The Financial Conduct Authority recently published long-awaited guidelines detailing how it plans to implement the Alternative Investment Fund Managers Directive, which aims to curb the buccaneering habits of the alternative fund industry in Europe. The hedge fund industry was particularly concerned by the potential impact of new pay measures, which will force managers to receive half of their pay in units of their funds and to defer payment over longer time periods. But, according to draft guidance from the FCA, companies with between £500 million and £1.5 billion of assets under management in alternative funds may be allowed to opt out of the pay restrictions.
In its consultation paper on the guidance, the FCA says: “We believe that by providing this guidance on proportionality, including setting these thresholds, there should be no significant costs incurred by AIFMs. This is because this guidance is likely to provide [alternative fund managers] with greater certainty as to the application of proportionality, and potentially exclude some AIFMs from applying the full regime.”
The proposals have been well received by industry participants, who feared the Directive could put the European hedge fund industry at a competitive disadvantage to the US and Asia.
Groups with more than £1.5 billion of assets under management, meanwhile, could also escape the rules if they can prove that their organisational structure is simplistic, such as hedge funds with a high level of assets but that operate in one territory, or those that run non-exotic strategies or have straightforward governance processes.
The existence of the exemptions could create competitive disadvantages for large fund companies that fail to meet the necessary opt-out criteria.
National authorities across Europe are likely to follow the FCA’s lead in how they apply the AIFM rules, although few will distribute such detailed guidelines, according to Tim Wright, director of the reward practice at PwC.
He says: “I don’t expect many other regulators to come up with formal guidance at all – they will probably tell firms to comply as they feel they should and challenge firms when they think they should". He adds that only countries with negligible alternative fund industries were likely to put stricter rules in place than the UK, reducing the risk of regulatory arbitrage across Europe.
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