New UK rules track European Alternative Fund Managers Directive 5 min read
The landscape for wholesale investment funds in the UK has shifted in the wake of Brexit. We give a round-up of the latest developments, and explain what Australian fund managers who are marketing their products to EU or UK investors need to know.
Key takeaways
- Following the end of the UK's Brexit transition period on 31 December 2020, the UK is no longer directly subject to EU law, including the European Alternative Fund Managers Directive and associated regulations (AIFMD), although it has put in place rules that, in the main, track AIFMD.
- Additional environmental, social and governance disclosure requirements have also been imposed on fund managers (including Australian managers) marketing their funds to wholesale investors in Europe.
- There has been no further update on the extension of the pan-European marketing passport to non-European fund managers. However, following the Federal Government's Budget announcement about Foreign Financial Service Providers (FFSPs), there is more prospect of its extension to Australia.
Linklaters' updated microsite
Although we have provided key updates of relevance to Australian fund managers below, additional detail on the operation of AIFMD and the equivalent UK regime can be found via the recently updated Linklaters client microsite. Australian fund managers who are marketing their fund products to EU or UK investors can refer to the site, particularly the 'Marketing' section, for a helpful overview of the rules they must follow to market their funds under existing national private placement regimes, and the ability to rely on passive marketing (reverse solicitation).
No changes for Australian fund managers seeking European capital
As we updated you last year, while an extension of the pan-European marketing passport to non-European Alternative Investment Fund Managers (AIFMs) is contemplated by AIFMD, there is currently no ability for Australian or other non-European AIFMs to avail themselves of the passport (which would permit those managers to market fund interests to investors across Europe, but would require full compliance with AIFMD).
Australian fund managers looking to access European capital from professional investors must therefore continue to do so either via narrowly construed reverse solicitation exemptions in the applicable European jurisdictions or by complying with jurisdiction-specific national private placement regimes (for European jurisdictions, unlike Germany, where those regimes are available). For more information, see the 'Marketing and Third Country Provisions' tile on the Linklaters' microsite.
Following the Australian Federal Government's 2021–22 Budget announcement that it will 'consult on options to restore' the current 'sufficient equivalence relief' and 'limited connection relief' for FFSPs (as we reported in May 2021), the prospect of an extension of the pan-European marketing passport to Australia does, at least, look more promising. The European Securities and Markets Authority (ESMA) has previously said that, in order for it to positively recommend the extension of the passport to Australian AIFMs, Australia's sufficient equivalence relief would need to be extended to AIFMs in all European jurisdictions. The Government's Budget backflip has given Australia a real opportunity to extend the sufficient equivalence relief in a way that will encourage ESMA's recommendation of an extension of the passporting regime to Australia. We look at the current state of play in relation to FFSPs in our recent Insight, and are making submissions on the proposals, both in our own name and through a range of industry bodies.
Application of AIFMD in the UK post Brexit
Following the end of the UK's Brexit transition period on 31 December 2020, the UK is no longer directly subject to EU law, and UK law that implemented European Directives such as AIFMD into national law ceased to apply.
However, the UK has put in place a new domestic regime regulating the management and marketing of wholesale investment funds in the UK. The new regime has generally maintained the rules stemming from AIFMD, only making changes where they were necessary to ensure effective operation of the new regime now that the UK is not part of the EU.
Going forward, the UK will have more autonomy as to how it regulates the management and marketing of Alternative Investment Funds (AIFs), and it is possible that its approach will diverge from the EU's regarding the interpretation of existing AIFMD rules and/or the implementation of changes to the regime in future. This will be an interesting space to watch, as the UK has already indicated that it will not implement the EU's legislative package in relation to cross-border distribution of investment funds. For more information, and to keep up to date with any changes in the UK's approach post-Brexit, see the 'AIFMD in the UK after Brexit' tile on the Linklaters microsite.
ESG
Finally, the Sustainable Finance Disclosure Regulation imposes a number of new disclosure requirements in relation to sustainability, environmental and social characteristics. These obligations require certain matters to be disclosed to investors pre-investment under Article 23 of AIFMD and, given that Article applies to non-European managers seeking to market their funds under national private placement regimes, the requirements will apply to Australian fund managers seeking to access European capital.
Additional information on these disclosure requirements can be found under 'SFDR' in the 'Disclosure and Reporting' tile on the Linklaters microsite, and include:
- a description of whether – and, if so, the manner in which – sustainability risks are integrated into the AIFM’s investment decisions;
- a description of the results of the assessment of the likely impacts of sustainability risks on the returns of the AIF;
- if the AIFM does not, at AIFM-level, consider adverse impacts of its investment decisions on sustainability factors, a statement to that effect and the reasons why;
- regarding any AIF that promotes environmental and/or social characteristics, information on how those characteristics are met; and
- regarding any AIF that has sustainable investment as its objective, an explanation of how that objective is to be attained.