Asset management quarterly - Europe

Developments and market trends in Europe


Update on the UK market

Authors Richard Sheen and Craig Cordle

Brexit, Brexit, Brexit. You would be hard-pushed to have missed the debate, which is set to be decided one way or another on June 23, 2016. The impact of the forthcoming referendum on fundraising has been significant and protracted, with the fund IPO market struggling to woo investors who are uncertain of what the future may bring should Vote Leave prevail. Uncertainty over the result has stalled a number of deals, although the secondary fundraising market (particularly for private funds) remains robust.

Whatever the result on June 23, 2016, the key point from a fundraising perspective is that there will be a result and that the referendum will be over. We remain optimistic for an increasingly busy second half of the year, and although the first two quarters of this year have been challenging for IPO activity, we continue to see a diverse pipeline of potential deals with many companies targeting IPO dates in the fourth quarter and early 2017. As we said in our last update, it is unlikely that investors’ appetite for income will wain anytime soon. We still see this as ringing true, and if new alternative investment funds are to be launched, income will no doubt feature.

There continues to be speculation concerning further consolidation in the asset management industry driven by factors such as the increasing regulatory burden, growing investor preference for cheaper passive products and the desire to gain exposure to new asset classes. Mergers amongst medium sized asset and wealth managers seeking to achieve cost synergies are expected to be the hot area.

On the regulatory side, the directly applicable EU Market Abuse Regulation (MAR) is almost upon us, with the new regime set to take effect on July 3, 2016. There will be an element of learning on the job as it is unlikely that the new regime will be fully baked by the time the regulation becomes effective. However, the Financial Conduct Authority (FCA) has published a Policy Statement (PS16/13) on April 28, 2016 in which it confirmed a number of key points:

  • firstly, the Model Code will be abolished and no replacement requirements will be introduced for premium listed companies to have effective systems and controls in place regarding the process for persons discharging managerial responsibilities (PDMRs) obtaining clearance to deal nor will it introduce the associated guidance as was previously proposed in its earlier consultation paper (CP15/35);
  • secondly, it will adopt €5,000 per calendar year as the de minimis threshold below which PDMRs will not be required to disclose their transactions under Article 17 MAR; and
  • thirdly, where disclosure of inside information to the market has been delayed, an issuer (whilst being required to keep a record and to notify the FCA of its decision to delay immediately after the disclosure is made) need only provide a written explanation of how the conditions for delay were met if requested by the FCA. This is a good development in light of what was potentially a very onerous provision.

The removal of additional restrictions on PDMR dealings from the Listing Rules has the benefit of clarity and simplicity. However, issuers need to ensure that nothing falls through the cracks, and may still wish to restrict PDMR dealings outside of MAR closed periods. For listed alternative investment funds, boards will be seeking clarity of when they can deal and the procedure for doing so. A formalised share dealing code is therefore advisable. Boards will also be considering the impact of MAR on share acquisitions in “closed periods” under savings plans and dividend reinvestment schemes as well as their policies relating to share repurchases during those periods. If you haven’t already, we recommend that you discuss the application of MAR to your business with your advisers without delay.

A technological revolution? Several of the UK’s largest fund houses are investigating whether Blockchain, an online public ledger and the technology underpinning Bitcoin, could be used to trade illiquid securities directly between one another thus improving the speed of settlement and enabling asset managers to eliminate intermediaries and reduce staffing costs. Blockchain may also change traditional regulatory reporting since asset managers could allow the FCA to access the ledger containing records of all trading activity, enabling the regulator to see every transaction in real time. Further details to follow when we know more.

The final word (for this edition). For decades offshore collective investment vehicles have been used legitimately to provide tax efficiencies for investors who have pooled their resources in order to gain exposure to assets which, given their scale, sector or risk profile, they would have been unable to invest on their own. Such investors will include the pension funds responsible for managing your pension pot, and, if you have a stocks and shares ISA or SIPP, may include you. These collective investment vehicles, which charge fees to investors and provide for diversification of risk, have been set up in compliance with local laws and international taxation treaties. We hope that recent media attention does not translate into revisiting the wholly legitimate activities carried on by properly established and regulated offshore collective investment vehicles.

FCA consults on UCITS Level 2 Regulation

Authors Imogen Garner and Albert Weatherill

On May 20, 2016 the FCA published Consultation Paper 16/14: UCITS V Level 2 Regulation, SFTR and consequential changes to the Handbook (CP16/14).

The UCITS V legislative package includes a ‘Level 1 Directive’, which amends the existing UCITS Directive, and a ‘Level 2 Regulation’, which sets out additional, detailed requirements for UCITS management companies and depositaries. The Level 1 Directive was transposed into national law on March 18, 2016. The Level 1 Directive was designed primarily to increase investor protection and improve investor confidence in UCITS, by enhancing the rules on the depositaries’ responsibilities and introducing remuneration policy requirements for management companies.

The FCA’s final rules and guidance transposing the changes from the Level 1 Directive can be found in FCA Policy Statement 16/2: Implementation of the UCITS V Directive. The rules and guidance took effect on March 18, 2016.

The UCITS V Level 2 Regulation applies to firms from October 13, 2016. The Regulation introduces new requirements for UCITS depositaries. The requirements include safekeeping requirements for UCITS depositaries, requirements for the UCITS management company and the depositary to act independently, and steps to protect the UCITS’ assets if a third party delegated custodian becomes insolvent.

The UCITS V Level 2 Regulation is directly applicable and does not need transposing by Member States. However, in CP16/14 the FCA proposes certain amendments to its rules and guidance to ensure consistency with the Level 2 measures.

In particular the FCA’s proposals include:

  • amendments to the Client Assets sourcebook (CASS) 6.6 which apply to UCITS depositaries. The FCA proposes to dis-apply certain CASS rules and guidance to ensure consistency with the requirements under the UCITS V Level 2 Regulation;
  • new guidance in the Collective Investment Schemes sourcebook (COLL) 6.9 to signpost the conditions for meeting the independence requirements introduced by the Level 2 Regulation; and
  • a minor amendment to Senior Management Arrangements, Systems and Controls (SYSC) 2.9R(1) which sets out the circumstances where a UCITS management company must appoint a remuneration committee.

In CP16/14 the FCA also proposes to copy out into COLL and the Investment Funds sourcebook (FUND) the relevant provisions from the Securities Financing Transactions Regulation (SFTR) to help firms comply with the new disclosure requirements. The SFTR contains other provisions that are directly applicable for managers of UCITS and alternative investment funds but these are not considered in CP16/14.

The deadline for comments on CP16/14 is July 19, 2016. The FCA intends to publish a Policy Statement in Q3 2016.

Robo-advice: back to the future

Authors Imogen Garner, Gavin Punia and Jamie Gray

This article first appeared in the May 2016 issue of PLC Magazine.

Automated advice models, known as robo-advice, can be seen as an innovative and lower cost way of delivering financial advice to consumers, offering a potential way to extend access to advice to those falling within the so-called "advice gap".

Robo-advice is an emerging trend, both in the EU and globally. In the UK, the recently published final report on the Financial Advice Market Review (FAMR) encouraged the Financial Conduct Authority (FCA) to build on its existing successful robo-advice initiatives and to establish an advice unit to support the development of robo-advice tools that would provide low-cost, high-quality advice to consumers in the areas of investment advice, protection and retirement income planning (see "Financial advice market review: final report", Bulletin, Securities and corporate finance regulation, this issue).

However, regulators are also exploring some of the key risks arising from robo-advice and the industry should therefore expect to hear more from regulators, in the form of rules or guidance, in the future.

Regulatory responses to robo-advice

The FCA is increasingly recognising that robo-advice could help in extending customer access to advice, particularly in relation to "simplified advice", and appears keen to explore the simplified advice process as a potential solution in addressing the advice gap. Simplified advice is not a defined term in the FCA Handbook but has been adopted to describe streamlined advice processes which aim to address straightforward consumer needs and which do not involve analysing the consumer’s circumstances that are not directly relevant to those needs.

Most recently, in the call for input for the FAMR, the FCA and the Treasury asked respondents what role technology such as robo-advice could play in improving access to financial advice. The final report on FAMR, which was published on March 14, 2016, identified extending access to advice as a key goal. In order to increase the use of simplified advice models, the FCA is to develop further guidance on what does and does not amount to regulated advice and how simplified advice models need to comply with existing regulatory requirements.

The FCA is also to set up an advice unit to help firms develop automated advice models. The advice unit will build on the FCA’s previous work in creating an innovation hub for technology start-ups and incumbents developing financial technology (fintech) services. The Treasury’s involvement in FAMR has also given the FCA the ability to change the legislative framework in relation to financial advice in ways that may help reduce barriers for fintech services such as robo-advice.

EU regulators are also taking notice and, at an EU level, the Joint Committee of the European Supervisory Authorities (ESAs) launched a discussion paper in December 2015 on automation in financial advice, which highlighted the potential benefits and risks to consumers and to financial institutions of robo-advice. The ESAs are seeking to determine what, if any, regulatory and supervisory actions may need to be taken to mitigate the risks of automation in financial advice while at the same time harnessing its potential benefits.

There are a number of robo-advisers being set up in EU member states, such as Italy and the Netherlands. The Netherlands introduced its own expanded version of the UK’s retail distribution review (RDR) in 2013, which includes a ban, similar to the UK, on inducement-based schemes for independent and non-independent advice, but the Dutch authorities extended the policy to include execution-only and portfolio management activities. Italy implemented a ban on discretionary managed fund platforms receiving commission in 2007, but has not developed a national regime comparable to the Dutch or UK RDR regimes.

In the US, robo-advisers have developed over a number of years, with US regulators such as the Securities and Exchange Commission (SEC) identifying the perceived benefits of robo-advice, including lower cost, ease of use, and broad access for customers. However, US regulators have recently been keen to communicate the risks and limitations in using automated investment tools to customers. For example, the SEC and the US Financial Industry Regulatory Authority issued a joint alert on May 8, 2015 that provided investors with a general overview of automated investment tools and provided key tips or issues to consider before using these tools.

In Australia, robo-advice has also been subject to strong regulatory focus from the Australian Securities and Investments Commission (ASIC). ASIC is strongly focused on consumer protection and considers that robo-advice services should be subject to the same regulatory regime as conventional human-based advice services. This is reflected in its consultation and accompanying draft regulatory guide on robo-advice that was released on March 21, 2016, in which ASIC expresses the view that there is no need for law reform to better facilitate the provision of robo-advice.

However, it seems that the Australian government has a different view. In March 2016, the Australian Treasurer announced that the government will introduce a new system to regulate fintech start-ups that will better facilitate the building of new businesses using a new "regulatory sandbox" in which entrepreneurs can test their new disruptive business models in a controlled environment. Australia implemented its own RDR regime, the Future of Financial Advice (FOFA) in 2012. FOFA, like the UK RDR, has prohibited advisers from charging fees through products in the form of commission. However, it still permits the payment of adviser fees out of the product held by the client with the client’s consent. As the fees are paid out of the client’s money and not the product provider’s own money, the payment is not characterised as commission.

Key risks identified by regulators

Robo-advice is an emerging model across the globe but risks and concerns have been identified by regulators and the industry alike. In particular, concerns exist that the automation of financial advice beyond simple financial planning tools may give rise to new or increased risks compared to the traditional model of human professional advice.

Some commentators warn that consumers may misunderstand the advice or the nature of the service provided to them without the benefit of a professional adviser to support them through an advice process, or may not understand the limitations in using the automated tools when compared against personal human advice, particularly in more complex product areas.

Another perceived risk is the potential for limitations or errors in automated tools to the extent that they cannot be as intuitive as a human adviser. For example, many automated advice tools are based on decision trees and are not traditional investment advice in the sense that they do not take into account the customer’s objectives and goals, and how their circumstances may change over time. Some see this as having the potential to lead to a risk of automated mis-selling of products and it may take years to identify bad advice provided through these tools. This concern also relates to the perceived risk associated with the widespread use of automated advice tools, in that a significant volume of consumers could end up transacting in the same way in the same financial products and services, and therefore lead to a "herding" of risk.

Imogen Garner is a partner, and Jamie Gray and Gavin Punia are associates, at Norton Rose Fulbright LLP. The authors would also like to thank partner Zein El Hassan of Norton Rose Fulbright Australia and senior associate Floortje Nagelkerke of Norton Rose Fulbright LLP for their contributions.

Robo-advice and the advice gap

Robo-advice is an umbrella term that refers to a broad spectrum of online automated tools that leverage customer information and use algorithms to determine the financial or investment decisions for an individual’s portfolio. These automated tools can range from personal financial planning tools (such as online calculators) to financial instrument selection services, portfolio selection or asset optimisation services, and online investment management platforms, such as robo-advisers that select and manage investment portfolios.

In some jurisdictions, such as the UK, the Netherlands and Australia, there is a perception that robo-advice has emerged to fill a so-called "advice gap" that has been created in part by regulatory reforms in the retail financial advice market. In particular, reforms such as the UK’s retail distribution review have required retail financial advisers to be paid by their clients through adviser charges, rather than be paid by product providers through commission. The advice gap refers to those customers at the lower and middle end of the investment advisory market who cannot, or are not prepared to, pay an adviser charge for investment advice and therefore are no longer seeking the services of investment advisers.

Brexit: what are the exit options?

Author Simon Lovegrove and Peter Snowdon

On June 23, 2016, the UK goes to the polls to decide in a referendum its future membership of the EU. The UK’s Electoral Commission proposed wording for the ballet paper, which has been accepted by MPs is: “Should the UK remain a member of the European Union or leave the European Union?”

Should the UK vote to stay within the EU then life should continue as normal albeit that the package of changes that Prime Minister Cameron negotiated in relation to the UK’s EU membership in February will take effect immediately. However, if the UK votes to leave the EU the big question in the financial services and asset management sector is what happens next? Would the vast majority of UK financial services law that derives from EU legislation be swept away overnight? The answer is probably “no”.


To some extent the answer to this question is tied up in the legal process which enables Member State to exit the EU and what form its new relationship with Europe would take.

The starting point is Article 50 of the Treaty on European Union. This provision states the following:

  1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
  2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council of the EU (Council), acting by a qualified majority, after obtaining the consent of the European Parliament.
  3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
  4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.
  5. If a State which has withdrawn from the Union asks to re-join, its request shall be subject to the procedure referred to in Article 49.

So in the event that the UK votes to leave the EU, it would have to negotiate a withdrawal (and also its post exit arrangements). One suspects that such a negotiation would be a long and complicated process. In the July 2013 House of Commons Research Paper, Leaving the EU, it was noted that “withdrawal from the Union would involve the unravelling of a highly complex skein of budgetary, legal, political, financial, commercial and personal relationships, liabilities and obligations.” Greenland withdrew from the European Community in 1985 after it voted to leave on February 23, 1982.

The EU Treaties that the UK is a party to would remain in force until a withdrawal agreement acceptable to the UK and a qualified majority of the Council is finalised or, failing that, two years after notifying the EU of its intention to leave (which could be extended if the UK and the Council (unanimously) agree).

So what are the alternatives to EU membership?

One of the key problems facing firms at the moment is uncertainty as to what form a Brexit would take. This creates difficulties in contingency planning or even understanding as to what sort of regulatory system the UK would be left with.

One possible option would be for the UK to look to other European free trade arrangements: the European Free Trade Area (EFTA) and the European Economic Area (EEA). However, the UK would have no representation in the EU institutions and could only exert “soft influence” when legislation is being made. As Nikolai Astrup of the Norwegian Conservative Party succinctly put it, “If you want to run the EU, stay in the EU. If you want to be run by the EU, feel free to join us in the EEA!”

But EEA and EFTA membership is only possible if the UK can negotiate entry. Membership is not assured, for instance Norway vetoed Slovakia’s membership.

If the UK were to leave the EU but join the EEA and EFTA, it would continue to have access to the EU single market under the EEA Agreement. However, access for EEA states to the single market for financial services is at present not complete, as the EEA is making slow progress in incorporating EU legislation on financial services law into the EEA Agreement. In addition, the EEA Agreement did not foresee the  establishment of the European Supervisory Authorities (ESAs) nor their powers of direct supervision and binding mediation. As a result of the differences in regulation, access in some parts of the financial services sector is presently limited. For example, the Alternative Investment Fund Managers Directive has not yet been adopted into the EEA Agreement. However, there has been some movement on this issue. On June 2, 2016 the European Commission announced that it had adopted a proposal for a Council decision on the position to be taken by the EU in the EEA Joint Committee concerning the incorporation of the Regulations on the ESAs and a number of related Regulations and Directives. The Commission added that after adoption of the proposal by the Council, the EU could take a formal position on nine draft-decisions of the EEA Joint Committee, covering in total 31 EU legal acts. The acts to be incorporated into the EEA Agreement would be the ESAs Regulations, the European Systemic Risk Board Regulation, the Alternative Investment Fund Managers Directive and related delegated acts, the Short Selling Regulation and related delegated acts, the European Market Infrastructure Regulation and the Credit Ratings Agency Regulations and related delegated acts. At the time of writing the Parliament of Liechtenstein had already agreed the nine draft-decisions of the EEA Joint Committee, whilst the Icelandic and Norwegian Parliaments were assessing the package.

Another possible option for the UK would be to follow the Swiss model. Switzerland is a member of the EFTA but not the EEA. Rather than be a member of the EEA Switzerland has negotiated with the EU around 72 bilateral treaties in order to participate in the EU Single Market. The exact relationship between the UK and the EU under this model would be a matter for negotiation following the conclusion of bilateral agreements over time. It is worth noting, however, that Switzerland does not have a bilateral treaty in respect of financial services. Indeed in 2012 the Council thought that the Swiss model could be taken no further by stating that: “…the approach taken by Switzerland to participate in EU policies and programmes through sectoral agreements in more and more areas in the absence of any horizontal institutional framework, has reached its limits and needs to be reconsidered.” The 2013 City of London Corporation report, Switzerland’s Approach to EU Engagement, noted a year later: “The prevailing situation now seems under threat, as the Swiss financial sector faces tougher EU rules on third country operations. These can be discriminatory, MiFID II is seen as creating new barriers for Swiss firms by forcing more of them to open (larger) subsidiaries in the EEA and to obtain authorisation from an EEA Member State in order to gain an “EU passport.”

Another possible route for the UK would be to follow Turkey’s example by entering into a customs union with the EU. This arrangement would give the UK access to the EU internal market for goods without customs duties. However, services (including financial services) would not be covered by such a union. In such an instance the UK would, for the purposes of EU financial services legislation, be treated as a third country like the United States and be subject to, where relevant, equivalence provisions.

Another possibility could be that the UK seeks to negotiate from scratch a new free trade agreement (FTA) with the EU. Under this model, access to free trade in the EU, including financial services, would depend on the agreement negotiated but there is no guarantee such negotiations could be successfully or swiftly concluded. The EU’s FTA with Canada took more than 5 years to negotiate and sign.

Whatever exit model the UK opts for it is clear that there will be extensive, complex and time consuming negotiations. However, as terms of the exit become clearer, it will become possible to take steps to reduce the adverse effects of, and assess any opportunities presented, by Brexit.
But are we talking wholesale changes to UK financial services law?

The UK has taken an opposing line both publicly and privately on a number of EU financial services measures. For example on February 29, 2016 the PRA and FCA issued a joint statement concerning the EBA’s December 2015 guidelines on sound remuneration policies and registered their disagreement with the EBA’s interpretation of the proportionality principle in relation to the bonus cap set by Article 94(1)(g) of the CRD IV.

So one could probably expect some changes to UK financial services law should the UK vote to leave the EU. But wholesale changes?

The level of change is difficult to predict at the moment but in a speech Kay Swinburne, MEP and member of the Economic and Monetary Affairs Committee of the European Parliament made an important point when she said: “Ask Norway, ask Switzerland, for that matter ask South Africa. If you want to have access to the EU market, you have to comply with EU rules.” Swinburne gave the example of the US which has spent four years seeking to meet EU equivalence standards for central counterparties to clear over-the-counter derivatives. “That should give a taste of what we should expect as a financial centre outside the EU.”, she added.

So it seems that if the UK wants to continue to have access to the EU market it needs to think very carefully as to what changes it can make.

The UK Finance Bill – upcoming tax changes

Author Andrew Roycroft

The upcoming UK referendum on Brexit has pushed back the usual Parliamentary timetable for the Finance Bill, which is now unlikely to become law until Autumn 2016. Whilst this will delay the implementation of some changes, such as aspects of the BEPS-inspired extension of withholding tax on royalty payments, other changes were always intended either to be backdated to the start of the current tax year or to begin in April 2017.

The change to the tax treatment of carried interest is one of the measures which applies from April 6, 2016. We wrote about the original proposals in the previous edition, and since then they have been revised to reflect concerns raised about the effect of these rules. The broad thrust of the rules – which impose income tax on some forms of carried interest – remains, but:

  • the average holding period required in order to fall outside these rules has been shortened (from 4 years to 40 months);
  • the conditional exemption is now available for carried interest in the first ten years after the fund begins to make investments (previously, four years); and
  • there is now a limited facility to sell-down part of an acquired investment, and greater ability to treat follow-on investments as having been made at the time of the original investment.

Not all of the changes to the original proposals are an improvement, as more arrangements might now be direct lending funds. Carry in such funds is taxed as income regardless of how long the (debt) assets which it is calculated by reference to are held for.

As employment-related securities are not subject to these rules, there might be some circumstances where a straight-forward share incentive arrangement might be more appropriate. The ability to provide capital-gains tax free returns through Employee Shareholder Shares has been restricted, with a £100,000 cap being introduced for arrangements entered into after the Budget. With that exception, the changes to be introduced to capital gains tax are largely beneficial to management shareholders, with:

  • a reduction, to 20 per cent, in the rate of capital gains tax, although this will not apply to carried interest (or second-homes); and
  • changes to Entrepreneurs’ Relief (ER) to partially reverse (with retrospective effect) some of the changes made in 2015 to counter the use of “manco” and certain partnership structures – in addition to withdrawing ER from those with a shareholding carrying less than 5% of the underlying business, those changes had denied the relief to certain commercial arrangements which were not intended to be caught.

In addition, ER will now be available for certain investors, extending the current 10% rate to new shares issued to individuals who are not employees or owner-managers of the business, provided additional conditions are met (a 3-year holding period, rather than 12 months for employees/owner-managers).

The reduced rate of capital gains tax coincides with the changes to dividend taxation, which sees a new £5,000 pa exemption for dividends accompanied by higher rates of tax for dividends in excess of that allowance – up to an effective rate of 38.1% for those paying the highest rate of income tax.

Upcoming changes which will have effect from 2017, or later, include the Apprenticeship Levy which will add 0.5 per cent to the payroll bills in excess of £3 million per annum and the new corporate criminal offence of failing to prevent the facilitation of tax evasion in the UK or overseas. The latter will require businesses to review their procedures to ensure that they have reasonable steps in place to identify and prevent such behaviour.

The changes to the taxation of overseas investors in UK property is another subject which may be of interest, and which we will cover in a subsequent issue.


Author: Florence Stainier, Partner – Investment Funds, Arendt & Medernach


On June 1, 2016, the law adopted by the Luxembourg Parliament on May 10, 2016 transposing the UCITS V Directive came into force. Several amendments were made to the Luxembourg laws of December 17, 2010 on undertakings for collective investment (UCI Law) and of July 12, 2013 on alternative investment fund managers (AIFM Law). The new law is merely a transcription of the UCITS V Directive into Luxembourg Law, implementing the new depositary and sanctions regimes and the requirement to establish remuneration policies.

The new regime needs to be considered together with the provisions of the Level 2 Depositary Regulation that will apply as from October 13, 2016 and the provisions of Circular 14/587 of the Luxembourg supervisory commission (Commission de Surveillance du Secteur Financier (CSSF)) which had already anticipated certain changes introduced by the UCITS V directive. The CSSF circular should be further updated before the Level 2 Depositary Regulation comes into force.

It is worth noting that the newly adopted law goes beyond the mere implementation of the UCITS V Directive, as it subjects Luxembourg UCIs established under and governed by Part II of the UCI Law to the new and more stringent UCITS V depositary regime. Until now, so-called Part II funds were subject to the depositary regime of the AIFM Law where in scope of the Alternative Investment Fund Managers Directive (AIFMD) or otherwise to the lighter regime of Circular 91/75.

Although in line with ESMA’s position, the CSSF seems to expect remuneration policies to be in place at the level of UCITS management companies and self-managed SICAV-UCITS by January 2017 at the latest and is already assessing the status of this obligation. Indeed, since mid-May 2016, the CSSF has been distributing a questionnaire to UCITS management companies and self-managed UCITS-SICAVs on the key aspects of the revised remuneration policies that they will implement in order to comply with the requirements of the UCITS V regime.

In addition the AIFM law has also been amended to allow authorized AIFMs to provide portfolio management and non-core services on a cross-border basis.

Eligible assets

On the eligible assets side, the CSSF has recently expressed some caution with regard to UCITS investing in certain types of assets.

With regard to contingent convertible bonds (CoCos), the CSSF expects some disclosure in the offering documents with regard to investment restrictions and related risks. In case of moderate exposure (i.e. less than 20 per cent), such disclosure is currently the sole requirement. Where a UCITS invests more than 50 per cent of its assets in CoCos, the CSSF has reaffirmed that it will impose restrictions on distribution (i.e. to well-informed or institutional investors as the case may be). In principle, no restrictions should be imposed where the percentage of investment in CoCos comprises between 20 per cent and 50 per cent, however the CSSF reserves the right to analyze the situation on a case-by-case basis.

The CSSF is also applying increased scrutiny with regard to catastrophe bonds (CAT bonds), despite these being eligible investments for UCITS in certain cases.

The CSSF has recently confirmed that the classification of participatory notes (P Notes), regardless of the market to which they refer (i.e. KSA, India, etc.), falls under the responsibility of the board of directors of the fund/management company. It is therefore incumbent on the management body of a fund to determine whether P Notes are classified as transferable securities or as derivatives. Such qualification is of particular importance for UCITS, given the impact of the classification on the applicable investment restrictions.

The same applies to real estate investment trusts REITs. The CSSF is of the opinion that it is the responsibility of the board of directors of the fund/management company to assess whether a REIT qualifies as a closed-ended or opened-ended fund or as a commercial company. Different investment restrictions shall apply depending on such classification.

Risk management

On April 22, 2016, the CSSF issued a circular letter to all Chapter 15 management companies, all Luxembourg self-managed SICAVs and all management companies authorised by a competent authority of another EU Member State managing at least one Luxembourg domiciled UCITS. The aim of this circular letter is to implement a new semi-annual reporting focusing on risk data (UCITS Risk Reporting). The first UCITS Risk Reporting covering the reference period from October 1, 2016 to March 31, 2016 was due on May 16, 2016.

Marketing of AIFs

With regard to the AIFMD, it is worth noting the publication of CSSF Regulation 15-03 dated November 26, 2015 (CSSF Regulation) which sets out the conditions applicable to the marketing of AIFs to Luxembourg retail investors, irrespective of whether the AIF is an EU AIF or a non-EU AIF.

EU AIFMs wishing to use the AIFMD marketing passport to market AIFs to Luxembourg retail investors must notify their home competent authority. Such authority shall then transmit the notification to the CSSF. In addition, the AIFM must also obtain prior authorisation from the CSSF under the CSSF Regulation in order to market to retail investors.

It is also possible to market non-EU AIFs to Luxembourg retail investors provided the relevant AIFM has previously complied with the notification procedure under Article 42 of the AIFMD and obtained additional approval from the CSSF on retail distribution.

For both EU and non-EU AIFs, CSSF authorisation will only be granted if the following conditions are satisfied:

  • the AIF must be subject to permanent supervision by its home competent authority;
  • the AIF must be managed by a single AIFM subject to Chapter II of the AIFMD;
  • the AIF must be subject to all the conditions of the AIFMD on an ongoing basis; and
  • the AIF must fulfil the conditions for the calculation of subscription and redemption prices and for risk diversification as further described in the CSSF Regulation.


Asset management update

Author Donnacha O’Connor, Partner at Dillon Eustace

Brexit has been a standing item for discussion in board rooms across Ireland for some time. The UK is one of Ireland’s most significant trading partners, with over €1.2 billion in goods and services traded weekly between the two economies and with Ireland exporting approximately 16% of its goods and 19% of its services to the UK. Should the UK vote to leave the EU, the economic and political impact would undoubtedly be keenly felt here.

For many decades Ireland has been a back-office centre and fund domicile for UK asset management firms. Irish UCITS provide access to the UCITS product EU internal market to hundreds of UK managers via the UCITS marketing passport and these are very often sold back into the UK. Irish UCITS will continue to avail of this marketing passport and it would be expected that UK managers will continue to be approved by the Central Bank of Ireland to manage Irish UCITS even if the UK leaves the Union.

The impact on UK managed Irish UCITS should therefore in principle be minimal in that respect. There are of course EU wide passports where access is conditional on the firm rather than the fund being EU authorised, such as those internal markets created for EU alternative investment fund managers (AIFMs), UCITS management companies and MiFID firms, covering activities such as portfolio management, investment advice, risk management and the marketing of fund shares, all of which require boots on the ground in some EU jurisdiction.

In the event of a Brexit, it remains to be seen how managers position themselves to address this. It may be a question that is resolved at a political level and some managers may choose to wait and see what happens. Other managers may choose to establish a beachhead somewhere in the EU to ensure ongoing market access. Such a move would not necessarily involve a transfer of the manager’s operations lock, stock and barrel and could be reasonably straightforward to achieve. Whatever happens, Ireland has much at stake and believes it has much to offer.

The Central Bank of Ireland (Central Bank) continues to look to apply harmonised minimum governance standards to Irish AIFMs, Irish UCITS management companies and other Irish fund management companies.

On November 4, 2015, the Central Bank published recommendations which covered delegate oversight, organisational effectiveness and directors’ time commitments. These rules will become applicable to existing entities on a phased basis over 2016 and currently apply to newly established entities. On June 2, 2016, the Central Bank issued a consultation paper containing guidelines as to how a firm’s key managerial functions (identified as being Capital and Financial Management, Operational Risk Management, Fund Risk Management, Investment Management, Distribution and Regulatory Compliance) should be carried out. The consultation also covers operational matters (such as record retention, archiving and retrieval of records) and procedural matters (such as how an application to the Central Bank for the authorisation of one of these entities should be documented to reflect these new guidelines on managerial functions if introduced).

There is quite a bit in what the Central Bank is proposing and some of it requires close attention, such as the so-called “location rule” which, if introduced, may require an in-scope firm to have at least two thirds of its directors in the EEA and at least two thirds of non-directors appointed to take responsibility for one or more managerial functions (so-called “designated persons”) in the EEA.

At least two directors will continue to be resident in Ireland as has traditionally been required. While there is a large amount of overlap between these proposed standards and existing OECD/European governance standards such as those of the G20/OECD Principles of Corporate Governance, these standards, if introduced, will require boards to be well organised, resourced and supported into the future. Importantly, these standards apply to Irish fund management companies and self-managed funds and are largely disapplied in the case of an Irish fund that have not appointed an Irish AIFM, UCITS management company or other fund management company. The consultation is open until the August 25, 2016.

Luxembourg has added the Luxembourg Reserved Alternative Investment Fund (RAIF), an unregulated European domiciled alternative investment fund (AIF), to the menu of European fund structures now available to international managers. While Ireland has always had niche unregulated AIF structures, such as the limited partnership contributed under the Limited Partnerships Act 1907, it is better known for its regulated Qualifying Investor Alternative Investment Fund (QIAIF) product. The QIAIF, which was first introduced in 1997, continues to have: (i) a simple tax status – it is fully exempt from Irish taxes on its income or gains subject only to the condition that it is authorised by the Central Bank; (ii) a simple regulatory authorisation process – it is authorised by the Central Bank within 24 hours based on self-certification process and (iii) no portfolio regulation while being able to avail of the pan-European AIFMD marketing passport. It will be interesting to see how the Lux RAIF fares.


Cross-jurisdictional AIFMD guides 2016 – now available

Author Imogen Garner

The updated version of our two guides on the Alternative Investment Fund Managers Directive (AIFMD) are now available.

The first guide looks at the requirements non-EEA alternative investment fund managers (AIFMs) face when marketing non-EEA AIFs to professional EEA investors in fifteen EEA jurisdictions (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom). The guide reveals a number of discrepancies across EEA Member States. For example, the payment of notification and, in some cases, annual fees varies greatly between EEA Member States, while the rule book is almost entirely thrown out should non-EEA AIFMs wish to market to retail investors.

The second guide considers how the AIFMD marketing passport is working in practice and whether it is fulfilling its goal of encouraging managers to bring their fund structures within the EEA to benefit from a harmonised distribution market. The guide shows significant differences across the jurisdictions. While the Netherlands, Sweden and the UK allow certain promotional activities to be carried out prior to receipt of the passporting notification and have refrained from charging for the process, the vast majority have taken a tougher stance, requesting the payment of notification (and, occasionally, annual) fees.

If you wish to receive a copy of the guides please contact Imogen Garner.

Europe – EU / UK Regulatory roundup

Author Simon Lovegrove


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.

ESMA publishes updated Q&A on the Market Abuse Directive — April 1, 2016

The European Securities and Markets Authority (ESMA) updated its Q&A document on the common operation of the Market Abuse Directive. The Q&A contains an updated question and answer on investment recommendation.

ESMA updates Q&A on application of AIFMD — April 5, 2016

ESMA has updated its Q&A document on the application of the Alternative Investment Fund Managers Directive (AIFMD). The Q&A includes a new question and answer on notification requirements relating to additional investment in existing alternative investment funds.

Commission Implementing Regulation under the MAR laying down ITS on format and template for notification and public disclosure of manager’s transactions — April 5, 2016

There has been published in the Official Journal of the EU (OJ) the European Commission Implementing Regulation (EU) 2016/523 laying down implementing technical standards regarding the format and template for notification and public disclosure of managers’ transactions in accordance with the Market Abuse Regulation (MAR). The Implementing Regulation will apply from July 3, 2016.

Commission Delegated Regulation under the MAR covering indicators of market manipulation, disclosure thresholds, trading during closed periods and notifiable managers’ transactions — April 5, 2016

There has been published in the OJ the European Commission Delegated Regulation (EU) 2016/522 supplementing the MAR as regards an exemption for certain third countries’ public bodies and central banks, the indicators of market manipulation, the disclosure thresholds, the competent authority for notifications of delays, the permission for trading during closed periods and types of notifiable managers’ transactions. The Delegated Regulation applies from July 3, 2016.

ESMA updates Q&A on application of UCITS Directive — April 5, 2016

ESMA has updated its Q&A document on the application of the UCITS Directive. The Q&A includes a new question and answer on UCITS feeder funds.

ESMA discussion paper on UCITS share classes April 6, 2016

ESMA has published a discussion paper on share classes of UCITS which describes their nature, the reasons for their existence and their key elements. The discussion paper builds on the feedback received to an earlier ESMA discussion paper, published in December 2014, which proposed providing actual examples of share classes deemed compatible and non-compatible with the UCITS framework. In this latest discussion paper, ESMA puts forward a revised, principles-based approach. The deadline for responses to the discussion paper was June 6, 2016.

FCA Market Watch 50 — April 27, 2016

Last summer the FCA published Market Watch 48 in which it set out certain observations from its suspicious transaction reporting (STR) supervisory visits that took place in 2013 and 2014. The FCA continued its programme of STR visits during 2015 and this latest issue of Market Watch sets out further observations which include those on:

  • offshore surveillance teams;
  • independence of market abuse surveillance functions;
  • defensive reporting of STRs; and
  • suspicious transaction and order reports (STORs) under the MAR.

The FCA also sets out a reminder to firms of their transaction reporting obligations under SUP 17 and the Transaction Reporting User Pack.

FCA publishes Policy Statement on the MAR — April 28, 2016

The FCA has published Policy Statement 16/13: Implementation of the Market Abuse Regulation (PS16/13). In PS16/13 the FCA sets out its final rules and guidance to implement the MAR. It is worth noting that in relation to the discretion given to national competent authorities under Article 17 MAR (public disclosure of inside information) the FCA is maintaining its position of setting the threshold at €5,000 pursuant to Article 17(8) MAR and will not at this stage be increasing the threshold to €20,000.

Council of the EU compromise proposal on MMF Regulation — May 12, 2016

The Presidency of the Council of the EU published its fifth compromise proposal relating to the proposed Regulation on Money Market Funds.

Commission Delegated Regulation on RTS on market soundings under the MAR — May 17, 2016

The Council of the EU has published the final draft of the Commission Delegated Regulation supplementing the MAR with regard to regulatory technical standards (RTS) for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings. The Delegated Regulation once published in the OJ will apply from July 3, 2016.

ESMA communication on reporting of reference data under the MAR — May 5, 2016

ESMA has issued a communication clarifying the reporting of reference data under the MAR. ESMA states that following the agreed one year delay in application of both MiFID II and MiFIR certain provisions of the MAR will also be delayed by a year. Specifically, the requirements set out under Article 4(2) and (3) will apply from January 3, 2018. However, the application date of the requirement in Article 4(1) remains July 3, 2016.

Primary Market Bulletin No.15 — May 25, 2016

The FCA has published Guidance Consultation 16/15: Primary Market Bulletin No.15 (GC16/15). GC16/15 is a short special edition focusing mainly on how issuers are expected to file PDMR notifications, and notifications for delayed disclosure of inside information with the FCA under the MAR.

FCA update on closed periods and preliminary results under the MAR — May 26, 2016

The FCA has published a new web page which discusses its approach to closed periods and preliminary results under the MAR.

ESMA issues Q&A on the MAR implementation — May 30, 2016

ESMA has issued a Q&A regarding the implementation of the MAR. The purpose of the Q&A is to promote supervisory convergence.

ESMA publishes updated EuSEF and EuVE-CA Q&A — May 31, 2016

ESMA has updated its Q&A on the application of the European Social Entrepreneurship Funds (EuSEF) and the European Venture Capital Funds (EuVE-CA) Regulations. The Q&A now contains a new question and answer on the use of the designations of EuSEF and EuVECA funds when marketed only in their home Member State.

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