In what could eventually pave the way for a new AIFMD 2 regime, the European Commission (EC) last month published its consultation on the AIFMD. Nine years after its launch in the aftermath of the GFC, the AIFMD generally considered a success.
But as the EU continues to pursue a capital markets union (CMU), the future and harmonisation of any AIFMD remains a core issue for the European asset management industry. With the EC AIFMD consultation open until January 2021, the Commission last week hosted a three hour webcast with leading experts to discuss how a new framework may harmonise the regulatory rules while balancing the objectives of financial stability, investor protection and market integration. There were some important insights.
Fine tuning for stability
In her opening remarks, Mairead McGuinness, the EC’s Commissioner for Financial Services, was quick to point out the success of the AIFMD regime in strengthening financial stability. Where the GFC had exposed the inadequate legal patchwork that applied to alternative investments, AIFMD had put the industry on much sounder footing. Assets have grown, overall transparency has increased, and EU supervisors can better monitor risks, McGuinness noted.
But financial stability must remain central to any alternative framework, even as the EC aims to balance the sometimes competing aims of financial stability, investor protection and market integration.
‘Any framework must continue to bolster financial stability,’ she added, ‘especially in the wake of 2020 when central banks were called upon to bolster liquidity.’ Certain funds, such as property and high yield funds, for instance, continue to run into troubles, with the liquidity mismatches prompting McGuinness to ask whether ‘the AIFMD directive provides participants the tools they need to respond to any shocks?’
Speaking in the first panel, Adina Gurau Audibert, the Head of Asset Management at the French Asset Management Association (AFG), agreed that the AIMFD had been vital in achieving financial stability after the GFC. Risk are well captured, she said, especially in ESMA’s own data and regular reviews, and there are now very few highly leveraged funds within the AIF universe. That means that sweeping changes to risk management protocols are unlikely.
‘Any future work is more about find tuning,’ Gurau Audibert admitted. ‘A GAP analysis will be done by regulators. It’s great to see that the US reforms are inspired by the European experience, but there is always room for improvement. In Europe, certain countries permit different liquidity management tools (LMTs), such as gating, and so we should look at whether this can be harmonised across Europe under the local national competent authorities (NCAs).’
Steffen Kern, the European Securities and Markets Authority’s (ESMA) Head of RAE, concurred.
‘Although the AIFMD framework is comprehensive and covers the main risks, ESMA have been calling for the harmonisation of liquidity management rules for a while,’ he said. ‘We are hoping to have ESMA’s guidelines for the coordination of Article 25 of the AIFMD published before Christmas. We’ll also implement a risk-based approach to identify alternative managers that are likely to pose a risk to the system. This is about a data framework and granular portfolio detail of funds going forward, although the availability of LMTs will be important.’
Investor protection vs competitiveness
The second and third panels, meanwhile, discussed the need to balance the competing aims of investor protection and industry competitiveness.
Sven Giegold, a German MEP, said that ‘we should not be opposed to funds which take risks. The real problem from my perspective is that we have created absolute legal limits to certain groups of investors to buy certain products. We should not forbid people taking certain risks, even if they are high, because his is a personal choice.’
In addition, Giegold said that one of the main problems is that the different texts between UCITS, AIFMD, and MiFID have all sorts of inconsistencies, which can never be addressed because the regulators are always amending different rules at different times
‘Most people agree that we should have a capital markets union to get rid of these inconsistencies, in particular UCITS and AIFMD. But everyone wants to have their own national tweaks,’ he said. ‘We must have the courage to move to a common framework of laws. Otherwise we will not get the efficiency advantages Europe needs by a common capital market.’
The participants agreed that harmonisation could clearly work in some areas, such as risk management, and simplifying and clarifying the framework would certainly make it more competitive. That includes passporting rights, which have so far been a success but has forced firms to go to long lengths to show local substance.
‘The EU will never have one centre or jurisdiction, especially post-Brexit,’ said Patricia Volhard, a partner at law firm Debevoise and Plimpton. ‘There won’t be one city where everything about the fund is managed – the risk, portfolio management and marketing. But this is what makes Europe so attractive. We have national regulators that can work together.’
When it comes to substance, though, Volhard said she would rather see local regulators work better together, rather than wholesale changes to the rules or new, stringent substance requirements. ‘The more AIFMs we are setting up in Europe is important, and the less bureaucratic we are the better.’
Fabio Galli, the director general of Assogestioni, the Italian association of asset management companies, echoed many of Volhard’s concerns.
‘AIFMD is a good investment framework, but there needs to be long-term thinking and a balance needs to be struck,’ he cautioned. ‘When I talk to regulators from the US and China, there is a strong awareness that regulations should be about competitiveness as well, and not just about consumer protection and stability.’
‘When I work in Europe, however, I only hear about consumer protection and macro-prudential stability,’ he continued. ‘In Europe we should have a strong discussion about this – and have a specific requirement that competitiveness is one of the three pillars that is always considered. In China, they have a clear view on how to grow the industry of 10, 20 or 30 years. We should too.’
The deadline for responses to the EC’s consultation is 29 January 2021, and we are sure to hear plenty more before then. Key issues, including substance, delegation, marketing passports, and risk management, could all change, and the EC will surely have its work cut out for it in trying to balance the oftentimes competing aims of stability, consumer protection and competitiveness.
The EC will then publish its feedback in Q1 of 2021. Whatever the case, AQMetrics will keep its clients and readers abreast of the latest developments.