FCA hints at ‘sensible’ reforms to UK AIFMD regime

It comes after Ashley Alder, the chair of the Financial Conduct Authority (FCA), acknowledged the industry's calls to retain the core framework of the EU’s Alternative Investment Fund Managers Directive (AIFMD) while tailoring it more effectively to the UK market, in a speech last week.

Alder said feedback from funds and managers “pointed to practical issues caused by the full AIFMD regime only applying to firms above a threshold of assets under management.” To address this, Alder said the FCA would like a consistent set of rules for all managers of alternative funds, applied proportionately, to eliminate the need for separate rules based on the size of a firm's assets under management.

Alder added that current AIFMD restrictions prevent full-scope alternative fund managers from engaging in other activities within the same legal entity. Recognising the complexities arising from this, Alder said the FCA is considering potential reforms to these restrictions.

Addressing the regulatory burdens associated with AIFMD, particularly the requirements imposed on fund managers for reporting to regulators, Alder said: “We are considering if changes could be made to ease some of these requirements on the basis that the cost of compliance may not be proportionate to the benefits of this type of reporting.”

Asset management expert Mark Shaw of Pinsent Masons said the proposed review of UK AIFMD next year was a “sensible” idea, since a proposed revision to the EU regime, dubbed AIFMD II, “is now in its ‘trilogue’ process, ahead of being adopted”. He added: “The FCA is also aiming to simplify the rules for alternative funds targeting retail investors. It is worth noting, however, that the UK alternative regime has always been more favourable towards this type of distribution than those of its European cousins.”

Shaw added: “Regulatory breathing space for funds is welcome, since the industry has had a continual onslaught of regulatory burden since the credit crisis, which adds compliance costs that are ultimately borne by investors. Given the additional burden around Sustainability Disclosure Requirements (SDR), a reprieve on the main body of rules is eminently sensible.”

However, Shaw said that while the UK has “carte blanche to overhaul its asset management regime” since Brexit, “any regulatory upheaval would have to be for clear advantages” as there would be “a significant cost to the industry in adapting to a new regime.”

“While the UK no longer has regulatory equivalence with the EU, having a system of rules that more closely tracks those of our European cousins makes it easier for firms to manage portfolios of products that cross the UK and EU regimes,” he added.

In his speech, Alder also discussed the FCA’s commitment to fostering innovation – including the potential adoption of distributed ledger technology (DLT) by fund managers, which, he said, could lead to the creation of fully digitised funds for offering to the public.

He highlighted the regulator's collaboration with the Technology Working Group, which operates under HM Treasury's Asset Management Taskforce. The group has been working together with the regulator to develop a blueprint for fund tokenisation that Alder said would be published later in the year. He also emphasised that many financial firms are exploring the applications of DLT, even though the direct marketing of tokens might still be some time away.

Alder’s speech outlined how the FCA held an industry tech-sprint testing policy and rule changes that could support fund tokenisation, is “building in extra capacity” to support innovation, and further work on other initiatives including the ‘Direct2Fund’ proposal, which aims to enhance the efficiency of the UK’s fund dealing model. He also emphasised the importance of maintaining high standards in the industry, while ensuring that the regulatory framework interacts effectively with international requirements and seeking to “right-size and rationalise” unnecessary regulatory complexity.