ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø

February 2024

The EU has concluded protracted negotiations to update the AIFMD rulebook, which has been in place since 2011. Importantly, some of the changes will also be applied to the UCITS framework.

Given some of the more problematic proposals that were put forward during the negotiation process (e.g. on delegation), overall the industry will be relieved by the comparatively minor changes that have been agreed.Ìý

However, given the scale of the package and wide range of areas and functions impacted, AIFMs and UCITS Man Cos should start work now to identify where they will need to make changes, and to link these to wider supervisory and policy areas of focus (such as fund liquidity management and investor protection).

This article explores some of the incoming changes, next steps for firms, and parallel changes being considered in the UK by the FCA.

The AIFMD II changes will impact a wide range of areas (see the full detail in the amending directiveÌý).Ìý

Whilst all AIFMs and UCITS Man Cos will be affected to some degree, the changes look set to be most onerous for loan originating fund managers and their funds.Ìý

• ÌýLoan origination funds:ÌýLoan originating funds are defined for the first time, alongside a new framework with a transition period for existing AIFs that includes:Ìý
  • Requirements for effective policies, procedures and processes
  • Rules on conflicts of interest
  • Concentration limits
  • Leverage limits (175% and 300% for open-ended and closed-ended AIFs respectively)
  • Risk retention requirements for loans (to retain 5% of the notional value of each loan originated)
  • The need to have a sound liquidity management system, available liquid assets and stress testing (to be defined further by ESMA)
  • Disclosure of the composition of the portfolio

• Fund liquidity risk management:ÌýAIFMs and UCITS Man Cos will need to select at least two liquidity management tools (LMTs) in addition to suspensionÌýâ€� underpinned by supporting analysis, policies and procedures. They will also need to notify regulators when they activate/deactivate certain LMTs. ESMA will develop guidelines on the characteristics of LMTs and their selection and calibration.
• Delegation:ÌýAIFMs and UCITS Man Cos will need to be able to demonstrate that delegates are selected with due care and are appropriately qualified and monitored. Information will need to be provided to regulatorsÌýâ€� such as notifying regulators before delegating and via regulatory reporting (see more on this below). In future, ESMA will provide an analysis of delegation practices to the co-legislators. Whilst needing to have at least two FTE responsible for managing the firm domiciled in the EU, UCITS Man Cos and retail AIFMs are only “encouragedâ€� to have at least one independent NED.
• Investor protection:ÌýAIFMs will need to identify fees and charges allocated to AIFs, with corresponding disclosure and periodic reporting on all fees, charges and expenses. In future, ESMA will provide a report to the co-legislators assessing the costs charged by AIFMs and UCITS Man Cos, and will also develop guidelines to specify the circumstances where the name of a UCITS or AIF is 'unfair, unclear, or misleading' (linked to ESMA's proposals for ESG fund nameÌý).
• Sustainable finance:ÌýThe recitals recap existing requirements for AIFMs and UCITS Man Cos to integrate sustainability risks and factors into their governance and risk management arrangements. ESMA is requested to update its guidelines on remuneration policies to better align ESG risks with remuneration practices.
• AIFMs' functions and arrangements:ÌýThe list of ancillary activities that firms can perform will be amended —Ìýe.g. AIFMs' permissible activities will be extended to the administration of benchmarks and credit servicing. 'Host' AIFMs and UCITS Man Cos will need to explain the reasonable steps they have taken to prevent conflicts of interest, or how these are identified, managed and monitored.
• Marketing non-EEA AIFs in the EU:ÌýReferences to prohibited jurisdictions on FATF's non-cooperative list will be replaced with references to the EU's own high-risk list, and references to non-cooperative tax jurisdictions are widened.
• Regulatory reporting:Ìý
  • UCITS Man Cos for the first time will need to regularly report data for each UCITS they manage on the instruments they trade, markets where they trade, and on their exposures and assets, as well as on liquidity management arrangements, risk profile, results of stress tests.Ìý
  • AIFMs' Annex IV reporting will be adjusted and expanded from 'principal' to all markets, instruments, and exposures.Ìý
  • Both sets of firms will also need to provide wide-ranging information on delegation arrangements, including the name and domicile of delegates, activities delegated, how many FTE are employed monitoring, on due diligence reviews, and the amount and percentage of each fund's assets which are subject to delegation arrangements.Ìý

Now that the rules have been approved by the EuropeanÌýÌýand theÌý, firms should get ready for implementation.

Most of the requirements will become effective two years after the rules come into force (likely to be Q1 or Q2 2026), except for regulatory reporting (after three years).Ìý

Firms' actions should focus on:

• Scoping:ÌýIdentifying which of the new requirements and amendments are relevant to the AIFM or UCITS Man Co's regulatory footprint and activities.
• Gap analysis:ÌýBased on in-scope activities, perform initial analysis to identify gaps, potential actions, accountable owners, and timelines.Ìý
• Product suite:ÌýConsider how the new requirements could impact on the firm's commercial strategy, particularly regarding loan origination funds, and with reference to wider initiatives such as ELTIF 2.0.
• Reporting capabilities:ÌýGiven the new information all firms will need to submit, start considering the technology capabilities that will be required and which function of the business will be responsible.Ìý

Firms will need to watch out for how member states transpose the rules exactly, and also for the more detailed Regulatory Technical Standards (RTS) and guidelines that will be released over the coming months. The following consultations are expected from ESMA:

• Q2-Q3 2024:ÌýRTS on open-ended loan-originating AIFs.
• Q2-Q3 2024:ÌýRTS on the characteristics of liquidity management tools for AIFs and UCITS, and guidelines on the selection and calibration of those tools.
• 2025:ÌýRTS and guidelines for wider areas (except for regulatory reporting).

Since Brexit, the UK authorities have been responsible for the operation of the UK AIFMD regime. However, some UK firms and wider third country firms will be indirectly impacted by the EU's changesÌýâ€� for example when marketing AIFs into the EU or acting as delegate managers for EU firms.Ìý

The FCA has signaled it will make some adjustments to the UK regime. Following its initial discussionÌýpaper, the FCA set out itsÌýÌýin a speech. It plans to consult in 2024 on amending the UK AIFMD regime to make it more consistent and proportionate, and on re-evaluating the rules for non-UCITS retail funds. In 2025, the FCA will focus on reviewing the UK regulatory reporting regime.