can pose a significant challenge for fund managers. The Commission hopes to promote best practice to avoid discriminatory tax treatment but will be restricted in what further action it can take.

The Commission is still in the early stages of assessing how to address the barriers identified, however it is clear that the growth of online platforms will be a central theme in any follow-up actions. This is common theme throughout the Commission’s CMU initiative.

The deadline for responses is October 2, 2016. The Commission intends to follow up with a series of legislative and non-legislative initiatives to address the barriers identified in the consultation in 2017.

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