“It is difficult to know whether the directive will have a positive impact on London as a financial centre”
How are alternative funds across the channel reacting to the forthcoming introduction of the AIFM directive*?
The rationale behind the directive is not contested. Its objective is to protect European investors and reduce systemic risk in order to avoid a repeat of the 2008 financial crisis has been accepted by the industry. On the other hand, the arrangements for its implementation remain vague and uncertain. In the majority of cases, London-based investment managers are not only concerned but also irritated by the lack of certainty created by this directive. In these circumstances, it is difficult to say whether it will have a positive impact on London as a financial centre.
Which issues are currently seen as stumbling blocks by British investment managers?
Asset management companies are supposed to carry out major work to adapt their infrastructures to a system where portfolio management will be supplemented by risk controls. However, the lack of detail in the directive means that it is not possible at the current time to make informed decisions regarding these changes. The issues of portfolio and risk management delegation are also unclear and the CEOs of the alternative funds in which we invest are very concerned. Finally, these investment managers also have questions about how to approach reporting, which will be far more rigorous and demanding than in the past. Compliance with marketing rules is also an important point: although the private placement systems for marketing funds within the European Union will remain in place until 2015, we do not yet know what shape and form the replacement system will take.
What impact does the fund industry expect this directive to have in terms of costs?
Everything will depend on whether or not the management company intends to bear all these cost or pass part of them on to the fund itself: insofar as the cost ratio will increase, investors may well be called upon to bear part of the cost. Management companies that want to maintain their management fees policy may also try to allocate their costs to other entities, either to other management companies or to underlying funds. Generally speaking, we expect smaller players to be hit harder by incompressible fixed costs. It is also regrettable that there is not more consistency between the various regulations (SEC**, Solvency II, Ucits, etc.), which means that medium-sized companies will not be able to benefit from economies of scale. At a time when the directive is due to enter into force in a few months, consultations are still ongoing in the United Kingdom and the details have not yet been finalised.
*Alternative Investment Fund Managers.
**Securities and Exchange Commission.