By James Lawrie
As the fund management industry continues this much-welcomed period of transition, the July 22nd implementation deadline set by the AIFMD draws closer.
Since the directive was passed last year by the European Commission, the fund management industry has been required to undertake significant changes, both regulatory and culturally. Fund Managers and Directors have had to respect a raft of new regulatory obligations set out in the directive, as well as broader compliance requirements.
With just over three months until the AIFMD deadline for change, European asset managers controlling a significant proportion of total assets remain unprotected.
This of course, is a significant issue for those more risk averse Fund Managers, but it’s true that many currently do not hold the necessary insurance coverage. The AIFMD changes have also raised questions amongst investors seeking assurance and peace of mind that their investments are protected.
Institutional Investors are becoming increasingly concerned about whether funds are fully compliant and Fund Managers are under increasing pressure to make sure they tick all the compliance boxes.
This is especially true of potential ‘negligent’ trade errors or rogue trading. The ‘negligence’ concerned within the AIFMD is a relatively broad term, and covers a range of circumstances arising from Fund Manager’s behaviour. This could include the loss of documents evidencing title of assets of the AIF, misrepresentations or misleading statements made to the AIF or its investor or the failure to establish procedures to prevent dishonest, fraudulent or malicious acts.
Amongst the most prominent changes within the AIFMD framework, are the new insurance requirements. Essentially, the directive provides two clear options for fund managers regarding issues that may arise from professional liability risks, and the methods AIFMs must now adopt to protect themselves.
Some managers will use additional own funds to cover themselves which should represent at a minimum 0.01% of the value of the portfolios managed by AIFMs.
The second option, which will be popular amongst compliance, risk and governance professionals, is the purchase of PII. This will amount to 0.7% of the total asset value of the AIF for individual claims, and 0.9% of the total asset value of the AIF in aggregate per year. Protecting these assets through Professional Indemnity Insurance (PII) provides investors with an additional ‘safety net’, as well as giving Managers piece of mind.
For some Fund Managers, the additional own funds requirements outlined by the AIFMD may not offer the levels of investor protection necessary, particularly for the risk averse and smaller firms that don’t have sufficient capital. A large proportion of Fund Managers already hold some form of PII. It is very unlikely such managers will cancel existing PII to rely solely on additional own funds.
Whilst the industry is yet to feel the full effects of AIFMD, it is apparent the directive has the potential to exist long term as a regulatory framework. With increasing regulation, reporting and compliance rules for Fund Managers to follow, institutional investors are increasingly looking at ways to ensure their investment is protected.
With AIFMD implementation only months away, those more risk averse Fund Managers are likely embrace change sooner rather than later.
James Lawrie is head of asset management underwriting at Apsley
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