Regular Training – More than just a Regulatory Burden!

Business regulated by or registered with the Alderney Gambling Control Commission (AGCC), the Guernsey Financial Services Commission (GFSC) and the Jersey Financial Services Commission (JFSC) have requirements under the relevant AML/CFT (Anti Money Laundering and Combating the Financing of Terrorism) handbooks or guidelines to ensure regular ongoing training for their staff in this area.

The requirement to train staff in this area is not new, however often training is carried out in these areas alone, and is directed if not carried out by the Money Laundering Reporting Officer (MLRO). How many times have experienced practitioners been forced to take time out from their working day to sit through an hour-long in-house seminar and are able to repeat “placement – layering – integration” or “maximum of 14 years in prison and an unlimited fine” verbatim at their course leader simply from hearing it so many times. Also, how many people have been forced to watch an AML DVD with dodgy acting from Z-list actors portraying farcical characters?

Running in-house training sessions during lunch breaks inevitably leads to:

  • Running multiple training sessions, taking up the valuable time of the MLRO
  • Running additional training sessions for those who are unexpected unable to attend at the last minute (sickness or business)
  • New staff members joining the company who need to have the training provided as part of their induction, which will often be at a time when regular staff training is not scheduled
  • Knowing that someone has been physically present without being able to prove that they were mentally present
  • Lack of quantitative proof of the effectiveness of the training

Clearly, this is not the best solution to a regulatory training need.

Convenience and Scalability

In the modern era we often talk about flexibility, and this is now something that can be offered in the ongoing training space. Let’s take an example.

Company A decides that its employees need to complete their regular AML/CFT training in line with regulatory requirements. The company has engaged with an online training provider (who happen to be called Midshore) to use their online training solution. Taking the experiences of various executives of the company:

  • The Managing Director decides to login from his tablet at home one evening to complete the training – leading by example is important
  • The Sales Director has a rare few days in the office so decides he will complete it one lunchtime whilst eating a sandwich at his desk
  • The Operations Manager doesn’t have enough time during the working day so takes her mobile phone to the gym, logs into their Wi-Fi and burns calories on the cross-trainer at the same time
  • The MLRO and the Human Resources Manager receive regular reports on who has completed the training, together with the score that each employee has received for their end of course test

Midshore Online Training (MOT)

Midshore Online Training (MOT) is the online training solution brought to you by Midshore Consulting. Regularly updated, the Midshore AML/CFT training includes sections on Proliferation Financing, Sanctions and Anti-Bribery and Corruption (ABC) alongside the standard AML/CFT subject matter.

The training module consists of:

  • Online training video
  • Printable course notes
  • 15-question end of module test (75% pass mark)
  • Printable certificate of completion

Using MOT also means that staff located in other jurisdictions (including those in outsourced or offshored operations) can receive identical training to local staff.

MOT – more than AML/CFT

Regulation and legal requirements are changing all the time, additionally local businesses are not just impacted by local law and regulation. Staff in regulated businesses should receive more than just AML/CFT training on a regular basis to ensure that they remain aware of their responsibilities in a number of key areas. This is why the MOT suite of modules will also include:

At this point, it almost seemed appropriate to include a pun about booking staff in for a MOT! However, should you be interested in a scalable and cost-effective solution to ensuring your staff have up to date regulatory knowledge please contact us.

Midshore can also run in-house training, including practical workshops tailored to the needs of your business.

Key Changes to Up-Coming Regulation

We would like to highlight to you two key changes in the local regulatory environment, which have an immediate impact and where we could assist you.

Beneficial Ownership Law

This came into effect on 15 August 2017, and requires that the resident agent of any Guernsey company, foundation of limited liability partnership must register beneficial of that entity with the Guernsey Registry either by 31 October 2017 (foundations & limited liability partnerships) or 28 February 2018 (companies).

Clearly there is an immediate requirement to start pulling together the information for reporting, which may be complex where one of these entity types is held within a trust arrangement. If you need help with any stage of this please contact us to discuss your requirements.

Pension Regulatory Regime

The new Pension Regime is live, and places requirements both on the licensee and the pension or gratuity scheme.

Under the transitional provisions full compliance is not required until 30 September 2018, however by 30 September 2017 a licensee carrying on pension or gratuity scheme business must conduct an assessment of their internal controls to identify and plan for any amendments required.

To assist licensees in complying with this we are offering a gap analysis at a fixed price of £1,750. We are also happy to discuss any further services you may require.

Compliance – A Pragmatic Approach to Regulation

Too many times we hear financial services professionals complaining that they are at odds with their confrontational compliance department, more often than that business generation units refer to their anti-money laundering team referred to as a business prevention unit.

Whilst there are many pieces of financial services law, regulation, rules, guidance & codes in existence (even in a small jurisdiction such as Guernsey) they have at their heart a few key goals:

  • Protecting the financial services consumer
  • Protecting the financial services system
  • Preventing use of financial services for crime

So, how do we fix the often-confrontational approach that seems to prevail within the compliance / anti-money laundering space? Here are a few suggestions:

Not all business is high risk

Many Money Laundering Reporting Officers (MLROs) are very risk-averse, after all they run the risk of prosecution if they do not fulfil their duties properly. However, it is important that a business has appropriate risk-rating for clients.

A MLRO may want to investigate each client to the nth degree, however that flies in the face of the purpose of risk-rating – ensuring that client relationships that really are high risk have more time spent on them then lower risk client relationships. How can a business spend more time when it has to perform enhanced due diligence (EDD) across all clients?

Ensure that when the board reviews the organisation’s in-house Anti-Money Laundering (AML) Handbook that risk-rating is covered with clear detail as to what could constitute a higher risk relationship. The board has the decision to control the risk of the business, and the MLRO cannot override the board is setting this policy as they are the instrument ensuring compliance with the policies.

Regular review by senior management will help to ensure that an overly zealous MLRO is not jeopardising the profitable functioning of the business.

Not all countries are the same

This is an important mantra for two very different reasons:

  • Lists of low risk countries and sensitive jurisdictions issued by the regulator can assist with risk-rating clients in those countries; as can sanctions lists issued by governments
  • Not all clients in all countries can easily provide the required documentation

The former is important – firstly the Guernsey Financial Services Commission (GFSC) has published a list of jurisdictions that it considers to have equivalent AML frameworks (Appendix C) in its’ AML Handbook. The AML requirements are already quite complex, and whilst clearly the board should determine whether it wants to adopt the entire list of Appendix C countries as low risk the MLRO should provide the board with reasons why any of the list should be discounted. Furthermore, ignoring the GFSC list of sensitive jurisdictions, or countries which appear prominently on the sanctions lists, could potentially imperil a business.

I once had reason to question a Deputy MLRO as to why a certain country was on their list of high risk jurisdictions. The answer was “because I want to know if any business is done from that country”. When asked what they would do with that information the answer “I just want to know” indicated that there would be no special process for dealing with a client from that country, however arbitrarily including that country on the high risk list means that any potential client would face providing EDD without good reason.

The second bullet point is an important one, and often vexes MLROs. What do you do when a client can’t provide proof of their address in the form of one of the documents listed in the GFSC’s AML Handbook? The answer is to think outside the box, and to suggest alternatives at an early stage. Maybe two independent statements of the client living there could be provided in place of a utility bill? There are some countries where standard proof of address is near impossible to provide and the GFSC would simply want you to be comfortable that you have sufficient proof even in a non-proscribed form.

Don’t reject a document – seek additional confirmation

What do I do when the lawyer certifying the document hasn’t used the correct wording and hasn’t said that the photograph is a true likeness of the person they have met? Don’t just reject the certified passport out of hand – it nearly meets the requirements. How about emailing the lawyer asking them to confirm that it is a true likeness of the person they have met?

Not all business is high risk – Take 2

It is tempting for a MLRO to give any structure where a PEP is involved a high-risk rating even if there is no risk of the PEP illicitly obtaining funds based on the structure used and the financial services product they are using.

Let’s take the example of a UK-registered quasi-governmental entity that is regulated for financial services business and can be found on the FCA’s financial services register. There is a PEP on the board, however the entity is investing into a fund and will only receive monies from an account in the name of the entity and will only pay out to an account in the name of the entity. How can the PEP use the investment to illicitly obtain funds? They can’t. Therefore, what is the risk? It’s a regulated financial services business in a low-risk jurisdiction – the risk is low.

Codes are Codes and Guidance is Guidance

Sometimes the GFSC issues codes and guidance.

Codes can often be seen as best practice, however not all codes will precisely fit all business. Be willing to document where you don’t comply with a code and why. Table this before a board meeting and have the board approve the reason for non-compliance.

Guidance is just that, never take is a proscriptive. Guidance will often provide one route towards achieving a regulatory objective, don’t feel obliged to apply the guidance rigidly. Be willing to employ a pragmatic solution that meets the requirements of your own business, and again get the board to approve this. So long as the controls effectively ensure the law, rule or regulation is complied with the guidance does not need to be strictly observed.

If all else fails…

Sit down and discuss what you have and where the deficiencies lie. A Compliance Officer MLRO should never simply dictate to the business. Maybe remedial action can take place. Maybe a small number of additional documents need to be obtained. Maybe a policy or procedure in place is no longer appropriate for all of the business being carried out and needs to be reviewed and updated. Be willing to be flexible and pragmatic.

The Midshore Solution

We can offer a pragmatic compliance/AML solution for our clients. We can review your compliance monitoring programme along with any of your procedures and policies, offering advice on where to improve them. We can also act as compliance officer or provide a MLRO for your business, ensuring that these functions are carried out in a way that ensures your business continues to comply with regulation without compromising business flows.

We can also provide regulatory refresher training to your team, including all Guernsey laws, rules & regulations; MiFID II & MiFIR; GDPR; CRS/FATCA; BEPS; AIFMD; and AML. We also offer training for the following CISI level 3 regulatory modules:

  • Combating Financial Crime
  • Managing Cyber Security
  • Global Financial Compliance
  • Risk in Financial Services

Combating Financial Crime – more than just AML

Money Laundering (ML) and know your customer (KYC)

Back when we all first started performing KYC (know your customer) checks on our customers the focus was on two main objectives:

1. Ensuring sufficient documentation was held on the registered holder – know your customer (KYC)
2. Trying to stop Money Laundering (ML) – hence the term Anti Money Laundering (AML)

Essentially, we were all trying to make sure that our financial products weren’t being used for ML, which, by definition, has to have a predicate offence (the money must be the proceeds of crime and therefore there must have been an initial criminal act). Of primary interest was the proceeds of drug trafficking, however the predicate offence could be anything from simple theft through tax evasion to major fraud.

AML was just the beginning; however the concept of financial crime has evolved to encompass many more aspects. The Money Laundering Reporting Officer (MLRO) and their deputies have evolved to include:

Terrorist Financing (TF)

In 1999 the United Nations had already passed their International Convention for the Suppression of the Financing of Terrorism and in 2000 the UK had passed their Terrorist Act (TACT) before the horrific terrorist activities of 9/11 in 2001 brought the full attention of the world to bear on counter-terrorist financing (CTF), also known as combating the financing of terrorist (CFT).

The biggest difference between TF and ML is that the money involved in TF is usually “clean” to start with. There is no predicate offence and the money is not the proceeds of crime. The criminal element is what the money is being used to fund. TF can therefore be looked at as the reverse of ML – TF takes clean money and uses this to fund criminal (terrorist) activity whereas ML is seeking to take criminal money and separate it from the crime to create “clean” money.

The other significant difference is that relatively small amounts of money can be used to finance terrorist activities, whereas ML normally involves “laundering” larger sums of money.

ML gave us the opportunity to focus on where money was coming from/how it was obtained and the preference for focusing on larger sums. Adding TF into the mix means a different focus to where money is going/what it will be used for and focusing on larger transactions becomes less relevant.

Proliferation Financing (PF)

Proliferation relates to making available, or aiding in the development of, nuclear, chemical or biological weapons. This is different to TF in that PF relates to the financing of activities of sovereign nations.

Under United Nations Security Council (UNSC) Resolution 1803 there is the requirement for Counter Proliferation Financing (CPF) Reporting. This would be done on a Suspicious Activity Report (SAR) the same as reporting for both ML and TF.

Whilst TF is not the same as PF there are similarities in that normally the money used for PF will not itself be the proceeds of crime, but rather the money will be used for a criminal activity.

Anti-Bribery & Corruption (ABC)

Bribery and Corruption are two separate, yet linked, concepts – it is very difficult to bribe an official who is not corrupt.

  • Bribery is the offering, promising, giving, accepting, or soliciting of money, gifts or other advantage as an inducement to do something that is illegal or a breach of trust in the course of carrying out an organisation’s activities
  • Corruption is the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party

A financial institution’s AML, CTF & CPF procedures, which are largely about ensuring that internal processes stop clients from performing illegal acts and the institution becoming complicit. ABC policies should ensure that not only are clients not falling foul of legislation, but nor is the institution itself in its own activities.

Sanctions

Sanctions are measures adopted against a country, regime or individual (collectively “entities”) believed to be violating international law. They are political trade restrictions put in place with the aim of maintaining or restoring international peace and security.

Sanctions can be targeted at entities that are known to engage in terrorist activity or weapons proliferation, however sanctions may also be implemented as result of human rights violations or because of military action (one nation invades or annexes all or part of another nation).

Sanctions tend to be restrictive, coercive measures, that may involve:

  • Freezing of funds
  • Withdrawal of financial services
  • Bans or restrictions on trade or travel
  • Suspension from membership of international organisations

A review of possibly sanctioned individuals should include not only prospective customers, but also those existing customers who become the subject of sanctions. Whilst a sanctioned individual may not be guilty of a financial crime the identification of sanctioned entities (and subsequent reporting if necessary) is normally made a function of the MLRO and their team.

Politically Exposed Persons (PEPs)

Whilst a client being identified as a PEP is not necessarily a financial crime indicator it is most definitely a risk “flag” due to there being a higher chance of the individual being involved in ABC, PF or being sanctioned. These also lead to a higher risk of ML as the likelihood of a predicate offence is greater.

It should be noted, however, that involvement of a PEP in a legal structure is not necessarily a high risk indicator as the existence of the structure combined with policies and procedures may make it impossible for the PEP to illegally access the funds of the legal structure.

Consider a U.S. State Pension Fund where (maybe) the Governor (a PEP) is on the board of the fund structure. The State Pension Fund makes an investment into a Guernsey-based open-ended fund that will only receive monies from the registered investor and will only pay back to the registered investor. There is no possibility of embezzlement in this structure and with these policies/procedures in place.

Evolution of the MLRO

We can now see that the MLRO has multiple roles:

  • Ensuring that the financial system is not being used for ML, TF or PF
  • Ensuring that ABC policies are adhered to
  • Ensuring that Sanctions are not breached
  • Ensuring that high-risk individuals (such as PEPs) are identified

Whilst the tone from the top (i.e. the board and senior management) is important in ensuring corporate culture induces compliance with all relevant policies and procedures, it is the MLRO who ensures compliance on a day-to-day basis.

Whilst the stakes are high the MLRO needs to ensure that decisions are pragmatic and that their role does not become that of the Business Prevention Unit. Properly risk-rated business can be taken on and administered with minimal disruption.

It is also important to note that Customer Due Diligence (CDD) processes designed for KYC should be enhanced to ensure that requirements for FATCA and CRS are integrated into one seamless process. Whilst the MLRO may not be the Responsible Person for FATCA they should ensure that all take on requirements form one process, particularly as tax evasion itself is a predicate offence that we all want to avoid.

The role of the MLRO is only going to get more complicated in future and a good MLRO needs to be prepared. Qualifications such as the Award in Combating Financial Crime offered by the CISI give a good grounding in all of the relevant skill sets required for this position.

Fund Distribution: Impact of the 4th Anti Money Laundering Directive

The fourth Anti Money Laundering Directive (AML4), or Directive (EU) 2015/849 to give its proper name, is due to be implemented into National Law by all EU member states by 26 June 2017. As with all directives there can be gold-plating at the national level. There will also be recommendations, guidelines and interpretation from various bodies especially the European Supervisory Authorities (ESAs).

I will start by saying that whilst AML4 (4th Anti Money Laundering Directive) naturally mentions bodies such as the Financial Action Task Force (FATF), it is also distinctly European protectionist in nature. A clear distinction is drawn, yet again, between European Union member states and “third countries” (i.e. the rest of the world). AML4 extols the virtues of cooperation between the Financial Intelligence Units (FIUs) of the EU member states whilst keeping true global cooperation to the periphery.

To begin to understand the potential that AML4 has to affect global fund distribution, we must first understand the global nature of UCITS distribution.

UCITS Distribution – Current

As we all know, UCITS (Undertakings for Collective Investment in Transferable Securities) is a European Directive (now up to version five) designed to provide retail investors across the European Union with cross-border distributed funds that all meet the same minimum standard. That is what UCITS was originally designed to be, however that is not what UCITS remained.

UCITS is now effectively a “brand mark” and has global recognition. Not all countries recognise UCITS for retail distribution, but a large number do. One has only to look at the distribution that UCITS funds currently achieve to recognise that distribution crosses continents and oceans.

Looking now at non-EU distribution, a single UCITS umbrella fund might:

  • Be registered for retail distribution in Switzerland, with clients often buying using Swiss banks as intermediaries
  • Be registered for retail sale in Hong Kong or Macau with hundreds or thousands of individuals underlying a single nominee account that is transacting daily
  • Register for restricted sales to institutions in Singapore
  • Register for retail sale in Taiwan with all holdings via a few accounts in the names of banks
  • Sell into South Africa either by direct retail sale or via Life & Pension platforms where holdings will be bulked under the nominee of the platform provider
  • Be sold via the NSCC (National Securities Clearing Corporation) platform in the USA by numerous broker-linked representatives into the non-Resident Alien market – but with all holdings being under the broker-dealers street name (Matrix level 3 registration)
  • Be rated for sale to Chilean or Peruvian AFPs (Administradoras de Fondos de Pensiones) – pension funds investments that all get registered in the name of the AFP or their custodian (often the custodian is in a low risk jurisdiction)

This list has been kept intentionally short, however we can see that UCITS funds have global distribution and, more than that, investment via intermediaries is a global standard.

4th Anti Money Laundering Directive – Joint Consultation Paper

On 21 October 2015 the Joint Committee of the European Supervisory Authorities (ESAs) issued their Joint Consultation Paper JC 2015 061 in relation to AML4. This paper gave draft guidelines on risk factors that EU financial institutions should consider when assessing financial crime risk and on the application of either simplified or enhanced customer due diligence (SDD – simplified due diligence or EDD – enhanced due diligence).

It should be mentioned at this point that a final version of this document has yet to be released. The consultation period has ended, but there is no indication yet as to what (if anything) is going to be changed. Chapter 9 of this paper covers the sectoral guidelines for providers of investment funds and covers sections 200 to 215. Of particular interest in the context of this article are the final four sections, which cover intermediaries.

Section 213 covers financial intermediaries “subject to Anti Money Laundering/Combating the Financing of Terrorism (AML/CFT) obligations in an EEA jurisdiction” and, subject to certain other provisions, allows for the firm to undertake simplified due diligence. This is great where a Luxembourg fund has an investment from an Irish custodian… they don’t have to look through the Irish custodian to the underlying beneficial owners, although they must have the right to request details of the beneficial owners from the intermediary (section 214). This is also consistent with the application of both FATCA and CRS as the Irish custodian would be classified as a Foreign Financial Institution (FFI) and again there would be no need to look through to the underlying beneficial owner.

The problem comes for third country intermediaries investing into an EU fund, and this is covered under section 215 of the joint consultation. “Where the financial intermediary is established in a third country… firms should apply full CDD (Customer due diligence)… or EDD measures as appropriate”. What does this mean? Full CDD would include looking through to the beneficial owners and identifying them with verification of that identity, EDD means additional measures to verify the beneficial owner’s identity, source of funds/wealth, etc.

UCITS Distribution – after AML4

Until now the global distribution of UCITS has been largely governed by recognition of the brand in the jurisdiction where distribution is taking place. AML4 is bringing additional regulatory cost of compliance to bear, both for the fund operator and for the intermediary client.

Take the example of a Hong Kong nominee account with three hundred underlying beneficial owners invested in a Luxembourg fund. There is additional burden on the bank operating the nominee account… they must supply three hundred certified copies of identification documents and proofs of address (more if holdings are joint) and should do so before each new beneficial owner invests. The additional burden on the fund administrator is to keep record of the beneficial owner records, verify all the documents meet the required standard, confirm to the Hong Kong bank that each new beneficial owner has been properly identified, ensure ongoing review of each client. They must also rely on the Hong Kong bank to properly disclose all underlying beneficial owners and to not deal for a new beneficial owner before due diligence is complete.

This is an example of the EU wanting to regulate EU financial products out of the markets, in this case by making it more difficult for non-EU clients to invest into EU products. Increasing EU protectionist legislation will ultimately work against the EU/EEA financial services industry.

Alternatives to UCITS

Many jurisdictions outside the EU/EEA operate retail fund structures with striking similarities to UCITS but without many of the restrictions that the EU/EEA have towards third country clients. If jurisdictions, such as Guernsey, can come up with a more pragmatic approach towards the future use of intermediaries then there is an opportunity for those jurisdictions to begin encroaching on the UCITS dominance of the retail fund space.

Let’s hope that non-EU/EEA regulators don’t follow the example of the European Supervisory Authorities like a group of lemmings!

The EU Regulation Torrent

On 29th November I attended the 6th AIFM (Alternative Investment Fund Managers) Directive 2016 Conference held by the Private Equity Forum and hosted in the auditorium at the London office of Simmons & Simmons. The content was heavy on regulation and had a large focus on Brexit. I was also able to have a conversation with the Director of Regulatory Policy at EFAMA (the European Fund & Asset Management Association) to discuss the increasing amount of EU regulation in further depth.

Over the past 8 years the increase in financial services reform has been driven by the 2008 crisis, resulting in 39 EU Directives & Regulations, 305 Implementing Measures and 232 Guidelines/Recommendations. AIFMD really is just the tip of the iceberg (although an important one to anyone in the alternative funds industry).

PRIIPS – Packaged Retail and Insurance-based Investment Products

This piece of regulation introduces the KID (Key Information Document) across the whole range of packaged investment products available, previously a KID or KIID was only applicable to collective investment schemes (funds). Whilst this was previously due to be implemented in 2017 it looks increasingly likely that it will be delayed until 1st January 2018 to coincide with implementation of MiFID II (see below), itself previously delayed.

Other than the matching implementation one of the delaying factors is clearly the unprecedented political decision (by the EU Parliament) to reject the Regulatory Technical Standards (RTS) developed between the European Supervisory Agency’s (ESA’s) and adopted by the European Commission. It remains to be seen how long it will take to come to a mutually agreed set of RTS.

Two main concerns regarding the PRIIPS KID still have to be addressed:

  • Serious flaws in the methodology for calculating transaction costs giving erroneous / misleading results
  • Past performance is no longer included in the KID – giving no easy opportunity for potential investors to compare the past performance of investment managers

MiFID II (Markets in Financial Instruments Directive 2)

MiFIR (Regulation on Markets in Financial Instruments)

The new updated directive and its accompanying regulation are set to have a major impact on the future of Asset Management. Whilst the asset management of UCITS (Undertaking for Collective Investments in Transferable Securities) funds and AIFs (Alternative Investment Funds) are covered under the UCITS V Directive and AIFMD (Alternative Investment Fund Management Directive) respectively, MiFID II and MiFIR will apply to any other asset management (e.g. bespoke, segregated portoflios), other services being provided in respect of UCITS funds or AIFs (e.g. distribution) will be covered under MiFID II/MiFIR.

Originally slated for implementation on 1st January 2017 this was pushed back by a year, however with 13 months left to go many aspects (e.g. the third country provisions) still require more details prior to implementation. Currently ESMA is consulting on guidelines for target markets for distribution, however given that the consultation documents indicate that ESMA thinks that portfolio management is a form of distribution clearly more work is required in this area.

CMU – Capital Markets Union

CMU is not a single directive or regulation, but rather a whole raft of reforms designed to “standardise” Capital Markets in the European Union under one single regime. Work is being carried out in phases, and success in some areas has been limited resulting in amendments to already “finalised” regulations.

To complete the first phase still requires implementation of the securitisation package and modernisation of the prospectus rules. The first phase also implemented two new fund “brands”, the EuVECA (European Venture Capital Fund) and EuSEF (European Social Entrepreneurship Fund), yet these fund types are already undergoing redesign. In a Briefing Paper to the European Parliament dated October 2016 it is stated that “take-up of EuVECA could be considered successful, the EuSEF results have been disappointing”.

The EU is clearly trying to come up with branding to follow the success of UCITS, however given that these funds are already subject to AIFMD the additional regulation is just adding more complexity & work. Given the low take-up in the EuVECA and EuSEF does not necessarily bode well for the ELTIF (European Long-Term Investment Fund) or PEPP (Personal Pensions Product), especially given that many EU countries already have national standards/products for personal pensions.

Many of the barriers to a true “market union” lie in the arena of taxation. Differences in national tax rates, some countries applying Financial Transaction Tax (“Tobin Tax”) and the levying of Withholding Tax (WHT) with differing and often complex refund procedures are all obstacles to the CMU. So long as tax discrimination remains within the EU true “union” will remain difficult to achieve.

AIFMD II or AIFMD Review?

Before leaping into what may come next for the Alternative Investment Fund Managers Directive, I would say that the prevailing feeling of the conference was that implementation of the third country passport has been firmly put on the backburner. This may well be to use as a stick or carrot in Brexit negotiations, however this may also be due to two of the five countries that have the ESMA recommendation being British Crown Dependencies.

Under Article 69 of AIFMD from 22nd July 2017 the European Commission commences a review of the application and scope of the Directive (yes it really will be three years since implementation!). This will include an analysis of the extent to which the objectives of AIFMD have been achieved and will also include a general survey. There is no deadline for the completion of this review, although it seems fanciful that any meaningful review can take place until the impact of the third country passport can be observed.

One big question is whether the scope of AIFMD is too broad, as currently any collective investment vehicle that is not a UCITS is an AIF (Alternative Investment Fund) if in the EU/EEA or may be an AIF if outside. Given that managers (not funds) are regulated under AIFMD this may require fundamental changes to the structure of the Directive.
Another area of potential change is to address the difference in remuneration treatment between AIFMD and UCITS V. Whether alignment comes via change to AIFMD or UCITS remains to be seen.

One area that personally I would like to see addressed in any review of AIFMD is the onerous reporting requirements, the results of which are presumably just sitting on servers somewhere since the national regulators must be wondering what to do with this mass of data. If it is truly designed to prevent systemic failure, then surely reviewing quarterly data received a month after the quarter-end is going to highlight any potential failure after such failure has or has not occurred. It is also ludicrous that when choosing the investment strategy of an AIF “equity” or “bond” is not an option and instead “other” must be selected.

UCITS VI

The EC has no immediate plans to review the UCITS Directive again and move on from the current 5th version (or 4th if you take into account the absence of UCITS II). There is a specific clause to review the Sanctions regime in September 2017, but other than that UCITS currently seems largely fit for purposes (within the EU/EEA).

If AIFMD undergoes any significant changes it is likely that some of these will also be applied to UCITS, which may fit into the next sequel, along with alignment of the remuneration regimes applied under the two directives (whichever is updated to harmonise this).

There may be work to amend OTC derivative exposure limits to be consistent with EMIR (European Markets Infrastructure Regulation). There may be work done to amend leverage or share classes. There may also be some tidying to be done of outstanding “issues”. Regardless, UCITS VI is currently very low on the agenda.

Looking at the third country provisions within both AIFMD and MiFID II/MiFIR as well as any possible extension of the EuVECA and EuSEF brands to third countries, is there any possibility of extending to third country UCITS provisions? This is highly unlikely given the protectionist stance of the majority of EU member states. Some countries (Luxembourg, Malta, Ireland) may like to see the option of reciprocal recognition as a future tool to extend their offering into new jurisdictions or secure recognition of UCITS in countries where such recognition is currently available. These are clearly in a minority, and I feel a further article coming on about the “one-way” UCITS ultimately hampering global distribution of the brand…

My EU Regulatory Change: Conclusion

I haven’t even touched on some directives and regulations (the 4th Anti-Money Laundering Directive and General Data Protection Regulation being amongst them, and have sought to focus on fund and investment specific regulation. Clearly financial services businesses are going to have to continue to deal with a mass of changing EU regulation/legislation and this isn’t even considering ongoing international tax initiatives (FATCA, CRS, BEPS) or the requirements for selling funds into non-EU jurisdictions whether via registration or private placement.
Compliance Officers, Money Laundering Reporting Officers, Data Protection Officers, Lawyers, Accountants and Consultants clearly have employment for a long time to come. What is scary, and something that we all acknowledge, is that most international regulation is set by politicians with little understanding of the functioning of the financial services industry and markets. Sense does not often prevail, and industry is left counting the cost of increased compliance in an age where passing that on to the client is not easy.