Global asset management quarterly - Europe

Developments and market trends in Europe

United Kingdom

Quarterly update

Author Richard Sheen

Turning first to the listed fund sector, 2016 was a slower year for fundraising than previous years with only around five IPOs. The year did finish on a high note and December was the strongest month for issuance in the year with approximately £1.1 billion raised. However, a mood of uncertainty has continued into the first few months of 2017. The unresolved shape of Brexit (see below) and the prospects for political shocks in both the US and the Eurozone continue to influence investor sentiment. Investors in the sector continue to demonstrate appetite for income, which has been most readily found through investment in funds focussed on alternative and illiquid asset classes such as property, infrastructure and debt.

In the year to date, there have not been many announced fundraisings for listed closed-ended funds. A good example of the type of product that has demonstrated traction over the past few years is the proposed IPO of Impact Healthcare REIT plc which is seeking up to £200 million to invest in healthcare real estate assets and which was announced on March 7. This fund, in common with many other launches in the current environment is focussed on quarterly income distributions with an initial target annual yield of six per cent. Also instructive is the fact that the fund is being launched with a seed portfolio of existing residential care homes – a common concern for investors on fund IPOs is the ability to secure investments and the timing of the ramp-up period. Other recent IPO announcements include BioPharma Credit PLC, which will invest in debt in the life science industry and is again a predominantly income focussed vehicle.

The fund raising market for private funds remains significantly fragmented. While substantial established managers, and those with niche propositions for which there is investor appetite, have little difficulty in raising funds, smaller managers often continue to experience difficulty in attracting capital. Global macro-economic uncertainty feeding into asset price volatility has also slowed both investor demand for certain asset classes as well as deployment by managers of what is reported in some sectors as a record amount of uncalled capital. However, there remains strong demand for alternative assets exposure generally; with debt remaining particularly popular. However, managers of more traditional asset classes such as private equity are also reporting strong investor interest.

As regards Brexit, planning with certain asset managers is well advanced in some cases based on the "worst case" assumption of a clean break with Europe and loss passporting rights. Other managers are taking a wait and see approach depending on how the negotiations between the UK and the EU pan out over the next year or so. As has been previously discussed in this column, the impact of Brexit is likely to be very different depending on the type and size of the asset manager, the scale of its activities, current distribution model and geographical spread. A recent European Capital Markets Institute policy brief outlines four major risks to the industry: loss of the passport, potential constraints on outsourcing of core activities to third countries, the limitations on management of EU assets and the impact upon financial infrastructure (including staffing).

Brexit aside, the impact of regulatory change on the industry continues to be a significant concern for managers including as to the impact of changes such as MiFID II as well as the potential fall-out from the FCA’s Asset Management Market Study. Navigating these regulatory challenges must also be seen in the context of the economic pressures on the industry including fee pressure and cost increases which are affecting the asset manager business model. The last couple of weeks have seen a number of potential asset manager mergers announced, including Standard Life’s all share £3.8 billion possible offer for Aberdeen Asset Management. Rationalisation and synergies appear to be a key motivation behind this deal and analysts have pointed to the need for active managers to achieve greater scale to mitigate the impact of regulatory and compliance costs and to compete more effectively on price. That said, in the wider context active managers are under sustained threat from the large passive fund managers whose cost base is typically materially lower. March also saw the agreement to sell Allfunds Bank, one of the largest European fund platforms to US private equity firm, Hellman & Friedman.

Speculation exists as to further deals in the sector on the back of the proposed Aberdeen transaction and other recent tie ups including Janus and Henderson, particularly in the mid-sized asset manager sector (the so called "squeezed middle"), lacking the economies of scale of larger managers. Candriam Investors (formerly Dexia Asset Management) has announced a strategy of targeting illiquid fund managers including private equity, real estate and infrastructure. Wealth manager, Julius Baer has announced that it will consider an acquisition in the UK potentially driven by opportunities created by Brexit.

Corporate tax – extending substantial shareholdings exemption, but restricting relief for funding costs and losses

Author: Andrew Roycroft

Points arising from the changes to SSE and the interest/loss caps which will be of potential interest to investee companies.

In recent years, UK Governments of various political complexions have used changes to corporate taxation as a tool to attract inbound investment. This is reflected in exemptions from tax for gains on substantial shareholdings in trading companies, for dividends from overseas companies and for overseas branch profits, as well as successive reductions in the rate of corporation tax.

This policy seems set to continue in the face of a continuing uncertainty about the UK’s economic outlook, with what was a relatively low-key Budget confirming changes proposed in the Autumn Statement to the UK’s participation exemption for substantial shareholdings in trading companies. The changes will extend the availability of that exemption.

Details of the proposed changes to this exemption were published in December. Currently, the selling company must be part of a trading group. This requirement has proved difficult to apply in practice, primarily because of the uncertainty which it creates for trading groups which have mixed activities (trading and investments) or complicated group structures. This will be removed; the seller need not be part of a trading group.

Amongst other relaxations to the conditions for this exemption is a change which is potentially beneficial for UK-based asset managers acting for tax exempt investors, regardless of where the underlying asset is located. This change removes, for certain shareholders, the requirement that the investee company be a trading company.

This only applies to UK corporate shareholders – for example, a UK intermediate holding company – which is owned by "Qualifying Institutional Investors"; full exemption is available if QIIs own at least 80 per cent of the UK corporate shareholder, with a proportionate exemption for companies whose QIIs own between 25 per cent and 80 per cent. In addition to removing the trading company requirement, the 10 per cent minimum shareholding requirement need not be met provided the initial investment was at least £50 million. The reason for this relaxation is to encourage the use – or at least remove one of the disadvantages of using – UK companies by otherwise tax-exempt investors as a holding vehicle for their investments in non-trading assets, particularly infrastructure and real estate assets. This is reflected in the limited category of QIIs, which is currently restricted to certain pension schemes, life assurance companies, sovereign wealth funds, charities, investment trusts and widely marketed UK investment schemes. As yet, REITS are not included in the class of QIIs.

All these changes take effect for disposals after March 31, 2017, and so will have retroactive effect – potentially allowing the exemption to apply to a disposal of an investee company where there might have previously been doubt (for example, because of the old ‘member of a trading group’ requirement) as to the availability of the exemption.

Despite the economic uncertainty of a post-Brexit Britain, the UK Government is also proceeding with the caps on both the use of carried forward tax losses and on corporation tax relief for interest expense/other funding costs. Although the former might be seen as an acceptable cost for the greater freedom to use post-April 2017 losses against all forms of income, it is questionable why the UK Government needs to proceed at such speed with the interest cap whilst other countries are taking a more measured approach to this aspect of the OECD’s BEPS (Base Erosion and Profit Shifting) recommendations. There are genuine, and significant, concerns with the interest cap, which can also be levelled to a lesser degree at the carried forward loss cap, about the complexity of the legislation. The draft legislation was released in stages, with some parts still incomplete or defective; for example, the initial draft prevented entirely UK groups from utilising any carrying forward disallowed interest expense. This is far from ideal for managers seeking to model the impact of the changes on the post-tax return for investments, particularly long-term projects.


UCITS and AIFMD convergence

Authors: Imogen Garner and Jamie Gray

ESMA has drawn the attention of the Commission to assess certain inconsistencies between the UCITS, AIFMD and MiFID II frameworks with a view to achieving greater consistency in this area, among others

On February 9,  2017, the European Securities and Markets Authority (ESMA) moved to address some of the inconsistencies between UCITS and AIFMD through its 2017 Supervisory Convergence Work Programme (SCWP). The SCWP is ESMA’s second consecutive annual work programme on supervisory convergence and details the work that it will carry out in 2017 in order to promote sound, efficient and consistent supervision across the European Union. The programme forms part of a broader shift in ESMA’s focus from building the single rulebook, towards ensuring harmonization of supervision across the EU, as envisaged in its Strategic Orientation for 2016 to 2020. ESMA intends to continue to devote increasing resources to supervisory convergence.

In particular, ESMA wishes to develop common approaches to the delegation of collective portfolio management and depositary functions under the UCITS Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). This includes promoting a common understanding of so-called "substance" requirements for UCITS management companies and AIFMs.

In addition, ESMA intends to follow up its earlier consultation on asset segregation under AIFMD and to develop a common procedure for the operation of the powers to impose leverage limits. It will seek to gain a better understanding of supervisory actions in relation to liquidity management tools and also proposes to develop common practices on fees and expenses of investment funds, depending on available resources.

The move follows ESMA’s call in an Opinion published in January for certain product intervention powers under the recast Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) legislative package to be made available under the UCITS Directive and the AIFMD. In the Opinion, ESMA highlighted the lack of clarity around the exclusion of UCITS management companies and Alternative Investment Fund Managers (AIFMs), which can carry out certain MiFID activities, from the scope of the intervention powers. The powers, which will be exercisable from January 3, 2018, will allow ESMA and national competent authorities (NCAs) to ban the sale of certain products that they believe are unsuitable for retail investors. ESMA considers that the extension of those powers to cover UCITS management companies and Alternative Investment Fund Managers (AIFMs) would address the risk of arbitrage between MiFID firms and fund management companies, and ensure that there is a "common toolkit" across entities and instruments and contribute to a level playing field.

In its response to the European Commission’s Green Paper on Retail Financial Services, ESMA has already drawn the attention of the Commission to assess certain inconsistencies between the UCITS, AIFMD and MiFID II frameworks with a view to achieving greater consistency in this area, among others.

The areas of focus for the asset management sector form part of a broader package of priorities for convergence in the 2017 SCWP. These are aimed at continuing some of the work started in 2016, and include

  • Ensuring the sound, efficient and consistent implementation of key new EU legislation by preparing for MiFID II and the Markets in Financial Instruments Regulation (Regulation (EU) No. 600/2014) (MiFIR), and applying the Market Abuse Regulation (Regulation No. 596/2014) (including the finalisation of the underlying IT infrastructure).
  • Improving data quality through focusing on NCA’s efforts to prepare for and to enforce compliance with various reporting requirements under EU legislation such as MiFID II and MiFIR, the European Markets Infrastructure Regulation (Regulation (EU) No. 648/2012) and the AIFMD.
  • Ensuring adequate investor protection in the context of cross-border provision of services.
  • Ensuring effective convergence in the supervision of EU central counterparties.

ESMA will continue to monitor the implementation of these activities and may readjust.

EU/UK Regulatory Roundup

Author: Simon Lovegrove

A roundup of recent regulatory developments in the EU and UK. To receive daily updates on regulatory developments subscribe to our blog, Regulation tomorrow.




Commission adopts amended Delegated Regulation on RTS on key information document for PRIIPs


The European Commission adopts a Delegated Regulation of March 8, 2017 supplementing the Regulation on key information documents (KID) for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of KIDs and the conditions for fulfilling the requirement to provide such documents. The Regulation will apply from January 1, 2018 while Article 14(2) will apply until December 31, 2019.

Updated version of IA guidance on authorised funds


The Investment Association publishes an updated version of its regulatory guide on authorised funds.

FCA highlights concerns about investment managers and best execution


The FCA publishes a web page stating that it is concerned to find that most investment managers have failed to take on board the findings of its thematic review on best execution and payment for order flow (Thematic Review 14/13: Best execution and payment for order flow). The FCA states that it expects investment managers to consider the findings of the thematic review and the recent asset management market study.

FCA sets out expectations on use of dealing commission


The FCA publishes a new web page stating that it has visited 17 firms to assess their dealing commission arrangements, including how they have responded to the examples of good and poor practice from its 2014 Discussion Paper on the use of dealing commission. The FCA states that the majority of the firms it visited fell short of its expectations.

ESMA issues implementing rules for package orders under MiFID II


The European Securities and Markets Authority (ESMA) publishes a final report on draft Regulatory Technical Standards (RTS) regarding the treatment of package orders under MiFID II and MiFIR. The Commission has three months to decide whether to endorse the draft RTS.

Changes to the RAO


HM Treasury publishes a response to its earlier consultation on amending the definition of regulated advice under Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), to bring it in line with the EU definition set out in MiFID. Having considered the responses to the consultation, the Government has decided to change the definition of financial advice for regulated firms. Regulated firms will be giving advice only where they provide a personal recommendation. However, for unregulated firms the Government will leave in place the wider RAO definition of "advising on investments". The Government will lay a statutory instrument shortly. The new definition will come into effect on January 3, 2018. This will give the FCA time to consult on and publish new guidance.

FCA Policy Statement on changes to DTR 2.5 (delaying disclosure of inside information)


The FCA publishes Policy Statement 17/2: Changes to DTR 2.5: delay in the disclosure of inside information (PS17/2). In PS17/2 the FCA confirms that it has notified ESMA of its intention to comply with the guidelines on market soundings and the guidelines on delay in the disclosure of inside information. The FCA does not need to make any changes to the Handbook to comply with the ESMA guidelines on market soundings. However, it does need to amend DTR 2.5 in order to comply with the ESMA guidelines on the delay in the disclosure of inside information. In PS17/2 the FCA sets out its final amendments to DTR 2.5 and provides feedback on the responses received to its earlier consultation. The revised Handbook text set out in Appendix 1 came into force on February 24, 2017.

FCA statement on EMIR variation margin deadline


The FCA issues a statement concerning the European Market Infrastructure Regulation March 1, 2017 variation margin deadline. The FCA states

"The new regime for variation margin may require a number of significant changes for many firms, in terms of documentation and other arrangements.

In our supervision of firms’ progress, we will take a risk-based approach and use judgement as to the adequacy of progress, taking into account the position of particular firms and the credibility of the plans they have made.

Where a firm has not been able to comply fully, we will expect it to be able to demonstrate that it has made best efforts to achieve full compliance, and be ready to explain how it will achieve compliance in as short time as practicable for all in-scope transactions entered into from March 1, 2017. We will expect detailed and realistic plans to be in place, which we may request to see at any time.

We expect firms to have come into compliance within the coming few months."

IOSCO concludes that at this stage further work on loan funds is not merited


The International Organization of Securities Commissions (IOSCO) publishes a final report setting out its findings following a survey on loan funds. The report concludes that further work on loan funds is not warranted at this stage. However, IOSCO will monitor this segment of the fund industry.

FCA review of the effectiveness of primary markets


The FCA publishes a discussion paper and a consultation paper as part of its 2016/17 Business Plan commitment to review the structure of the UK’s primary markets to ensure they continue to serve the needs of issuers and investors.

The FCA papers are

  • Discussion Paper 17/2: Review of the Effectiveness of Primary Markets: the UK Primary Markets Landscape.
  • Consultation Paper 17/4: Review of the Effectiveness of Primary Markets: Enhancements to the Listing Regime.

The deadline for comments on both papers is May 14, 2017.

ESMA launches a new Q&A tool


ESMA launches a new Q&A tool so that it may publicly address questions from stakeholders for the purposes of ensuring consistent and effective day-to-day application of EU law within the European Supervisory Authority’s remit.

The areas that ESMA will take questions are

  • Corporate disclosure.
  • Credit rating agencies.
  • Fund management.
  • MiFID II and investor protection.
  • Benchmarks.
  • Short selling.
  • Post trading.
  • Innovation and products.

ESMA also sets out a list of Q&As it has already produced in the above areas.

HM Treasury Policy Statement on MiFID II transposition


HM Treasury publishes its Policy Statement regarding the transposition of MiFID II. HM Treasury also sets out three updated draft statutory instruments which give effect to transposition

  • The Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (MiFID II Regulations).
  • The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2017.
  • The Data Reporting Services Regulations 2017 (DRRs).

The HM Treasury Policy Statement contains feedback on the following

    • Third countries.
    • Data reporting services.
    • Position limits and reporting.
    • Unauthorised persons.
    • Structured deposits.
    • Binary options.
    • Further issues.

In relation to third countries, the UK Government will maintain the current third country regime, including the overseas person exclusion. It will not implement Article 39 MiFID II. Notwithstanding this the UK Government notes that a number of consequential changes need to be made to enable, in particular, an Article 39 MiFID II branch in another Member State and a third country firm registered with ESMA to navigate the general prohibition so that they can provide services to UK clients. Amendments have been made to the MiFID II Regulations.

FCA Discussion Paper on illiquid assets and open-ended investment funds


The FCA publishes Discussion Paper 17/1: Illiquid assets and open-ended investment funds (DP17/1). In DP17/1 the FCA considers some of the risks created when consumers use open-ended investment funds to gain exposure to assets that may be difficult for a fund manager to buy, sell or value quickly. The FCA refers to such assets in DP17/1 as “illiquid assets”, and these may include land and buildings, infrastructure, and financial assets such as unlisted securities. The deadline for comments on DP17/1 is May 8, 2017.

Transparency Directive: ESMA guide to EEA national rules on major holdings notifications


ESMA publishes a practical guide that summarises the main rules and practices applicable across the EEA in relation to notifications of major holdings under national law in accordance with the Transparency Directive.

Government publishes White Paper on UK’s exit from and new partnership with the EU


The UK Government publishes a White Paper on the UK’s exit from, and new partnership with, the EU. The document also confirms plans for a separate White Paper on the Great Repeal Bill.

ESMA opinion on UCITS share classes


ESMA publishes an opinion on UCITS share classes.

FCA to extend master fund level reporting for non-EEA and UK AIFMs


In FCA Handbook Notice 40, the FCA confirms that it will go ahead with its proposals to extend master fund level reporting requirements under the Alternative Investment Fund Managers Directive.


BaFin-consultation 01/2017 on its draft interpretative guidance on the tasks to be performed by an AIF-KVG

Author: Ludger C. Verfürth

This article highlights the key aspects of BaFin’s consultation on its draft interpretative guidance concerning the tasks to be performed by an AIF-capital investment management company (AIF-Kapitalverwaltungsgesellschaft – AIF-KVG) with regard to an AIF-investment company externally managed by it

The German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has published a consultation paper on its interpretative guidance on the tasks to be performed by an AIF-KVG. The consultation was published on February 3, 2017; the investment fund industry was invited to comment until March 3, 2017.

BaFin’s interpretive guidance focuses on several questions which have been intensively discussed in the investment management industry since the adoption of the Capital Investment Code (Kapitalanlagegesetzbuch – KAGB), i.e.

  • Which tasks can be performed by an AIF-investment company in its own name when being externally managed by an AIF-KVG and which tasks are to be performed by the AIF-KVG on behalf of the KVG itself. In this context, the question also arises whether the AIF-KVG acts in its own name or in the name of the AIF-investment company if it delegates the performance to a third party. And further, it has also been discussed whether the AIF-KVG is entitled to delegate the performance of its tasks back to the AIF-investment company.

The investment management industry welcomes BaFin’s effort to provide interpretative guidance to these questions. However, they are quite unhappy with the answers that BaFin has given in its consultation paper, which can be summarized as follows.

An AIF-investment company delegates all tasks concerning the collective investment management to its AIF-KVG and grants comprehensive according power of representation to the AIF-KVG which then in turn is solely responsible for the collective investment management of the AIF-investment company. Collective investment management comprises not only risk and portfolio management but also any administrative tasks as set out in Annex I paragraph 2 of the AIFM-Directive. As a consequence, the AIF-investment company is only responsible for such tasks which result from its structure and organization under company law aspects, such as organization of annual partners’ or shareholders’ meetings, resolutions adopted at such meetings.

An AIF-KVG acts principally in its own name when performing the task of collective investment management. This holds true for risk as well as portfolio management and any administrative task such as legal and fund management accounting services, customer inquiries, valuation and pricing, regulatory compliance monitoring, marketing, activities related to the asset such as facility management. However, as far as portfolio management is concerned BaFin takes the view that only the question of "whether" and "how" shall be decided by the AIF-KVG in its own name whereas the actual carrying out of such task, such as the acquisition or sale of the AIF’s assets or the conclusion of loan agreements or rent agreements, shall be done in the name of the AIF-investment company so that the AIF-investment company becomes the owner of the asset or of the consideration or the borrower or the tenant.

An externally managed AIF-investment company cannot perform collective investment management if it has delegated such task to an external AIF-KVG. In other words, an external AIF-KVG is not entitled to delegate the collective investment management or parts of it back to the AIF-investment company.

Whereas the latter answer does not provoke any contradictions, more or less all the other answers that BaFin has given raise concerns.

The underlying thesis which BaFin’s interpretative guidance is based on is that an externally managed AIF-investment company shall not be treated differently from a contractual investment fund, i.e. a fund without its own legal personality (Sondervermögen). This thesis is highly questionable since an AIF-investment company is a fund with its own legal personality. The BaFin consultation acknowledges that the AIF-KVG requires a power of representation from the AIF-investment company. In this context it should also be noted that the Higher Regional Court of Munich has ruled that an external AIF-KVG cannot represent a closed end AIF-investment company in the legal form of a GmbH & Co. KG in court (OLG Munich, 23 U 1570/15). Hence, it would be more consistent to say that the AIF-KVG is always acting on behalf of the AIF-investment company rather than on its own behalf. BaFin’s approach would result in legal issues, e.g. lack of own contractual claim of damages in case of mis-performance of contractual parties, e.g. under the valuation contract or under the contract of provision of accounting services.

The KAGB differentiates between the collective investment management on the one hand and the management of investment assets on the other hand. Only the latter term is vastly used throughout the Capital Investment Code in connection with the duties of an AIF-KVG. Thus, the fact that the KAGB defines the term collective investment management as also comprising the administrative functions listed in Annex I, fifth paragraph of the AIFM Directive does not mean that the AIF-KVG shall also be originally responsible for such mere administrative tasks.

As far as the marketing is concerned, BaFin’s answer appears to be in contradiction to its statements in its Guidance Note on KAMaRisk, which was recently adopted in January 2017, where BaFin has clearly stated that the provision of marketing of units in investment funds by a third party shall not be regarded as delegation of marketing by the AIF-KVG to such third party. It would also result in severe practical problems if the provisions on delegation of the KAGB would have to be applied to the marketing of units in investment funds. Therefore, it is expected that BaFin will modify its statement in the interpretative guidance note by clarifying that the statement shall not mean that the provisions on delegation shall apply to marketing.


Market trends in Luxembourg

Author Florence Stainier, Partner at Arendt & Medermach

Over the course of the past few months, we have seen increased interest for reserved alternative investment funds (RAIF), debt funds and structured UCITS

Furthermore, several asset managers are discussing the redomiciliation of their foreign investment funds or management companies/AIFM to Luxembourg, particularly in the context of Brexit.

Ongoing interest for RAIF

This new flexible investment vehicle pursues its route. Since implementation in August 2016, 57 RAIFs have been created in Luxembourg with a variety of different investment policies and purposes (time-to-market, incubation, private wealth management …).

Debt funds

Debt and credit funds are also continuing their steady growth in Luxembourg thanks to the flexible legal and regulatory environment allowing them to implement all types of debt/credit strategies: mezzanine, distressed, including origination, etc.

Luxembourg is strengthening its position as a key domicile for structuring debt funds: over 70 per cent of the top 30 debt fund managers worldwide are present in Luxembourg.

Structured UCITS

Getting exposure to non-eligible assets via delta one notes is still an important trend more particularly for asset managers wishing to structure CTA type of investment strategies in a UCITS format.


As a consequence of the uncertainties as to the implementation of the third-country AIFM passport and the limitation of reverse solicitation capacities, numerous re-domiciliation projects in Luxembourg involving both regulated and non-regulated funds are under examination.

The possibility to transfer a foreign investment fund’s registered office to Luxembourg with the continuation of its legal personality is creating some strong interest for asset managers wishing to raise assets in the European Union.

This process allows for a foreign fund to preserve its full corporate history, including track record and it is also worth noting that it is generally completely tax neutral.

Parallel structures are also raising strong interest.

This possibility of re-domiciliation to Luxembourg may also be particularly relevant in the Brexit context for promoters wishing to keep the benefit of the passport for their funds.

In the same connection, several asset managers are currently discussing with the Luxembourg regulator possible localisation of their UCITS management companies or AIFM in Luxembourg.


Finally, particular focus has been given over the last weeks on advising clients on the new margin requirements under the European Market Infrastructure Regulation as well as on Securities Financing Transactions Regulation) and disclosure requirements in documents.

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