and on-boarding. For most existing UK hedge fund managers, the depositary-lite regime, which will apply in order to continue to market their non-EU funds through private placement in the EU, will take effect on 22 July 2014. Whilst some managers of non- EU funds will choose to rely on reverse solicitation and side-step the depositary-lite requirements altogether, many recognise that marketing in the post-AIFMD era will be a grey area for some time to come. Many managers are viewing depositary-lite as a way to manage the regulatory and general business risk of non-compliance with the marketing rules as well as providing flexibility to market their funds. In practice there are going to be many hundreds of offshore funds looking to on-board depositary-lite providers in a very short period.
“There are going to be many hundreds of offshore funds looking to on-board depositary- lite providers in a very short period.”
Despite the volume of funds requiring depositary- lite, the lack of preparedness in many parts of the administration and depositary industry to perform these duties may come as a surprise. There are various reasons for this. For most existing depositary businesses, depositary-lite has been a lower priority to finalising the full depositary model for EU funds. Newer entrants, typically independent administrators seeking to provide depositary-lite services to their existing administration clients, have in several cases simply left it too late to be operationally ready in good time for client on-boarding ahead of July. Some firms seeking to pursue UK regulatory authorisation have either only recently, or not yet, applied to the FCA and uncertainty remains around the regulatory framework which may or may not apply to depositary- lite providers in Ireland.
INDOS Financial was authorised by the FCA as a depositary-lite provider in early January, and remains the only authorised AIFMD depositary-lite firm in the UK. Managers need to allow sufficient time to on-board depositary-lite providers in a controlled manner and in order to ensure the manager gets the best commercial deal for the fund. Looking at what on-boarding involves, it can take time to agree the
roles and responsibilities of the depositary, prime brokers and administrator. Two-way due diligence is required between the manager and provider. Legal terms require negotiation and disclosures are required in offering documents. Leaving the agreement of operating models, fees and legal terms to near the regulatory deadline will most likely result in a more favourable outcome for providers. There are already some reports that established depositaries may experience capacity constraints or impose a cut-off for new client take-on. New entrants that are not yet operationally ready and don’t hold their regulatory authorisation are increasingly unlikely to be a viable solution for managers given the time-frames involved.
Considering these factors, managers really ought to be selecting their depositary providers in the near future. Delaying decisions could result in depositary- lite compliance becoming increasingly more difficult than it needs to be.
CHANGES TO THE UK’S APPROVED PERSONS REGIME Peter Bibby, Partner, Brown Rudnick LLP
In July 2013 the Parliamentary Commission on Banking Standards issued a report which recommended major changes to the Approved Persons regime for banks (which for these purposes includes PRA-authorised firms).
It concluded that the current regime had lacked teeth, been an ineffective tool in curbing reckless behaviour and had failed to enable the regulators to bring those responsible for serious regulatory failure to account. The FCA welcomed the proposals and confirmed that it would consider the extent to which the changes should be applied more generally to the regime applying to all authorised firms including hedge funds and asset managers.
The Banking Reform Act received Royal Assent on 18 December, setting out the framework for the new regime. The changes will represent the biggest shake-up of the regime since its introduction more than a decade ago, and firms will need to be closely engaged in the FCA consultation in 2014 in order to respond to the detailed proposals from the FCA. Some changes to the overall regime are dictated by the Act. The Statements of Principles and Code of Practice for Approved Persons will be replaced by Conduct Rules (which will apply to all approved persons and to employees of banks whether approved or not). The rules will be made by the FCA. The rules can relate to conduct in relation to any business carried on by an authorised person and not just to conduct in relation to regulated activities (as was previously the case with the Principles and Code).
The FCA will therefore have the power to make rules, enforceable by disciplinary sanctions that apply more generally to behaviour in the financial services workplace and to behaviour in relation to activities that are not regulated (for instance spot forex which is not yet regulated but is currently the subject of investigation by the FCA). The limitation period in which disciplinary action can be taken against an approved person is also extended from three years from when the regulator became aware of the facts giving rise to the case to six years.
In other areas the Act imposes requirements on the regulators in relation to banks but gives them greater discretion as to whether to introduce similar obligations more generally. The Act introduces the concept of a “senior management function”, defined as those decision-makers who may be involved in decisions that could have serious consequences for a firm or more generally for business interests in the UK. It is expected that these senior managers will only be a subset of those who were previously approved for Significant Influence Functions. The Act requires the FCA to obtain statements of responsibility from banks for those filling senior management functions. The statements of responsibility will have to set out those aspects of the business the senior manager is responsible for. Banks will be required to update the statements where there is a significant change in responsibility. It seems likely that the FCA will propose that this concept is applied across authorised firms more generally, particularly as in its evidence to the Treasury Committee the FCA cited a lack of clarity about the responsibilities of significant influence functions as one of the reasons why it struggled to discipline senior management successfully.
The Act introduces the concept of “Significant Harm Functions” for banks. These are employees who fill a function in which their activities could cause significant harm to the bank or its customers. It is expected that this group will extend beyond those individuals who were approved persons in the current regime. These individuals will not be approved but will be required to be certified as fit and proper by the bank on an annual basis. The FCA will have the power to make rules governing their behaviour and to take disciplinary action against them. It will be interesting to see whether the FCA proposes that the approved person regime for non-banks is extended to cover the same group of individuals in other institutions (the previous restrictions on the functions that the FCA could designate as Controlled Functions has been removed) or seeks to place additional requirements on non-bank firms in relation to their employees (recognising that if they chose the latter course they could not make rules governing the behaviour of those employees or take disciplinary action against those employees). THFJ
55
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72