Legal and compliance teams at European private equity and venture capital firms might have been relieved to see the end of 2018 — with GDPR and MiFID II implementation projects largely completed — but 2019 seems unlikely to be a quiet year. So, what is on the regulatory “to-do list” for the next 12 months?
Brexit uncertainty — some would say chaos — will, of course, continue to dominate the headlines, at least in the early part of the year. Firms will, for now, continue to plan for the possibility of a no-deal Brexit — although the extent of the planning required varies considerably from firm to firm. For those operating mainly in the UK, the government’s legislative “onshoring” project will ensure regulatory continuity in the event of a hard Brexit, and EU firms with operations in the UK will have the benefit of the UK’s temporary permissions regime to cushion the sudden impact. But UK firms with EU branches providing services in the EU, or actively relying on marketing passports to raise their funds, will face significant disruption. We will soon find out whether the UK and the EU will conclude an agreement that includes a transitional “standstill” period until at least December 2020 but — if not — the run-up to March will be busy.
As for the UK’s future relationship on financial services with the EU — presently enshrined in brief and somewhat vague commitments in the draft political declaration of November 2018 — there will be some time to wait before that becomes clear. Even if there is a deal before March 2019, the uncertainties caused by the European Parliament elections and the establishment of the new Commission mean that significant progress is unlikely during 2019.
But there are plenty of other matters to attend to. All UK-regulated asset managers will need to implement the major part of the Senior Managers and Certification Regime (SM&CR) by December 2019. Before then, firms must identify senior individuals who will step up to the responsibilities of “senior managers”, and other “certified staff” whom the firm will need to assess as “fit and proper” to perform their role. The new regime will entail a culture change for some firms, because it will require senior business people to be directly accountable to the UK’s regulator. Not exactly the post-Brexit de-regulatory push that some may have hoped for.
Meanwhile, the much talked-about (and feared) review of AIFMD is also getting underway. Last year, the European Commission kicked-off a review of the operation of AIFMD across all asset classes, and published a report yesterday. Reforms are certainly not likely to come quickly but, when they do come, even minor changes could have a significant impact — and the industry must actively engage this year to help shape the outcome.
However, one important change to the AIFMD regime is more immediate: legislation to improve various aspects of the cross-border distribution of investment funds is likely to be finalized early in 2019. Of particular interest is a new (harmonized) definition of “pre-marketing”, which will almost certainly be helpful. On the other hand, it will probably come with conditions — for example, a need for EU-based managers to notify regulators of an intention to “pre-market”. The legislation will also be clear that reliance on the exemption for “reverse solicitation” will not be possible if there has been any prior pre-marketing. But it remains unclear what impact, if any, these changes will have on non-EU fund managers using private placement rules.
Those private equity firms that are regulated under MiFID — which includes many UK “adviser-arrangers” — should closely follow the 2019 legislative work on the new prudential framework for investment firms. All such UK firms will move from their existing (modest) regulatory capital requirement to one based on annual fixed overheads, and firms that do not fall into the category of “small and non-interconnected firms” will also have to maintain regulatory capital proportionate to their assets under management (and potentially assets subject to advisory mandates as well). Firms will probably also be subject to significantly enhanced rules on remuneration. Even though these new rules will not become effective for some time, and there will be a transitional period, the changes are expected to have a significant impact.
ESG will continue to be an important theme during 2019. In particular, the European Commission will re-double its efforts to make sustainability a factor in investment decisions and risk management procedures for all EU-regulated investors, including pension funds, insurance companies and alternative asset managers. The draft rules would introduce EU-wide criteria to determine whether an activity is environmentally sustainable (essential for consistent disclosure) and require managers to describe how they take account of environmental, social and governance (ESG) considerations in their investment and risk management process.
And finally, there is some indication that regulators will address the well-known shortcomings in the so-called PRIIPs Regulation (requiring provision of a “key information document” [KID] for any fund that is made available to an EU retail investor, with information presented on the basis of set methodologies). The European Supervisory Authorities have signaled work in 2019 on the practical application of some of the Regulation’s technical requirements and, in early 2019, the UK’s FCA is expected to publish a statement on the industry’s initial experiences with the PRIIPs requirements. It is to be hoped that the requirements will be made more workable, even if there is little hope that they will be abolished.
So, a busy year is in prospect for European regulators. But save for the UK’s SM&CR, many of the changes will probably not become clear until later in the year, or perhaps even 2020 and beyond, and implementation may be even further away.
Simon Witney is special counsel and Patricia Volhard is a partner at Debevoise & Plimpton.
This is part of a series, European Funds Comment, by Debevoise & Plimpton.