FCA decision provides clarity on impact of AIFMD

Is the Financial Conduct Authority’s (FCA) rejection of formal EU guidance on financial regulations in favour of alternatives more than just a political move? Nicola Higgs of Ashurst says the FCA’s decision is welcomed by UK-based financial services firms who now have further clarity on the potential impact of the Alternative Investment Fund Managers Directive (AIFMD).

 

According to a recent report in the Financial Times, the FCA has rejected formal EU guidance on financial regulations in a move analysts claim is a sign of the government’s hardened stance towards Europe. The FCA’s interpretation of two financial rules eases pressure on bankers and brokers, helping to minimise the impact of EU regulation on the City.

What does this decision tell us about the FCA’s relationship with European authorities?

It demonstrates that the FCA is not afraid to publicly break ranks from the European Securities and Markets Authority (ESMA) where it deems it important that the UK market has clarity over the implementation of EU rules. Interestingly, the FCA’s position has caused other European regulators to follow suit since they do not want institutions in their territories to be disadvantaged by the often stricter/uncertain position taken at European level.

What aspects of AIFMD have the FCA put their foot down about?

The FCA has confirmed that special purpose vehicles issuing debt securities will not fall within scope of an AIF under AIFMD. This breaks away from the current EU guidance available. The FCA has also disagreed with the European position that managers cannot offer both AIFM services and brokerage services under the Markets in Financial Instruments Directive (MiFID) on a cross border basis. Further, the FCA has clarified the definition of a market maker for the purposes of the short selling regulation. Its position is that it is possible to make a market in unlisted securities. This departs from ESMA’s position that the security must be listed somewhere.

What reasons have the FCA given for going against ESMA’s guidance?

It has not explained its rationale for departing from the ESMA guidance although it appears to have done so to solve uncertainty for UK firms who are working hard to implement a raft of new measures. Taking AIFMD as an example, the deadline for implementation had passed and many firms were still unclear as regards whether some of their AIF like products (including structured products) were caught by the new rules.

This caused concern for firms who were not sure whether they were permitted to issue these products and who had no clear understanding of the potential recategorisation risk which should be disclosed to investors. FCA’s statement followed the German regulator (BaFin) who itself took a view as to the meaning of an AIF on the basis that breach of AIFMD was criminal and the German constitution could not accept a law which had criminal consequences, and which was uncertain in its application.

Will this decision be welcomed by UK-based financial services firms?

The decisions have been widely welcomed by UK-based financial services firms who now have further clarity on the potential impact of AIFMD on their products and the market making exemption under the short selling regulations. Firms who are home regulated by the FCA and who have branch offices in other EU member states are now considering the extent to which the decision taken by the UK regulator can be applied across their European operations.

Are there any upcoming European measures where the FCA might depart from the guidance again?

The FCA has demonstrated its willingness to distinguish itself from ESMA where it feels it is important to do so. It will be interesting to see how this plays out as further controversial European proposals, particularly in the context of MiFID II and CRD IV, are brought into being.

This interview was first published as a Legal News Analysis piece in LexisPSL Financial Services. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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