Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018

In December 2017, the Government announced they would introduce a temporary permissions regime for inbound passporting EEA firms and funds. The draft alternative investment funds regulations create a temporary marketing permissions regime for EEA managers of alternative investment funds, including the European venture capital funds and European social entrepreneurship funds. This will allow EEA fund managers who currently have a marketing passport to continue to market funds as they could before exit day for a temporary period. This period is for three years. However, subject to an assessment by the Financial Conduct Authority as to the effect of extending, the Treasury can extend the period by no longer than 12 months at a time.

As outlined in my letter to the noble Lord, Lord Tunnicliffe, on 7 January, the Treasury has now committed that any extension of this or any other temporary regimes would be preceded by a Written Ministerial Statement issued to both Houses of Parliament. The Statement would give Parliament advance notice of the Government’s decision to extend the temporary permissions regime ahead of the extension SI being laid. This commitment responds to the concerns raised by the Secondary Legislation Scrutiny Committee and by my colleagues in this House. While it is our continued position that the negative procedure is appropriate, we take parliamentary scrutiny seriously and hope this commitment will allay the House’s concerns in this regard.

The temporary marketing permissions regime provides continuity and certainty for passporting funds that enter the regime and the UK customers they serve. The FCA will have the power to oversee operation of the regime and have supervisory oversight of all funds with temporary permissions. While in the temporary marketing permissions regime, fund managers will be directed by the FCA to notify under the national private placement regime, which is the current mechanism that allows non-EU third country fund managers to market in the UK.

On the other provisions of these instruments, first, all these draft regulations remove references to the Union and to EU legislation, which are no longer appropriate, and replace them with references to the UK and UK legislation. Secondly, in the alternative investment fund managers regulations, the definition and scope of alternative investment funds will be amended to reflect the UK leaving the EU. Any fund that does not meet the new definition of UK UCITS will be defined as an alternative investment fund. This will therefore mean that all EEA UCITS will be regarded as an alternative investment fund in the UK. UCITS funds are a simple and regulated type of fund intended for retail investors, whereas alternative investment funds are more complex, aimed largely at professional investors, and have additional requirements, such as transparency of reporting. Requiring EEA UCITS to meet additional requirements for an alternative investment fund would be disproportionate. Recognising this, this instrument removes certain aspects of the regime for alternative investment funds that were not designed for retail funds, such as reporting requirements. This will ensure that UCITS funds will continue to be regulated proportionally in the UK as retail funds.

I have no comments on the way in which the onshoring has been done in so far as it follows the kind of path we have seen before, with temporary permissions in place until transfer to the domestic regime—in this case, the UK national private placement regime—takes place. I do, however, have a couple of questions, and I gave notice to the Treasury of the first one.

I believe that, in his introduction, the noble Lord, Lord Bates, covered the reasons why there has been a change to the private placement regime’s reporting requirements. The reasoning, which I understand fully, is that EEA UCITs become AIFs and therefore slot into a regime meant to cover the sort of funds used by only professional investors, whereas it has protections that correspond to the retail case from the EEA UCITs. That was given as a reason for changing the reporting requirements for those under the national private placement regime.

However, I do not understand what power the Government are using for that proportionality, and here I refer to what is said in paragraph 7.10 of the Explanatory Memorandum concerning Regulation 10(9)e. Is it a continuation of the withdrawal Act powers or are the Government using another form of empowerment? I did not perceive the withdrawal Act as giving powers to amend the national private placement regime, but I may have missed something in the logic. I hope that there is an answer there; it is quite likely that there is, which is why I gave notice of my question. Paragraph 7.10 also references the “reporting requirements for funds” recognised as retail funds under Section 272 of FSMA. It is true that they are less risky, so less reporting is needed, but where has the power to amend the private placement regime come from? Has it come from FSMA? That may be possible. If so, that should be said. I decided not to spend yet another weekend trying to work out where it came from, but to ask the question instead.

My second question concerns asset stripping. The asset stripping provisions have been contracted to apply only to UK companies. Does that mean that EU funds that are allowed to continue in the UK under the temporary regime can come here to asset-strip EU companies that they acquire? Are we going to get ourselves a bad reputation—“Come to London and we will strip your EU assets”—or are they covered by the built-in requirement of their home member state? Could they separately acquire something that is somehow ring-fenced in the UK? When they are converted to the UK national regime, will it still have all the asset stripping protections? It may not be the place to correct that here but, on a point of information, will our NPPR have UK asset-stripping protections? That was a novel aspect that was introduced into the AIFMD.

I will move on to venture capital and social entrepreneurship funds. When they were proposed, they were said not to be attracting much interest in the UK; people said that we did not need this kind of thing and we had all the funds we needed. I wonder therefore whether there are any figures for the volume of assets under management or sold in the UK using this heading.

We come now to the interesting point I have already mentioned: symmetry and continuity of assets under management. This is an instance of where we are treating the EEA preferentially and not as a third country, so that these funds can still have EEA assets within them, which I fully understand—you would not want to have to rapidly divest assets. But when they were constructed, preferential bias was built in to try to help the EU and EEA companies. Will there be a review of that in the fullness of time, for example to restore in some way the benefit of the UK footprint rather than an EEA footprint? What has been done is sensible in the immediate, but it would be interesting to know the longer-term view, partly because the logic of coming under the same jurisprudence no longer holds. The other side of that is: why not open up so that they can have all funds, including third countries, in them? How are we going to deal with that?

That is probably all that I need to say. My question is, what is the justification? The choice was between three options and the continuity option has been chosen. But where are we going to jump to next? Are we going to shrink back to the UK or are we going to open up to third countries?