The UK’s fund management industry has been given an extra year to comply with the EU’s Alternative Investment Fund Managers Directive (AIFMD), says Bovill, the financial services regulatory consultancy.
In its consultation on how to implement the European rules, HM Treasury gave a boost to UK private equity and hedge funds by proposing that UK managers will not have to comply with the new rules until 22 July 2014. This means existing firms will have full use of a one year transitional period provided by the Directive, which actually takes effect on 22 July this year.
In a sign that the UK Treasury is giving the fund management industry a more relaxed deadline than the European Commission intended, Gareth Murphy, a senior Irish regulator and current chair of the Investment Management Committee of the European Securities and Markets Authority (ESMA), refused to confirm whether Ireland would allow its fund management industry the same year’s delay.
Bovill points out that Ireland would normally take the pro fund management stance adopted by the UK. Its reluctance to publicly follow the Treasury’s lead on AIFMD adoption may signal a lack of support for the Treasury’s position.
John Everett, principal at Bovill, says: “The Treasury has interpreted a key measure in the Directive in such a way as to provide the UK’s fund management industry with an extra year’s breathing space to comply with the new rules. It is a much more realistic timetable. We now need to see how other EU member states approach the deadline.
“This is a very welcome move by the Treasury, especially as the final wording of the rules that have to be complied with has only recently been released. Firms would have had to comply with all this extra red tape within just seven months of seeing the detail. By extending the implementation date, they’ll get over eighteen months instead, which is a much more sensible timeframe.”
Bovill points out that the Treasury has confirmed that it will not be forcing small private equity funds below a threshold size (having managed assets of EUR100m or EUR500m if the fund is unleveraged and has no redemption rights for the first five years) to comply with onerous new rules set out for private equity fund managers in the Directive.
Everett says: “The Treasury has made a very sensible choice in opting to exempt smaller funds from the heavy-handed new private equity regulations in the Directive. The UK private equity industry knew that the Directive would hold bad news for them but at least smaller funds won’t be affected.”
Bovill explains that private equity funds above the threshold size will have to comply with strict rules when they acquire larger non-listed companies or issuers.
These include strict limits on the ability of private equity fund managers to undertake what the Directive emotively describes as “asset stripping” of acquired companies.
The rules restrict the ability of private equity investors to make distributions above earned profits out of the company for a two year period.
Larger private equity funds will also have to inform the employees of an acquired business of their intentions, via the board of the firm. Private equity firms will be concerned that these provisions may result in announcements that destabilise the company or give the investee company’s rivals a competitive advantage.
Everett says: “There are practical issues with the requirement for the private equity house to inform the target business’s employees of its intentions.”
“This will have to be enforced by the FSA’s replacement, the FCA, which would be the first to admit that this responsibility falls well outside its expertise as a financial services regulator.”