AIFMD Review

**ESMA letter on delegation**

AIFMD review

The Commission published its consultation on its review on the Alternative Investment Fund Managers Directive (AIFMD) which will be open until 29 January 2021, which will be followed by a legislative proposal due for Q1 2021. The questionnaire covers a range of subjects, including on delegation, retail participation, financial stability, sustainability and the interaction with UCITS. The consultation follows the Commission’s Report on the AIFMD Review in June 2020 (see circular 251-20), and the report prepared by KPMG published in January 2019 (see circular 016-19). Based on the questions, we now expect the AIFMD review to propose some changes to the delegation framework confirming what ESMA suggested to the Commission in its letter sent on 19 August 2020.µ

ESMA letter on delegation
On 19 August, ESMA published a letter addressed to EVP Dombrovskis containing recommendations in view of the upcoming AIFMD review. A key topic for us is ESMA’s recommendations on delegation and substance, especially to introduce quantitative criteria to define minimum substance requirements, or alternatively a closed list of functions to be performed in the EU. The letter also represents potential extra-territorial impact of new delegation rules for AIFs and UCITS.

The letter builds on the ESMA “Brexit” Opinions of July 2017 to insert additional qualifications into both UCITS and AIFMD frameworks. ESMA’s concern is the potential for a large part of an EU-based UCITS/AIF’s functions to be performed outside the EU. These functions would not necessarily only relate to the classic portfolio and risk management ones, but to any other required by the fund’s operations on a daily basis, including IT, along with unspecified admin tasks.

To achieve this, the Commission is encouraged to consider quantitative criteria (accompanying the qualitative ones under Article 82(1) letter d. of the aforementioned delegated regulation), or alternatively, consider a list of functions that should always be performed from within the EU. “Supporting tasks” (as legal & compliance, research, risk et al.) will also call for greater scrutiny, especially where these are performed outside the EU.

IA WORK IN RESPONSE

The IA is working closely with EFAMA to ensure delegation to the UK is protected post-Brexit. The IA position is based on the argument that the the ability to delegate is 'mission critical' to the efficient operation of our industry, and is demonstrated to function well under robust supervision and oversight by local authorities. Introducing qualitative or quantitative restrictions would undermine the economies of scale that have been carefully established by firms, increasing costs for European savers and reduce capital available to be invested in the rest economy despite the pressing need to recapitalise European SME's post-pandemic.

Moreover, the UK’s departure from the political establishments of the EU does not create an increased risk to delegated activity that demands further intervention in either a AIFMD or UCITS review. Delegation operates on the basis the delegating entity remains legally accountable for all delegated activity, and ensuring this is properly carried out in accordance with EU rules by way of monitoring and oversight, a model which is well-established and proven effective.