Clara Smith, Intertrust

Two-thirds of alternative investment fund managers predict a rise in regulatory arbitrage between EU member states


Over two-thirds (67 per cent) of alternative investment fund managers believe the prospect of regulatory arbitrage between European Union member states seeking to attract business is likely to grow over the next two years, according to a new study.

The research reveals that regulatory arbitrage has muddied the waters for many investors, which has led to widespread unfamiliarity when it comes to the practical application of the rules. Sixty per cent of respondents agreed that variances of AIFMD interpretation between different EU member states has created the biggest knowledge gap among non-EU AIFMs.
 
Intertrust, a global leader in providing expert administrative services to clients operating and investing in the international business environment, interviewed over 100 alternative investment fund managers in private equity, real estate, hedge and infrastructure based in Europe, North America, the Middle East and Asia about the benefits and challenges generated by AIFMD since its introduction in 2011.
 
Although AIFMD has become largely normalised and integrated into the mindset of investors and stakeholders, Intertrust’s study shows that some challenges remain.  An overwhelming majority (91 per cent) cited regulation as the leading cause for concern when marketing funds across Europe, of which, over half (51 per cent) said it was ‘very challenging’.
 
Some 87 per cent highlighted applications and variations of permissions, followed by concerns over compliance (79 per cent), risk management (72 per cent), governance (62 per cent) and fee transparency (55 per cent).
 
The study shed light on the desired outcomes of AIFMD II, which mirrored the perceived weakness of the first version. Over half of respondents (60 per cent) said they would like to see better harmonisation to reduce variances of AIFMD interpretation between different EU member states.  Some 44 per cent expressed the desire for a more consistent approach to what is pre-marketing and marketing, followed by an extension of marketing passport to non-EU AIFMs (33 per cent) and non-EU AIFs (23 per cent).
 
Looking ahead, over 79 per cent expect the take up of third-party turnkey solutions for managers looking to remove the burden of setting up their own AIFM to increase over the next two years, highlighting the opportunities and challenges the directive has generated in the market.
 
Some 44 per cent of respondents have made progress with their contingency plans in relation to Brexit or European country fragmentation for marketing AIF’s into the EU. 
 
Over half (54 per cent) of respondents believe that UK fund managers are most likely to establish a presence in the EU until the AIFMD third-country regime is switched on, either through an EU subsidiary or by appointing an EU authorised ‘host’ AIFM.
 
Ciara Smith, Head of Regulatory and Compliance Services at Intertrust Group, says: “Regulatory arbitrage between different EU countries vying for new business is one of the unintended consequences of AIFMD and the perception is this will continue to intensify.  This has made an already complex piece of regulation even harder to understand, particularly for non-EU managers looking to set up AIFs in the region. It’s not surprising that investors want AIFMD II to bring an end to these variances in how the rules are interpreted. 

“It’s clear that although AIFMD has become largely normalised, significant challenges remain, which require a dedicated approach and expert understanding to ensure that processes and structures are fully optimised.”

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