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The UK regulation on alternative investment fund managers: a difficult compromise between two different legislative approaches

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Abstract

The transposition of the AIFMD in the domestic systems of the EU Member States has changed significantly the legal framework of reference for alternative investment fund managers. In transposing the Directive, however, the UK Legislature and Regulator succeeded in maintaining in the internal regulation some elements that could be able to attract financial players and investors from other jurisdictions. The article analyses these peculiarities and argues that due to them the UK financial sector could continue to develop in the future despite some new additional burdensome requirements. Brexit creates an even more challenging playing field that the UK will have to take into consideration.

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Notes

  1. Directive 2011/61/EU of the European Parliament and the Council of 8 June 2011.

  2. See Quaglia [1], who observes that the British Authorities were afraid because the adoption of the AIFMD could lead away many business from the EU to other less regulate jurisdictions; see also Quaglia [2, p. 666].

  3. Above all, the Alternative Investment Fund Managers Regulations 2013, the Financial Services and Market Act 2000, some Statutory Instruments and the FCA Handbook.

  4. See Quaglia [2, p. 668], who underlines that the UK hosts four-fiths of the AIFMs in the EU; see also Sennholz-Weinhardt [3], who states that the majority of the hedge funds assets in Europe are managed from the UK; for recent data, see ESMA [4], passim, where the Authority points out that from July 2013 to March 2015, 7868 EU AIFs were notified for marketing in other EU Member States in accordance with article 32 AIFMD, with the highest number of outbound notifications coming from the UK, i.e. 5027. Additionally, the Authority highlights that 1777 non-EU AIFMs, in the same period, marketed AIFs in the Member States in accordance with article 42(1) of AIFMD, including 1013 in the UK and that 4356 AIFs were marketed in the Member States by non-EU AIFMs in accordance with article 42(1) of AIFMD, of which 2657 in the UK.

  5. See Bodellini [5].

  6. See Zetzsche [6, p. 1], who underlines that before the adoption of the AIFMD, the alternative investment funds were not subject to European regulations; however, many asset managers of such funds were licensed for portfolio management and/or investment advice under MiFID and, at the same time, the sale of fund units, qualified as securities, were subject to the Prospectus Directive. The author also provides an historical overview concerning the debate, at international level, about the regulation of the alternative investment funds before the adotion of the AIFMD, see also Buller and Lindstrom [7, p. 396].

  7. See the data published by ESMA [4], passim.

  8. Shadow banking has been characterised as the “credit intermediation involving entities and activities (fully or partially) outside the regular banking system”. See Financial Stability Board, Shadow Banking: Scoping the Issues, 12 April 2011.

  9. See Payne [8, pp. 559–585]; about both these types of alternative investment funds and their regulation see Ferran [9].

  10. See Awrey [10]; see also Zetzsche [6, p. 3], who highlights that the G20 decisions committed all G20 States to subject all participants in the financial markets to regulation.

    Hedge funds are usually considered as an alternative form of investment to the traditional asset classes because of the particular management techniques used by their managers and the “light” rules that have always regulated them at international level. They have been created, firstly, in the Anglo-Saxon systems and then they also developed in the financial systems of other countries. It is believed that the first hedge fund in history is the one established by Alfred Winslow Jones in 1949. The purpose of this fund was to get a minimum return regardless of the financial markets. The innovation of the Jones’ model consisted in the use of two management techniques usually utilised for speculative aims, such as short selling and leverage in order to create a conservative investment approach designed to produce positive returns regardless of market direction and applying the concept of hedging, initially used in the commodities market, in running collective investment funds; for more detail about the Jones’ model see Senn [11], Swiss Report Presented at the XVIIIth International Congress of Comparative Law, 2010, 136, who highlights that this strategy consisted in combining long-position in undervalued securities with short-positions in overvalued securities to minimise the effects of movements on the exchange.

    Although there is no standard or statutory definition of hedge fund, the term is generally used to describe a wide range of investment vehicles with different strategies, structures and fee arrangements, see Greupner [12], who defines hedge funds “as privately offered, relatively unregulated pooled investment vehicles in the form of limited partnership or limited liability partnership companies that have the flexibility to invest in a broad range of securities and commodities using a broad range of trading techniques”; see also Ferran [13], passim; however, it is possible to say that certain characteristics are common among hedge funds and can be used to distinguish them from other types of investment funds, i.e.: (1) hedge fund advisory fees are based on the fund’s performance; (2) they often use leverage in a more aggressive way; (3) they pursue short-term investment strategies; and, (4) they seek absolute returns.

    The use of these complex management strategies can make the investment in hedge funds very risky, so in many financial systems the participation in these funds is reserved for sophisticated or qualified investors, like banks, securities dealers, investment funds managers, insurance companies, pension funds, wealthy private persons, see Financial Services Authority [14]. On the contrary, in these financial systems, quite often the parts of funds of hedge funds (so-called FoHF) can be distributed both to qualified investors and to not qualified investors.

    The risk linked to the investment in hedge funds also derives from the limited information that is available on these financial entities; on this aspect see Horan [15, p. 113], who underlines that “hedge funds managers seek to protect their trading activity methods and as consequence they disclose limited information to the public” and that “hedge funds founders tend to refuse to discuss their trading strategies because they do not want competitors to imitate their moves”; see also McVea [16], who highlights that the term “hedge fund” is a term of art, widely understood as representing a form of alternative collective investment vehicle, lightly regulated and targeted in the main at wealthy investors.

  11. See European Commission Statement at the Occasion of the European Parliament Vote on the Directive on Hedge Funds and Private Equity, 11 November 2010, (Reference: MEMO/10/573).

  12. See Buller and Lindstrom [7, p. 392], who point out that “it is widely accepted that banking sector, not the alternative investment industry, was primarily responsible for the global financial crisis”.

  13. See Recital (3) of the AIFMD, under which, “recent difficulties in financial markets have underlined that many AIFM strategies are vulnerable to some or several important risks in relation to investors, other market participants and markets”. This is the reason because the EU Legislature has considered necessary to establish a unique European framework capable of addressing those risks, taking into account the diverse range of investment strategies and techniques employed by AIFMs, in order to provide comprehensive and common arrangements for supervision. In the same way see also Shadab [17] and Rivière [18].

  14. See Recital (1) of the AIFMD, that specifies that “managers of alternative investment funds (AIFMs) are responsible for the management of a significant amount of invested assets in the Union, account for significant amounts of trading in markets for financial instruments, and can exercise an important influence on markets and companies in which they invest”.

  15. See Quaglia [1], who describes perfectly what business-friendly anglosaxon approach means; about the political fight for the adoption of the Directive, see Quaglia [2, p. 670]. The UK position was motivated by the fact that usually only professional clients, sophisticated investors and high net worth individuals can invest in alternative investment funds. So given that retail investors are not involved, it was considered not necessary to higher the level of the regulation and of the supervision; about that see Copland [19, p. 32], and Buller and Lindstrom [7, p. 392].

  16. See Quaglia [2, p. 666], who highlights that, in the British policy-makers’ opinion, the Directive could place “Europe at a competitive disadvantage vis-a’-vis less regulated jurisdictions”, such as Switzerland; similar considerations have been done by Bourne and Edwards [20]; see also Buller and Lindstrom [7, p. 401], who point out that also the London industry of alternative investment funds opposed the adoption of the AIFMD since the very beginning.

  17. The idea to regulate the managers of alternative investment funds comes from the De Larosière report and from the IOSCO Final Report on hedge funds oversight; see De Larosière et al. [21]; see also Andenas and Chiu [22]; more in general, about the new aims of the financial regulation after the crisis see Blackmore and Jeapes [23]; Moloney [24–27]; McMahon and Moloney [28].

  18. See Bodellini [29].

  19. See Recital (2) of the AIFMD, according to which “the impact of AIFMs on the markets in which they operate is largely beneficial, but recent financial difficulties have underlined how the activities of AIFMs may also serve to spread or amplify risks through the financial system. Uncoordinated national responses make the efficient management of those risks difficult”.

  20. See Recital (1) of the AIFMD.

  21. See Recital (2) of the AIFMD.

  22. See Recital (4) of the AIFMD, which also adds that to achieve the goal to create an harmonised internal market, the Directive aims to regulate both the AIFMs with registered office in a Member State (EU AIFMs) and those which have their registered office in a third country (non-EU AIFMs). For this reason the AIFMD has extraterritorial effects. According to that, Recital (9) of the Directive specifies that “when transposing this Directive into national law, the Member States should take into account the regulatory purpose of that requirement and should ensure that investment firms established in a third country that, pursuant to the relevant national law, can provide investment services in respect of AIFs also fall within the scope of that requirement. The provision of investment services by those entities in respect of AIFs should never amount to a de facto circumvention of this Directive by means of turning the AIFM into a letter-box entity, irrespective of whether the AIFM is established in the Union or in a third country”.

  23. A professional investor is, under Article 4, paragraph 1.ag) of the AIFMD, “an investor which is considered to be a professional client or may, on request, be treated as a professional client within the meaning of Annex II to Directive 2004/39/EC”; see Zetzsche and Eckner [30, p. 160], who observe that the category of professional investors under AIFMD includes all professional clients defined by MiFID and those who could on demand qualify as professional clients under MiFID.

    Annex II of MiFID provides that “professional client is a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs … The following should all be regarded as professionals in all investment services and activities and financial instruments for the purposes of the Directive.

    1. 1.

      Entities which are required to be authorised or regulated to operate in the financial markets. The list below should be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned: entities authorised by a Member State under a Directive, entities authorised or regulated by a Member State without reference to a Directive, and entities authorised or regulated by a non- Member State: (a) Credit institutions, (b) Investment firms, (c) Other authorised or regulated financial institutions, (d) Insurance companies, (e) Collective investment schemes and management companies of such schemes, (f) Pension funds and management companies of such funds, (g) Commodity and commodity derivatives dealers, (h) Locals, (i) Other institutional investors.

    2. 2.

      Large undertakings meeting two of the following size requirements on a company basis: balance sheet total: EUR 20.000.000, net turn over: EUR 40.000.000, own funds: EUR 2.000.000.

    3. 3.

      National and regional governments, public bodies that manage public debt, Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.

    4. 4.

      Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions”.

    But in addition, “clients other than those mentioned in section I, including public sector bodies and private individual investors, may also be allowed to waive some of the protections afforded by the conduct of business rules”.

  24. See art. 4 lett. (w) of the AIFMD and Annex I of the Directive; see also Zetzsche [31], who, observing the Directive, points out that management of AIFs means performing at least investment management functions under the Annex I for one or more AIFs, and, on the other side, that investment management functions which an AIFM shall at least perform when managing an AIF are portfolio management and risk management together.

  25. See art. 4 lett. (x) of the AIFMD.

  26. See art. 4 lett. (b) of the AIFMD.

  27. See art. 4 lett. (a) of the AIFMD; see also Zetzsche [32], who observes that the Directive defines the concept of “AIF” introducing a number of explanatory elements and providing a catalogue of activities excluded from its application.

  28. An open-ended AIF is an AIF in which its shareholders or unitholders have the right to repurchase or redeem their shares or units out of the assets of the AIF according to the following requirements: (1) at the request of any of its shareholders or unitholders; (2) prior to the commencement of the AIFs liquidation phase or wind-down; and, (3) following the procedures and frequency set out in its instruments of incorporation, prospectus, offering documents or other internal rules.

  29. A closed-ended AIF is an AIF not falling within the criteria established for an open-ended AIF, they are only defined as an exclusion of an open-ended one. In addition, any AIF whose shares/units can be repurchased or redeemed after an initial period of at least 5 years during which redemption rights are not exercisable is also considered an closed-ended AIF.

  30. See The Alternative Investment Fund Managers Regulations 2013.

  31. See Zetzsche [6, p. 10], who highlights that after the implementation of the AIFMD only two types of funds will exist: (1) open-ended UCITS, and (2) all-inclusive AIFs, which can be open-ended or closed-ended, with shares or units listed or unlisted on regulated capital markets and with different investing objectives (e.g. art, intellectual property, ships, commodities, cash and any other liquid or illiquid assets). And this, in the author’s opinion, appears unusual as, before the AIFMD, only hedge funds and private equity funds were considered alternative investment funds, given that they looked for (and carry on looking for) uncorrelated returns.

  32. See Bodellini [33].

  33. See Copland [19, p. 33].

  34. See Zetzsche [32], who underlines that from a technical perspective, under the AIFMD, the AIFs are not subject to authorisation even though the law of the Member States can provide for an additional authorisation of the funds. But it is worth noting that this approach can encourage regulatory arbitrages among the different Member States. In other words, the asset managers probably will avoid the EU jurisdictions whose laws require the authorisation of the AIFs, given that such jurisdictions cannot prohibit the access of foreign EU AIFs into their domestic market.

  35. Under Article 4, paragraph 1.l) of the AIFMD “‘EU AIFM’ means an AIFM which has its registered office in a Member State”.

  36. Under Article 4, paragraph 1.k) of the AIFMD “‘EU AIF’ means: (i) an AIF which is authorised or registered in a Member State under the applicable national law; or (ii) an AIF which is not authorised or registered in a Member State, but has its registered office and/or head office in a Member State”.

  37. It is the typical working model of the hedge funds, given that, very often, their managers are domiciled in the UK and the funds are established under the Cayman or BVI law; see Greig [34], who explains that this structure is motived by tax reasons.

  38. See Recital (13) of the AIFMD.

  39. See Payne [8, p. 577].

  40. By the way, see Recital (14) of the AIFMD, that, about non-EU AIFMs, specifies that although “this Directive lays down requirements regarding the manner in which AIFMs should manage AIFs under their responsibility”, for non-EU AIFMs, this is limited to the management of EU AIFs and other AIFs the units or shares of which are also marketed to professional investors in the Union.

  41. About more in general the possibility to use the passport for non-EU AIFMs and non-EU AIFs see Buller and Lindstrom [7, p. 397], who underline that this innovation was considered by the British Government as “a very good outcome”.

  42. It is important to underline that the Directive allows, for the first time, the use of the mechanism of the EU passport not only to EU AIFMs but also to non-EU AIFMs; see Klebeck [35, p. 87].

  43. See Duncan et al. [36, p. 351], who point out that the expression “private placement regime” means marketing without a passport and therefore pursuant to the national laws of the Member States.

  44. See Copland [19, p. 34], who highlights that these provisions can be an incentive for AIFMs to split off existing funds in order to stay below the thresholds and avoid the regulation.

  45. Accordingly, Recital 17 also specifies that “although the activities of the AIFMs concerned are unlikely to have individually significant consequences for financial stability, it is possible that aggregation causes their activities to give rise to systemic risks. Consequently, those AIFMs should not be subject to full authorisation but to registration in their home Member States and should, inter alia, provide their competent authorities with relevant information regarding the main instruments in which they are trading and on the principal exposures and most important concentrations of the AIFs they manage. However, in order to be able to benefit from the rights granted under this Directive, those smaller AIFMs should be allowed to be treated as AIFMs subject to the opt-in procedure provided for by this Directive. That exemption should not limit the ability of Member States to impose stricter requirements on those AIFMs that have not opted in”.

  46. See, above all, Article 6 of the AIFMD that states that “Member States shall ensure that no AIFMs manage AIFs unless they are authorised in accordance with this Directive”; see also Recital (18) of the AIFMD that makes it clear that “no EU AIFM should be able to manage and/or market EU AIFs to professional investors in the Union unless it has been authorised in accordance with this Directive. An AIFM authorised in accordance with this Directive should meet the conditions for authorisation established in this Directive at all times”.

  47. In particular, according to Article 5 of the AIFMD, each AIF managed within the scope of this Directive has to have a single AIFM, which is responsible for ensuring compliance with this Directive.

  48. This rule, included in Article 21 of the AIFMD, represents a very relevant innovation in the sector of the alternative investment funds (above all hedge funds) given that, before the adoption of the Directive, only few legislations (for example, in Italy) had similar provisions. About the rationale behind this rule, see, in particular, Recital 32 of the AIFMD, under which, “recent developments underline the crucial need to separate asset safekeeping and management functions, and to segregate investor assets from those of the manager. Although AIFMs manage AIFs with different business models and arrangements for, inter alia, asset safekeeping, it is essential that a depositary separate from the AIFM is appointed to exercise depositary functions with respect to AIFs”.

  49. See Duncan et al. [36, pp. 326–362].

  50. It is obvious, in fact, that all the new regulatory burdens, introduced by the AIFMD, represent significant costs for the AIFMs: see Buller and Lindstrom [7, p. 396], who highlight that “an impact assessment commissioned by the FSA in 2009 estimated that the directive would impose one-off compliance costs of 3.2 billion euros”.

  51. See ESMA [37], passim, where the Authority analyses the impact of the potential extension of the EU AIFMD passport to 6 non-EU Countries: US, Guernsey, Jersey, Hong Kong, Switzerland, Singapore; see also ESMA [38], where the Chair of the Authority highlights that “the advice was positive with respect to the extension of the passport to Guernsey and Jersey, whilst we considered that Switzerland would remove any remaining obstacles with the enacment of pending legislation. We did not reach a definitive view on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to carry out a proper assessment of the relevant criteria”.

  52. See Duncan et al. [36, pp. 326–362].

  53. See Zetzsche and Eckner [30, p. 360], who observe that the AIFMD passport is modelled on the UCITSD and the only difference is that, whilst with the UCITSD passport it is possible to market funds units or shares both to retail and professional investors, with the AIFMD one, the target market is only that one of the professional investors.

  54. See Wagne et al. [39], who underline that many rules of the Directive that are apparently manager regulations are rather product regulations through the back door, like, for instance, the ones of valuation and of depositary; see also Klebeck [35, p. 77], who underlines that, whilst prior to the AIFMD it was possible quite clearly to distinguish between the regulated (harmonised) UCITS and the unregulated (non-harmonised) alternative investment funds different to UCITS, now this is no longer possible.

  55. See Recital (15) of the AIFMD that states that “the authorisation of EU AIFMs in accordance with this Directive covers the management of EU AIFs established in the home Member State of the AIFM. Subject to further notification requirements, this also includes the marketing to professional investors within the Union of EU AIFs managed by the EU AIFM and the management of EU AIFs established in Member States other than the home Member State of the AIFM. This Directive also provides for the conditions subject to which authorised EU AIFMs are entitled to market non-EU AIFs to professional investors in the Union and the conditions subject to which a non-EU AIFM can obtain an authorisation to manage EU AIFs and/or to market AIFs to professional investors in the Union with a passport. During a period that is intended to be transitional, Member States should also be able to allow EU AIFMs to market non-EU AIFs in their territory only and/or to allow non-EU AIFMs to manage EU AIFs, and/or market AIFs to professional investors, in their territory only, subject to national law, in so far as certain minimum conditions pursuant to this Directive are met”; see also Zetzsche [32], who underlines that the authorisation concerns both the management and the marketing to professional investors of alternative investment funds; see also Horan [15, p. 111], who highlights that the choice of requiring the managers authorisation is motivated by the awareness that in the past huge losses have been caused by non-registered AIFMs.

  56. This means that the managers of alternative investment funds are subject to a general prohibition in carrying out this activity which will cease to exist with the release of the said authorisation.

  57. See Awrey [10].

  58. But from a different perspective, see Wagner et al. [39], who underline that the AIFMD, as well as the MiFID, regulates the manager, whilst the focus of the UCITSD is on the products; see also Moloney [40], who lists similarities and differences between the UCITSD and the AIFMD, underlining that the the UCITS regime is aimed at protecting retail investors, whilst the AIFMD, being a creature of the financial crisis, is mainly concerned with financial stability and highlighting that with respect to organisational, conduct and risk-management regulation the two regimes are similar; see ECMI–CEPS [41], where it is observed that the AIFMD borrows a significant part of its contents from the principles in the UCITSD, such as the rules concerning minimum operating conditions, conduct of business and segregation of the assets.

  59. About the important function carried out by the depositary of UCITS schemes see Naveaux and Graas [42], who underline that UCITS must entrust their assets to a depositary for safekeeping. The function of the depositary is very important because it is involved in the process in order to protect the position of the investors.

  60. See Zetzsche [6, p. 13].

  61. That is the Statutory Instrument 2013 No. 1773.

  62. “AIF means a collective investment undertaking, including investment compartments of such an undertaking, which:

    1. (a)

      raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of these investors; and

    2. (b)

      does not require authorisation pursuant to Article 5 of the UCITS directive”.

  63. According to regulation 3, instead, “none of the following entities is an AIF—(a) an institution for occupational retirement provision which falls within the scope of Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (a); (b) a holding company; (c) an employee participation scheme or employee savings scheme; (d) a securitisation special purpose entity”.

  64. At any rate, regulation 4 specifies that “none of the following entities is an AIFM: (a) an institution for occupational retirement provision which falls within the scope of Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (b), including, where applicable, the authorised entities responsible for managing such institutions and acting on their behalf referred to in Article 2.1 of that directive, or the investment managers appointed pursuant to Article 19.1 of that directive, in so far as they do not manage AIFs; (b) the European Central Bank, the European Investment Bank, the European Investment Fund, a bilateral development bank, the World Bank, the International Monetary Fund, any other supranational institution or similar international organisation, or a European Development Finance Institution, in the event that such institution or organisation manages AIFs and in so far as those AIFs act in the public interest; (c) a national central bank; (d) a national, regional or local government or body or other institution which manages funds supporting social security and pension systems; (e) a holding company; (f) an employee participation scheme or employee savings scheme; (g) a securitisation special purpose entity”.

  65. Regulation 45 also adds that “an investment firm markets an AIF when it makes a direct or indirect offering or placement of units or shares of the AIF to or with an investor domiciled or with a registered office in an EEA State at the initiative of, or on behalf of, the AIFM of that AIF”.

  66. In the UK system, the category of UCISs is one of the most important within the macro-category of AIFs given that usually, as it will be explained in the following paragraph, hedge funds are established as UCISs.

  67. Financial Services Authority.

  68. Financial Conduct Authority.

  69. See Gabbert [43, p. 2]; see also Cornish and Mason [44], and Duncan et al. [36, p. 330].

  70. Before the implementation of the AIFMD, the activity of managing collective investment schemes different to UCITS felt into the category of “managing investment” (RAO, art. 37) and/or “advising” (RAO, art. 53); in this way see Lomnicka [45, p. 886].

  71. According to Section 51ZC of RAO 2001, “a person manages an AIF when the person performs at least risk management or portfolio management for the AIF”.

  72. Article 5 (3) of the Regulations 2013 states that the regulator must not give the permission under FSMA 2000 to carry on the activity of managing an AIF unless “(a) the applicant would be an AIFM and would be the only AIFM of each AIF it managed; (b) the regulator is satisfied that the applicant will comply with the implementing provisions applicable to a full-scope UK AIFM; (c) the applicant has sufficient initial capital and own funds in accordance with implementing provisions relating to Article 9 of the directive; and (d) the shareholders or members of the AIFM that have qualifying holdings are suitable taking into account the need to ensure the sound and prudent management of the AIFM”.

  73. Under Article 5 (8) of the Regulations 2013 “an application is complete for the purposes of paragraph (4) or (7) if it contains—(a) information on the persons effectively conducting the business of the applicant; (b) information on the identities of the applicant’s shareholders or members, whether direct or indirect, that have qualifying holdings and on the amount of those holdings; (c) a programme of activity setting out the organisational structure of the applicant, including information on how the applicant intends to comply with its obligations under implementing provisions relating to Chapter 2 (authorisation of AIFMs), Chapter 3 (operating conditions for AIFMs), and Chapter 4 (transparency requirements) of the directive and, where applicable, Chapter 5 (AIFMs managing specific types of AIF), Chapter 6 (rights of EEA AIFM to market and manage EEA AIFs in EEA States), Chapter 7 (specific rules in relation to third countries) and Chapter 8 (marketing to retail investors) of the directive; (d) information on the remuneration policies and practices of the applicant that have been or will be adopted pursuant to implementation provisions relating to Article 13 of the directive; (e) information about the investment strategies, including the types of underlying funds if the AIF is a fund of funds, and the applicant’s policy as regards the use of leverage, and the risk profiles and other characteristics of the AIFs the applicant manages or intends to manage, including information about the EEA States or third countries in which AIFs are established or are expected to be established; and (f) information on where the master AIF is established if an AIF that the applicant manages or intends to manage is a feeder AIF”.

  74. In addition, given that the units (or shares) of AIFs fell within the category of the “specified investments” under the RAO 2001, activities carried out by way of business concerning units of AIFs, such as dealing in units as principal or agent, arranging deals in units, managing assets belonging to another which include units, safeguarding and administering such assets and advising on the merits of investment in particular units are considered regulated activities.

  75. According to the FCA position published on www.fca.org.uk, “a number of fund managers in the UK, before the implementation of AIFMD, held a permission to manage investments. It is likely that some of these firms, dependent on business models, will need to be re-authorised under the AIFMD to operate as AIF managers. These may include: (a) MiFID firms carrying out portfolio management and/or risk management for EEA funds that are not UCITS funds or funds located offshore in third-country jurisdictions, such as the US and Cayman Islands; and (b) operators of collective investment schemes that are not UCITS funds carrying out portfolio management and/or risk management in-house”.

  76. See Gabbert [43], passim.

  77. See Katz [46].

  78. See Lomnicka [45, p. 886].

  79. The FCA is the conduct and prudential regulatory body in the UK dealing with financial services firms and financial markets. Its operational objectives are to protect consumers and financial markets and to promote competition. The FCA’s Conduct of Business Sourcebook (COBS) states that firms must act honestly, fairly and professionally in accordance with the best interests of its client. Also, always ensure that communications and financial promotions are fair, clear and not misleading. Nor should they seek to exclude or restrict any duty or liability. COBS 4.12 deals with restrictions on the promotion of non-mainstream pooled investments.

  80. See FCA [47].

  81. See Lomnicka [45, p. 875], who notes that this does not mean that their managers do not need to be authorised persons and that these schemes are unregulated “in the sense that the schemes themselves do not need to comply with the detailed requirements that regulated collective investmente schemes have to satisfy”.

  82. See FCA [47], where ordinary retail investors are defined as “retail clients who are neither sophisticated investors nor high net worth individuals. These are the investors of ordinary means and experience who make up the vast majority of retail market in the UK Such investors are at particular risk in relation to inappropriate promotion of QISs and UCISs”.

  83. See COBS 4.12.4R(5) Cat. 9.

  84. See COBS 4.12.4R(5) Cat. 2.

  85. See FCA [47].

  86. UK UCISs will be considered as EU AIFs whilst the UK continues to be a EU member state, for this reason UK AIFMs and AIFs can continue to benefit from the EU AIFMD passport.

  87. After the official exit of the UK from the European Union (so-called Brexit), there could be three alternative scenarios: (1) if simultaneously the UK becomes a European Economic Area (EEA) country, UK AIFMs and AIFs can continue to benefit from the EU AIFMD passport; (2) if the UK does not become a European Economic Area (EEA) country, it will be considered as a third country and its AIFMs and AIFs will have to wait for the decision of the Commission regarding the extension of the AIFMD passport to non-EU AIFMs and AIFs. From this perspective, obviously if the domestic regulation will not be changed, the UK should easily obtain a positive assessment from the ESMA as its regulation is set on the basis of the AIFMD so it will be considered as AIFMD compliant; (3) if the UK does not become a European Economic Area (EEA) country, it is also possible that i twill negotiate a specific agreement with the Union and this agreement could allow UK financial entities to freely access the EU market.

  88. See ESMA [37, p. 166], where the Authority points out that in the period October 2014–December 2014, the non-EEA AIFs managed by EEA AIFMs and marketed in the UK pursuant to article 36 of AIFMD were from Bahamas (1), Bermuda (9), Cayman Islands (275), Guernsey (25), Jersey (8), US (19) and British Virgin Islands (25), whilst the non-EEA AIFMs marketing AIFs in the UK under article 42 of AIFMD were from Australia (12), Bermuda (16), Brazil (2), Canada (3), Cayman Islands (33), Guernsey (57), Hong Kong (15), Isle of Man (2), Japan (16), Jersey (27), Mauritius (6), Republic of Korea (1), Mexico (4), Singapore (11), South Africa (1), Switzerland (9), Thailand (2), United States (269), British Virgin Islands (3) and US Virgin Islands (1). Finally, the non-EEA AIFs managed by non-EEA AIFMs and marketed in the UK in the same period under article 42 of AIFMD were from Australia (13), Bahamas (1), Bermuda (28), Canada (3), Cayman Islands (587), Guernsey (121), Hong Kong (2), Japan (18), Jersey (47), Mauritius (9), Mexico (4), Singapore (7), Switzerland (1), Thailand (2), United States (236) and British Virgin Islands (42); see also ESMA [4], passim, where it is said that from July 2013 to March 2015, 1777 non-EU AIFMs marketed AIFs in the Member States in accordance with article 42(1) of AIFMD, including 1013 in the UK and that 4356 AIFs were marketed in the Member States by non-EU AIFMs in accordance with article 42(1) of AIFMD, of which 2657 in the UK.

  89. See ESMA [4], passim, where the Authority points out that from July 2013 to March 2015, 7868 EU AIFs were notified for marketing in other EU Member States in accordance with article 32 AIFMD, with the highest number of outbound notifications coming from the UK, i.e. 5027.

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    Rodrigo Olivares-Caminal & Marco Bodellini

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Olivares-Caminal, R., Bodellini, M. The UK regulation on alternative investment fund managers: a difficult compromise between two different legislative approaches. J Bank Regul 19, 73–85 (2018). https://doi.org/10.1057/s41261-017-0052-1

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