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AIFMD - FCA news round-up

    • Financial services and markets regulation - UCITS V
    • Financial institutions


    AIFMD – FCA news round-up

    The FCA has recently published a number of news items on the AIFMD page of its website covering:

    • An update on the number of AIFM applications which the FCA has received
    • A proposed change to the definition of funds under management for the purposes of calculating a firm’s “additional own funds” requirement
    • Agreement at EU level to permit the passporting of MiFID services under Article 6(4) of the Directive
    • Finalised FCA guidance on the AIFM remuneration code

    Update on applications received

    The FCA received 103 full-scope AIFM VoP applications in January 2014 and an additional 95 VoP applications for small AIFM authorisations. In addition, the FCA received 16 full-scope AIFM applications from firms which are currently not authorised by the FCA.  This is a significant increase in volume compared to previous months and the FCA is encouraged that it has received a positive response to its request for early applications.

    The FCA continues to encourage firms to submit their VoP applications and makes the point that it has a large team of case officers and staff from its Authorisations and Supervisory divisions in an “all-hands-on-deck” approach to ensuring that applicants will be able to meet the Directive deadline of 22 July 2014.

    We have commented in our previous briefings that, whilst it is not too late, submission of VoP applications should now be a priority.

    AIFMD capital: calculation of additional own funds

    On 14 February 2014 the FCA announced that it is considering its interpretation of the definition of “funds under management” for the purposes of Article 9(3) of the AIFMD. The definition is used to calculate the amount of additional own funds a manager must hold once the value of the portfolio of AIFs exceeds EUR 250m. 

    Following representations from a number of firms, the FCA has been made aware that the current requirement in Chapter 11 of the Interim Prudential sourcebook for investment business (“IPRU(INV) 11”) can in certain circumstances lead to disproportionate outcomes.

    In particular, the FCA is proposing a change that will, when calculating the value of portfolios, allow for derivatives to be valued at their market value instead of requiring them to be converted to their underlying positions. The FCA will consult on this change in a quarterly consultation later in 2014. 

    To discourage a delay in the submission of applications for authorisation as an AIFM, the FCA will allow individual AIFMs to take advantage of the proposed change by making available a modification by consent. To take advantage of the modification by consent, an email or letter must be sent to the Central Waivers Team at the FCA. On receipt of this, the FCA will write to confirm that the modification has been granted and will publish each modification on its website.  

    Firms that obtain a modification by consent should state this in their AIFM applications.  Unless withdrawn, it will be valid until 31 January 2015 or on the change of the Glossary definition of “funds under management” that is used in IPRU(INV) 11.

    UCITS management companies which are subject to IPRU(INV) 11 may also apply for the modification by consent.

    The FCA says that it continues to encourage firms to submit applications at the earliest possible time and hope that the ability to apply for the modification by consent will facilitate this.

    Passporting MiFID services

    The FCA’s statement last year on the passporting of “MiFID services” authorised under Article 6(4) of AIFMD highlighted a division of opinion on the interaction between AIFMD and MiFID.  The FCA expressed its view that firms should be able to exercise their single market rights by being able to passport those MiFID services.  However, this view was not supported by the European Commission at that time. 

    Following an agreement between the European Parliament and the Council on the proposed revision of the Markets in Financial Instruments Directive (MiFID II), Article 33 of AIFMD is now to be amended to make it explicit that the right to passport an AIFM’s services in other Member States extends to any services under Article 6(4).

    In light of this change, the FCA have issued a statement confirming that it is the FCA’s understanding that the European Commission’s revised view is that a notification for a full-scope UK AIFM to provide MiFID services in another Member State should be accepted by the Host State regulator.

    The Central Bank of Ireland (“CBI”) has also reacted swiftly to this amendment and updated its AIFMD Q&A, confirming that the CBI will, with immediate effect:

    • accept AIFM passport notifications from other national competent authorities where the notification includes services set out in Article 6(4) or AIFMD; and
    • process notifications from Irish authorised AIFMs who advise the CBI of their intention to provide the Article 6(4) services, for which they have received an authorisation.

    Despite the u-turn in opinion, firms must continue to be aware of the risk that host state authorities may refuse such notifications and that some Member States may have already implemented the European Commission’s original opinion into their national law. 

    Finalised Guidance on Remuneration Code

     Following its September 2013 consultation (CP13/9), the Financial Conduct Authority (“FCA”) has published finalised guidance offering clarification of how it intends to apply the EU level AIFMD remuneration requirements as set out in Chapter 19B of the Senior Management Arrangements, Systems and Controls Sourcebook (“AIFM Code”).

    The guidance, which  became effective on 31 January 2014 is directed “principally” at full scope-UK AIFMs.


    An AIFM should apply the AIFMD Code to the first full performance period following its authorisation.

    The FCA has adopted a flexible approach to the potential situation whereby certain disclosures are required to be set out in the AIF’s annual report where it is due to be published before AIFM has completed its first full performance period. In these circumstances, any disclosures which cannot be provided may be omitted from the report and replaced with an explanation as to why they are unavailable.


    The Guidance sets out the following proportionality size thresholds under which there is a working assumption that it is appropriate to disapply the pay-out process rules:

    • £5bn for AIFMs which manage portfolios of AIFs that are unleveraged and have no redemption rights for five years from initial investment; and
    • £1bn for AIFMs which manage portfolios of AIFs in other cases, including any assets acquired through the use of leverage.

    The FCA cautions against the use of these thresholds in isolation. The Guidance requires full scope UK AIFMs to consider the other proportionality elements identified by the FCA and ESMA guidelines prior to concluding that the pay-out process rules do not apply.

    The Annex to the Guidance contains a list of scenarios which illustrate how these rules may be applied in practice.


    The AIFM Code need not be applied to employees of a firm to which the AIFM delegates material portfolio management or risk management if the delegates are subject to other rules and guidelines which are “equally effective”.

    Exact equivalence is not necessary in order to qualify for this exemption. Firms subject to the rules and requirements of MIFID or CRD IV for example will be considered subject to an “equally effective” regime, however other regimes, such as UCITS rules which have not yet been finalised, or mere G20 commitments to the concept of remuneration restrictions, are not “equally effective”.

    LLPs and Partnerships

    The AIFM Code applies only to remuneration (compensation for the management of an AIF and carried interest) and not to profit shares (dividends or similar distributions that partners receive as owners). In addition, the AIFM Code applies differently to fixed income and variable remuneration.

    The Guidance sets out two methods open to AIFMs in order to differentiate between payment types:

    • Firstly, the FCA provides suggestions as to the type of payment likely to fall into each category. It concludes that advance drawings are likely to be considered fixed remuneration and that discretionary profit shares distributed to all partners, particularly if performance related, would normally be treated as variable remuneration. Additional profit shares for senior or founding partners on the other hand would normally be treated as profit shares (especially if structured as an automatic allocation with no adjustment for performance) and are therefore not considered remuneration.
    • Secondly, the FCA suggests using benchmarks, including consideration of the remuneration structures for those performing similar tasks in other organisations or the return on equity/capital expected in a similar investment context to that of the partner.

    Other considerations, such as the time that the partner spends working for the AIFM, how the fixed and variable components of the remuneration are balanced and whether compensation is provided disproportionately through profit shares in order to avoid the AIFM Code, should also be considered. 

    Form of remuneration

    The Guidance notes that for many AIFMs it is not possible to provide variable remuneration in units or shares of the AIF due to the very nature of the AIF that they manage (for example AIFs that are closed-ended or where the contents of the AIFs constitutive instruments are prohibitive). 

    Firms which are not able to apply the AIFM Code, in whole or part, or for particular staff are recommended to elect to pay staff in shares, interests or instruments linked to the AIFM or its parent (where the performance of the AIFM business is relevant to the parent company's valuation) or in shares or instruments linked to the performance of a weighted average of the AIFs managed by the AIFM or its affiliates. The FCA stipulates that these instruments should ordinarily be held for a minimum of 6 months.

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