Considered in Grand Committee
My Lords, these regulations implement the alternative investment fund managers directive, taking into account the European venture capital fund regulation and the European social entrepreneurship regulation. Member states are required to transpose the directive by 22 July this year.
The directive creates a new regulatory framework and a passport to market funds across the EEA for managers of investment funds that are not already authorised under the undertakings for collective investment in transferable securities, or UCITS, directive. The regulations also create an optional lighter framework for smaller managers of venture capital and social investment funds, including a marketing passport.
The investment management industry is one of the UK’s success stories. It serves millions of customers all around the globe and forms a key part of the UK’s financial sector, managing £4.9 trillion of funds and earning an estimated £12 billion a year for the UK economy. Around one-third of European assets under management are managed out of the UK and the industry is a significant provider of high value-added jobs and skills, with clusters of expertise in London and Scotland and across many UK regions.
Because of the importance of this sector to the country, sensible and proportionate application of the requirements of the directive is vital to safeguarding its future. Therefore, we have consulted extensively with industry and other stakeholders while developing these regulations. As well as setting up face-to-face meetings with a range of trade associations and individual firms, we published a discussion paper and two consultation papers. We received 27 responses to the main consultation paper. Jointly with the Financial Conduct Authority we also set up an open forum event, which was attended by more than 300 stakeholders. The regulations have been developed in line with the feedback that we received, and the asset management sector has been very supportive of our overall approach to their introduction.
We have made full use of the flexibility provided by the directive to ensure that our industry has as reasonable a timetable of transition to the new regime as possible. UK firms must therefore be authorised or registered in accordance with the directive before 22 July next year. A firm will need to comply with the relevant directive requirements by the time that its authorisation or registration is approved. The full scope of the directive applies to firms managing cumulative assets with a value in excess of the threshold of €500 million, or €100 million if they are leveraged—that is, if they have used debt to supplement investment. Other firms may also opt in to the full scope of the directive if they choose.
The directive prescribes uniform regulatory standards for fully AIFMD-authorised firms, in particular a requirement to appoint a depositary, new rules on delegation, disclosure of leverage to investors, liquidity management standards, common standards on valuing fund assets and restrictions on asset-stripping for private equity firms. In exchange, fully authorised firms will be able to benefit from a marketing passport. This will allow them to market the funds that they manage across the EEA, based on a single authorisation with the Financial Conduct Authority.
There is little discretion for individual member states on exactly how they implement these requirements. However, we are working closely with the FCA to ensure that these new rules are applied in a pragmatic and proportionate manner. We will not add any new regulatory requirements to firms below the threshold, with the exception of a few minor obligations imposed by the directive.
Implementation of the directive will represent a significant shift in the way that the European alternative investment fund management sector operates, and it is likely to increase operational costs for many firms. We have therefore explored every opportunity to minimise the negative impacts on UK firms. In addition to the 12-month transitional period to which I have already referred, we have made a number of policy decisions, including the use of available derogations to keep these impacts down. Also, we have not applied any gold-plating in our implementation of the directive. No directive requirements above the minimum required for implementation will be applied to UK firms and no other new requirements are being introduced.
Our regulations are also designed to ensure that UK investors continue to have access to funds in other jurisdictions, so that EEA and third-country managers seeking to market here will benefit from a similar transitional period to UK firms. EEA managers who cannot make use of the marketing passport will be able to market to UK retail investors on the same terms as a UK firm would, provided that the fund has been recognised as providing sufficient investor protection.
Third-country managers will be able to market to UK investors once they have completed a simple notification process with the Financial Conduct Authority. They will also cease to have to comply with the reporting requirements imposed by the directive as soon as there are no longer any UK investors invested in their fund. Again, this overall approach to non-UK firms follows the strategy of replicating the status quo of marketing arrangements as closely as possible within the framework of AIFMD.
Although the directive has not been without controversy in the industry, I hope that I have been able to reassure the Committee that the Government have worked closely with the sector to ensure that we have taken the most sensible approach possible to the implementation of the regulations. I am confident that the regulations will help to ensure an appropriate balance between protecting the interests of investors and promoting and safeguarding an important and successful UK industry.
My Lords, I am delighted to have the Floor. I cannot think of anything more exciting than to discuss this SI with the Minister. It looks as though only the two of us will participate in this absolutely fascinating debate.
Of course, we agree with the broad terms of the SI. After all, the origins of the directive were derived several years ago from a position that we largely endorsed in government. The Minister will appreciate that we very much agree that supervision and control should be robust and effective, and we expect the Financial Conduct Authority to fulfil that function. The SI indicates the need of this important part of our investment and service economy to have the opportunity to seek custom right across the European Community.
The Minister may nod his head enthusiastically, because I know his views on the European position, but I notice a dearth of Conservative support in the Committee on this issue. On issues such as this, in the absence of some of those noble Lords who, like their colleagues on the Conservative Benches in the Commons, always smell a rat in anything to do with the European Community, one always worries whether any such indication exists as far as this SI is concerned. Certainly, our side supports it.
The Minister identified the issue of costs, which, it is clear from the documentation, are not negligible. However, I ask the Minister to come clean on something that I do not think occurred in the other place. When this SI was being considered and the consultation had taken place with the industry, how is it that the Government, with extraordinarily adroit timing, also included in the Finance Bill £150 million of tax cuts to the industry? In this a case once again of the Government, with their well-known friends in the City and conscious that some costs are involved—I am not underestimating the costs—thinking that some softening of the impact must be made by other aspects of government policy?
All I can say is that I do not agree with that. I am not at all convinced about the necessity for that. After all, as the Minister was at pains to point out, and as was also made clear in the other place, there are considerable benefits from what the noble Lord referred to quite clearly as a passport for effective operation in Europe. That is not a negligible thing. Ordinary citizens pay for a passport when they have the right to go abroad, so I am not clear why the costs appear to have been partially defrayed by the Government acting in another legislative capacity to moderate costs for the industry with the tax concessions that they have made. After all, it is not as if the industry has not for some time been quite adroit at lobbying on this issue—with considerable effect, I might add.
I apologise if I am a little slow in understanding the position but perhaps the Minister can spell it out. I understand entirely the €500 million threshold on activity and the €100 million base, but I take it that those who fall below that threshold yet are in this category of activity are subject to some regulation from the Financial Conduct Authority. I was not quite sure whether the Minister had spelt that point out. I apologise to him in advance if he did and I merely missed it.
We endorse this SI and hope that it will bring to the industry the opportunities of using the passport for effective operation in Europe. I have one last question. The Minister referred to the date by which we were obliged to comply. What are the prospects of the other 27 states complying with that timetable? He says, “Well, we haven’t gold-plated this particular SI”. No, but fair is fair and a level playing field must exist across Europe. We therefore want some assurance that other actors on the European scene will meet the same obligations with the same degree of scrutiny and control as is to be applied in the United Kingdom.
My Lords, I am most grateful to the noble Lord for his intervention. Since he referred to the timing of this debate, I must apologise that we have chosen to have it on a particularly exciting afternoon in the first test. Australia were 19 for two when I last heard.
I do not want to dampen the mood but the noble Lord will know the score at which England were all out, so I am pleased to have been able to assist him marginally.
Regarding the noble Lord’s questions, he raised the point about whether the decision in the Budget to abolish Schedule 19 stamp duty reserve tax was a sop to the industry that was being hit by this directive, to which the answer is no. It is not, if for no other reason than that the firms covered by this directive were not bearing the stamp duty. This directive covers hedge funds and private equity, which were not paying the stamp duty reserve tax in the first place, so that is not the case. The reason for abolishing that relatively modest bit of stamp duty was that we were undertaking a package of reforms designed to enhance the competitiveness of the funds industry, and to help secure our status as the global asset management centre. The scope within the EU to expand that kind of activity of fund management is considerable, in our view, and we do not want to constrain it by unnecessary burdens of any sort.
The noble Lord asked about the state of play in terms of the implementation of the directive elsewhere. We are aware that Austria, Bulgaria, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Romania, Slovakia and Sweden have stated that they will implement the directive by the deadline. The majority of those member states now have relevant legislation being considered by their parliaments. I am afraid that I cannot give the noble Lord any information on the state of implementation in Belgium, Estonia, Greece, Hungary, Lithuania, Poland, Portugal, Slovenia or Spain. However, as far as we are aware, there is no reason to believe that any of those jurisdictions will miss the deadline.
The noble Lord asked whether sub-threshold managers are authorised by the FCA. Yes, they are. All sub-threshold managers will be subject to at least the same regulatory standards and oversight by the FCA as they are now, so they are not unregulated. I hope that I have answered the questions posed by noble Lords and, on that basis, commend the regulations to the Committee.