Guidance

The Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018: explanatory information

Updated 8 August 2019

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

###What does the underlying EU regulation and UK law do?

The Alternative Investment Fund Managers Directive (AIFMD) is the regulatory framework for Alternative Investment Fund Managers (AIFMs), and relates to the management, administration and marketing of Alternative Investment Funds (AIFs). AIFs are funds that are not regulated at EU level by the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. These funds are usually aimed at professional and institutional investors, although it is possible for AIFs to be marketed to retail investors, subject to meeting certain requirements. Hedge funds, private equity funds, and most kinds of unregulated collective investment schemes are traditionally AIFs. It is also possible for listed investment companies whose securities are traded on the London Stock Exchange and other regulated markets, and authorised open-ended funds to be AIFs. Professional and institutional investors are ‘sophisticated’ in nature, and are mainly organisations making investments on behalf of their members, for example pension funds, insurance companies and corporates.

AIFMD established an EEA-wide framework for regulating, monitoring and supervising risks posed by AIFMs and the AIFs they manage. It also established a ‘passporting’ system that enables ‘full-scope’ EEA AIFMs (those with assets under management above the specified size threshold) to market and manage AIFs in any other member state. AIFMD came into force in the EU in 2011.

3.1 Deficiencies this SI remedies

This SI will make amendments to retained EU law related to AIFMs to ensure that it continues to operate effectively in the UK once the UK has left the EU. Changes introduced by the SI include:

Meaning of ‘AIF’ – Regulation 3(5)(a)

An AIF is currently defined under AIFMD as an investment fund that is not subject to the UCITS Directive. All third country funds are therefore defined as AIFs.

This SI will amend the definition of AIF; an AIF will be any investment fund that is not subject to the UK UCITS regime, which will be amended by the Collective Investment Schemes (Amendment) (EU Exit) Regulations 2018. All non-UK funds, including EEA UCITS, will therefore be defined as AIFs.

Amendments introduced via the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 will ensure that UK firms will be able to continue to treat EEA UCITS as automatically non-complex instruments, so that they can, in general, continue to be sold to retail clients in the UK without a client undertaking an appropriateness test. Further information is provided in the associated policy note.

EEA UCITS will also continue to benefit from an exemption to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation up until 31 December 2019. Further information will be provided in the relevant statutory instrument and associated policy note in due course.

Provision of information – Regulation 10(9)(e)

Third country AIFs must currently notify the FCA under the UK’s National Private Placement Regime (NPPR) to be marketed to institutional investors in the UK. This includes requirements for the AIFM to provide specified information to investors and report periodically to the FCA.

This SI will disapply the NPPR information and reporting requirements for funds that are recognised under section 272 of the Financial Services and Markets Act 2000 for marketing to retail investors.

AIFs marketed in the UK via a passport – Regulation 14

UK AIFMs or EEA AIFMs can currently market AIFs in the UK through passporting, as set out in the Alternative Investment Fund Managers Regulations 2013. The subcategories of AIFs are also able to passport into the UK, including European Venture Capital Funds (EuVECA), European Social Entrepreneurship Funds (EuSEF), European Long-term Investment Funds (ELTIFs) and Money Market Funds (MMFs) which use an AIF structure. If the UK leaves the EU without a deal, the passporting system will cease, and any references in UK legislation to the EEA passporting system will become deficient at the point of exit.

To ensure that UK investors have continued access to AIFs that are currently marketed in the UK, the government announced on 20 December 2017 that it would put forward legislation to establish a ‘temporary permissions regime’, enabling EEA funds and AIFMs that have notified the FCA of their intention to market in the UK via a passport before exit day to continue to access the UK market for a limited period after exit day. This SI sets out the design and structure of such a regime for AIFs and AIFMs (including EuVECAs, EuSEFs, ELTIFs and MMFs which use an AIF structure).

The temporary permissions regime will last for three years after exit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances, detailed in section 78 of the SI.

To enter the regime, an AIFM of an eligible AIF will need to inform the FCA prior to exit day that it wishes the relevant fund(s) to have temporary permission to be marketed in the UK. The FCA will provide further details to firms on how and when to do this. During this temporary permissions regime, the AIFM will be able to market the relevant fund in the UK on the same terms and subject to the same conditions as it could before exit day. To continue marketing the relevant AIF after the end of the temporary permissions regime, the AIFM must notify under the NPPR. The AIFM will be directed by the FCA to make the notification within two years from exit day.

To ensure that the FCA continues to receive the necessary information to supervise the AIFMs marketing AIFs in the UK during the temporary permissions regime, this SI will require the AIFM to continue to comply with duties imposed on it in relation to a host member state by specific provisions of the AIFMD, and which were previously implemented by the home member state. This includes notifying the FCA of any changes to the documentation for a passporting AIF, and changes to the passporting AIFM’s programme of operations.

The FCA will have the same power to revoke or suspend an AIFM’s entitlement to market an AIF during the temporary permissions regime as it does to revoke or suspend the entitlement of an AIFM to market an AIF under the NPPR.

EEA AIFMs currently marketing third country AIFs – Regulation 14

An EEA AIFM is currently able to market third country AIFs in the UK through the NPPR, under regulation 57 of the AIFM Regulations (which implemented Article 36 of AIFMD). This SI will align the treatment of EEA AIFMs with that of other third country AIFs by requiring them to notify under regulation 59 of the AIFM Regulations (which implemented Article 42 of AIFMD). The SI will enable the EEA AIFM to enter the temporary permissions regime, and market the relevant fund on the same terms and subject to the same conditions as it could have been before exit day, before notifying and becoming recognised under regulation 59.

New EEA AIFs marketed in the UK after exit day

As set out above, UK and EEA AIFMs will no longer be able to make use of the passport if the UK leaves the EU without a deal. Both UK and EEA AIFMs marketing EEA AIFs in the UK after exit day will need to notify the FCA under the NPPR, as is required for the marketing of third country AIFs.

Reporting on portfolio companies and asset stripping provisions – Regulation 9

A UK AIFM (authorised by the FCA) must report and make certain disclosures when it acquires control of an EU company. There are also restrictions on the AIFM in the first two years of it acquiring control of the EU company. As a result of amendments made by this SI, a UK AIFM will only be required to report on portfolio companies and comply with the restrictions on asset stripping when it acquires control of a UK company, as opposed to an EU company.

Supervisory cooperation

When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in legislation requiring cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.

3.2 Relevant Rulebook and Binding Technical Standard changes

The FCA will be updating its rulebook and relevant binding technical standards to reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the autumn.

3.3 Stakeholders

This SI is relevant for AIFMs already regulated in the UK under the Alternative Investment Fund Managers Regulations 2013, and AIFMs marketing EEA AIFs in the UK. It is also relevant for fund managers that market EEA UCITS into the UK.

As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.

This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament in the autumn.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.