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Jon Watson, Director of Project Consulting at Cordium, answers questions about the FCA’s sanctioning powers under the Alternative Investment Fund Managers Directive. Important to know where you stand, particularly, it seems, if there’s a highly leveraged fund involved.
Just in case you’ve been away for a while:
Following consultation on the implementation of the Alternative Investment Fund Manager’s Directive (AIFMD) and analysis of the responses the government is going ahead with proposals to include Common Investment Funds (CIFs) and Common Deposit Funds (CDFs) within the scope of Alternative Investment Funds (AIFs); amend charities legislation so charities in the European Economic Area would be able to invest in CIFs and CDFs; and not to apply the Approved Persons Regime to Internally Managed Investment Companies.
What are the sanctions available for breach of the new rules?
The AIFMD states that the regulatory authorities may disclose to the public any measure or penalty imposed in infringement of the provisions within the legislation. There is nothing within it relating to sanctions. I take this to mean that the imposition of sanctions will be left to the discretion of the national regulators, though that is not to say that at some point a sanctions regime might be coordinated at EU level.
How is the Financial Conduct Authority (FCA) likely to approach enforcement of the new rules?
It’s difficult to say. If the FCA was to take a more active and interventionist approach at this point in time it would be in respect of products available to retail investors, a group to which AIFMD is not targeted at.
If, for example, there was a fund being marketed in the EU that took excessive risks and ‘blew up’, the FCA has more extensive powers to take action against the fund manager, but I don’t necessarily see them being more interventionist at the moment.
As more systemic risk reports under AIFMD are filed with the FCA, it may get a clearer picture as to whether some funds are taking significant risks, but it should already have the risk profiles of the large players in the market as the FSA conducted a regular hedge fund survey of the largest UK-based managers. Indeed, the FCA has said consistently there is little or no systemic risk in hedge funds managed by UK-based managers and advisers.
The FCA has indicated it has earmarked many of the problematic issues in AIFMD (eg delegation, ‘letterboxing’) to look at in 2014. It may be that no firm judgments on enforcement will be made until then. I suspect the FCA is biding its time as to how it will implement and monitor and supervise firms under AIFMD—we may see more intimations as to how it will do this early next year.
Are there any types of funds that are more likely to come under scrutiny?
Highly-leveraged funds (ie a fund that has been leveraged more than three times) will be coming under closer scrutiny. Under AIFMD the regulator has the power to intervene and require the fund to reduce its leverage. That’s a sea change in terms of what the regulator has done before. Previously, the regulator would not take a view on portfolio positions unless the positions were clearly inconsistent with the mandate. Now, the regulator will be asking questions within the AIFMD application around leverage. We will get a clearer sense of this through the application processes.
What powers does the FCA have?
Once a firm is FCA-authorised, the FCA will supervise based on its perceived risk of the firm’s activities to FCA statutory objectives. It will review firms according to a cycle of supervisory assessments, either comprehensively in terms of their governance arrangements and systems, or thematically (eg it may organise a visit to check a firm’s preparations for AIFMD). These thematic reviews are on the increase.
If something of concern comes up, the FCA can appoint a skilled person (paid for by the firm) to investigate. The person will report back to the FCA on the status of the firm’s compliance with the regulatory regime. This in turn can lead to enforcement action, which could involve some sort of fine, or the potential banning of the individual(s) concerned from the industry. The FCA can turn up at premises with a warrant, if its concerns are considered serious enough (eg market abuse) and can take files and computers away if relevant to its investigation. It has quite onerous powers and if it needs to move swiftly it shall do.
Jon Watson has over 20 years’ financial services experience. Jon qualified with Coopers and Lybrand before moving on to lead an asset management supervision team at the UK regulator where he was responsible for oversight of the collective investment scheme authorised unit trust trustees as well as numerous authorised fund managers. Jon gained further industry experience at UBS, Deutsche and Merrill Lynch Investment Managers in the UK and the US, having responsibility for a variety of financial, operational and regulatory roles.
Jon was interviewed by Duncan Wood of LexisNexis and this piece was first published as a Legal Anaysis news item on LexisPSL Financial Services.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor
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