Asset Management

Issue 1172 / 11 August 2022

European Central Bank

UCITS and AIFM Directives - ECB publishes opinion on proposed amendments - 10 August 2022

The European Central Bank (ECB) has published an opinion (CON/2022/26) (dated 9 August 2022) on the proposed Directive amending the Alternative Investment Fund Managers (AIFMs) Directive (2011/61/EU) (AIFMD) and the Directive relating to undertakings for collective investment in transferable securities (UCITS) (2009/65/EC) (the UCITS Directive), regarding delegation arrangements, liquidity risk management, supervisory reporting, provision of depository and custody services, and loan origination, by alternative investment funds (AIFs). The European Commission (the Commission) adopted the legislative proposal for the Directive in November 2021.

Although the ECB welcomes the Commission’s proposals, it highlights a number of issues for consideration, including in relation to:

  • liquidity management and macroprudential tools: the ECB notes that the proposed Directive should aim to limit the liquidity mismatch between the assets and liabilities of AIFs by means of measures that specifically target either assets or liabilities. The ECB also suggests how the ability of certain AIFs to withstand liquidity risks could be strengthened. 
  • reporting: the ECB supports the development of integrated supervisory data collection, but stresses that the integration of the underlying reporting infrastructure must not interfere with or otherwise prejudice the ECB’s competence to adopt statistical regulations for its own purposes; and
  • European System of Central Banks (ESCB) access to detailed data in the AIF sector: the proposed Directive should require ESMA, which currently receives individual AIF data from NCAs, to make that data available to the ECB and other relevant ESCB central banks.

The ECB has set out specific drafting proposals in a technical working document accompanied by explanatory texts.

Opinion of the European Central Bank of 9 August 2022 on a proposal for a directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment funds (CON/2022/26)

Financial Conduct Authority

Supervision of alternative investment funds - FCA publishes portfolio letter - 9 August 2022

The FCA has published a portfolio letter which it has sent to the CEOs of alternative investment funds, referring to the FCA’s view of the key risks of harm in the ‘alternatives’ portfolio and outlining the FCA’s expectations in this context. The letter notes that the alternatives portfolio encompasses a broad range of business models, from global hedge funds and private equity firms to smaller providers. While “alternative firms mostly deal with professional investors and counterparties capable of managing their own interests… this description is not accurate across the whole portfolio, with many firms dealing with retail or elective professional investors…These firms have a very different risk profile from a regulatory perspective, including the risk that investors are misclassified and subsequently denied appropriate protections.”

The FCA’s portfolio priorities are consistent with its 2022 business plan commitments, which include the integrity of the markets and market abuse, ESG (Environmental, Social and Governance), and consumer needs. More specifically, the FCA is concerned with:

  • investment strategies that carry inappropriate levels of risk for their target client: the FCA notes that the main risk warning rules come into force on 1 December 2022, with the remainder on 1 February 2023. The FCA also highlights the new consumer duty, under which rules and guidance for new and existing products or services open to sale or renewal come into force on 31 July 2023, and later on 31 July 2024 for closed products or services. The FCA will publish final rules for the promotion of cryptoassets once HM Treasury formalises legislation to bring these into its remit. In the coming months, the FCA will be issuing a questionnaire asking all portfolio firms for information about their business model, products, investor categorisations and associated control framework, and will follow up with those firms exhibiting characteristics that increase the potential of consumer harm;
  • conflicts of interest: the letter draws firms’ attention to recent enforcement action in this respect. Boards should review their procedures to ensure conflicts are avoided, managed or disclosed in a way that minimises harm to investors and markets;
  • market integrity and disruption: the FCA highlights its analysis which shows firms overestimating liquidity in the context of stressed or fast-moving markets, and leveraged structures coming under strain. In light of this, the FCA encourages firm boards to ensure that risk functions are appropriately resourced, contemporaneous, and commensurate with the levels of portfolio and business risk being taken; and
  • market abuse: the FCA stresses that firms must ensure that controls under the retained EU law version of the Market Abuse Regulation (595/2014/EU) are tailored to their business models. In the case of non-compliance, the FCA will consider criminal, civil or supervisory sanctions.

Several additional concerns are covered in the FCA’s letter, including how senior managers and firm policies influence an organisation’s culture and evidence of staff being unable to speak up. Also noted is the FCA’s July 2021 discussion paper (DP21/2), which outlines the issues and benefits that diversity and inclusion would bring to the sector alongside potential policy interventions. The FCA intends to consult on this later in 2022. The FCA also refers in the letter to ESG based investment and its July 2021 communication to authorised fund managers.

FCA Portfolio letter: Our Alternatives Supervisory Strategy