The Irish Central Bank has published a consultation paper setting out significant proposed changes to the regulatory regime for Irish non-UCITS funds (AIFs) in preparation for the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in July 2013. The Central Bank’s proposals represent a major overhaul of the existing regime with a number of welcome enhancements to the current AIF product offering in Ireland. A copy of the consultation paper is available at https://www.centralbank.ie/regulation/poldocs/consultation-papers/Pages/default.aspx.
What are the principal changes?
- Removal of the promoter approval regime
The Central Bank proposes to remove the current promoter regime, having regard for the obligations imposed on alternative investment fund managers (AIFMs) under the AIFMD. The promoter approval process applied to date by the Central Bank was designed to ensure that any promoter of Irish-authorised collective investment schemes had sufficient financial standing (minimum net shareholder funds of €635,000), appropriate regulatory authorisation by the competent authorities in its home jurisdiction and sufficient expertise and experience in the management and/or distribution of investment funds. Going forward, the Central Bank will instead rely on the prudential safeguards, including the capital requirements, applicable under the new AIFMD regime. The removal of the promoter approval regime will undoubtedly be welcomed by managers and distributors seeking to domicile AIFs in Ireland who are based in jurisdictions where they are not obliged to comply with such onerous authorisation and/or capital requirements in the context of their particular activities.
- Optimal reliance on European regulatory requirements set out in the AIFMD
The Central Bank’s proposals are specifically designed to ensure that Irish AIFs comply with all relevant AIFMD requirements and there is no unnecessary “gold-plating”. The proposed new regime will effectively consolidate, and in many respects simplify, the existing regulatory regime in Ireland where possible:
- Creation of a higher risk AIF option as an alternative to UCITS for retail investors
The current Irish retail non-UCITS product had in many respects become redundant in view of the increased flexibilities of the UCITS framework. The proposed requirements for Irish retail AIFs will be subject to less investment and eligible asset restrictions than currently apply under the UCITS regime. A summary of the key differences is set out below.
- The elimination of requirements currently imposed on qualifying investor funds (QIFs) that are not adding substantially to investor protection
Material amendments are being proposed to the regime applicable to the QIF - Ireland’s flagship AIF product. The changes summarised below will further enhance the considerable flexibilities already available under the existing QIF regime.
- The application of the AIFMD depository regime to all authorised AIFs, including those with an AIFM that falls below the relevant AUM thresholds
The requirement for a depository is a long-standing requirement of the Central Bank for all Irish authorised collective investment schemes. The Central Bank has now indicated that it is inclined to continue with this requirement.
What funds are in scope?
The proposals are applicable to all non-UCITS investments funds established in Ireland and authorised by the Central Bank. As such, the new regime will capture all existing retail non-UCITS funds, professional investor funds (PIFs) and QIFs, whether constituted as variable capital companies, unit trusts, investment limited partnerships or common contractual funds.
While the current consultation exercise is particularly focused on proposing an overhaul of the existing Irish non-UCITS authorised fund regime, AIFMD in fact has a wider scope and the Central Bank has specifically noted that other categories of (currently unauthorised) funds may be captured. In particular, the Central Bank has flagged in the consultation paper that it will in the near future look at the option of extending the domestic regulatory regime to “Exempted Unit Trusts” (a tax advantaged Irish structure that is used for pension purposes). The Central Bank has specifically requested submissions from interested parties as to what issues will arise from the extension of the regulatory regime to such structures and whether there are potentially unforeseen consequences that could arise.
What other changes are proposed?
It is proposed that the current QIF regime will be replaced by a new Qualifying Investor Alternative Investment Fund (QIAIF) regime. For retail investors, a separate Retail Investor Alternative Investment Fund (RIAIF) regime will be created to sit alongside the existing UCITS regime.
Professional Investor Funds (PIFs)
The current PIF regime has become somewhat redundant in recent years, in large part because of the additional flexibilities allowed within the UCITS framework and the reduction in minimum subscription levels for QIFs. In future, the Central Bank will not authorise new PIFs but will consider the establishment of new sub-funds for existing PIFs.
The current requirements of the Central Bank for non-UCITS funds are set out across a series of rather fragmented notices, guidance notes and policy documents. The Central Bank proposes to consolidate all requirements in the form of a single “AIF Handbook” made up of the following chapters:
- RIAIF requirements
- QIAIF requirements
- AIFM requirements
- AIF management company requirements
- Fund administrator requirements
- AIF depository requirements
The Central Bank’s intention is to eliminate duplication and ambiguity from the requirements applicable to AIFs. In particular, guidance on what is permissible has largely given way to language expressing clear regulatory requirements. Finally, it should be noted that the Central Bank views the AIF Handbook as an organic document that can be updated on a periodic basis.
What are the QIAIF product enhancements?
The Central Bank is proposing a number of enhancements to the flexibility of the QIAIF regime including:
- Removal of the specific Irish prime brokerage rules and counterparty credit rating rating criteria. The new regime in Ireland will instead rely on the AIFMD depositary, leverage and risk control requirements
- Providing greater flexibility to differentiate between investors in the same fund through the use of share classes. Subject to certain requirements, assets may be allocated to individual share classes and capital gains/losses and income arising from those assets may be allocated to shareholders in that class. This will allow assets to be immediately placed in side-pockets which will be a particularly useful feature for illiquid fund assets
- The proposed AIF Handbook helpfully clarifies that a QIAIF may raise finance though the issue of notes to financing institutions on a private basis
- The Central Bank has flagged that it intends to look at the possibility of broadening the circumstances in which QIAIFs can engage in lending activities. Currently QIAIFs can participate in existing loans but cannot originate such loans
Most of the specific fund type rules contained in the current Notices and Guidance Notes have been removed in favour of prudential rules applicable to all types of QIAIFs. In particular, Notices and Guidance Notes relating to the following fund types have not been included in the proposed Handbook:
- Private Equity Funds
- Property Funds
- Futures and Options Funds
- Multi-Advisor Funds
- QIFs authorised under the current framework are subject to certain requirements in relation to initial offer periods. The Central Bank currently allows property and private equity funds to extend their initial offer periods for up to one year and it is now proposed to allow QIAFs to extend their initial offer period for up to two years
- QIFs authorised under the current requirements are not subject to any specific investment or leverage restrictions. However, in order to avoid circumvention of Irish regulatory requirements, QIFs may not invest more than 50% of their net assets in a single unregulated investment fund. The Central Bank is not proposing to change this limit of 50% but is proposing to tighten the requirement somewhat by prohibiting investment in excess of 50% in unregulated investment funds which are identical in terms of management or strategy
What strategies can be accommodated within a RAIF that cannot be carried out in a UCITS?
The proposed RAIF requirements allow for the creation of a fund that is subject to less investment and eligible asset restrictions than apply under the UCITS framework but is more restrictive than the QIAIF regime. In particular, tighter limits apply to UCITS funds than will apply to RAIFs in relation to investment in unlisted securities, the percentage of securities of a particular issuer that may be acquired and investment in other investment funds. UCITS may invest in financial derivative instruments subject to detailed requirements relating to risk management procedures. It is intended that RIAFs should, at a minimum, be provided with the same flexibilities as regards the use of derivative instruments and the Central Bank is willing to consider extending this flexibility in future.
The Central Bank is proposing that RAIFs may invest in physical gold and is inviting views as to whether it should apply specific requirements for investment in commodities as an asset class or whether additional safe-guards should be applied on a case-by-case basis.
AIFMD leaves the decision as to whether to permit the marketing of AIFs to retail investors to the discretion of Member States and therefore the RIAIF product may be suitable in circumstances where a particular asset class or strategy cannot be accommodated within a UCITS structure. It should also be noted that all EU AIFs (including RIAIFs) can be marketed to professional investors under the passport provisions of the Directive.
When will the new requirements come into effect?
The Central Bank has indicated that it intends to issue an interim AIF Handbook with the consultation process has been completed. Thereafter, the Central Bank intends to conduct a technical examination of the interim AIF Handbook with a view to refining the drafting. It is the Central Bank’s intention that interested parties should be able to rely on the interim AIF Handbook that is issued in response to this consultation as a guide to our proposed post-AIFMD regulatory framework.
As such, existing Irish AIFs will automatically become subject to the new regime on implementation of the AIFMD in July 2013. This means that where an AIF, a manager or a fund service provider has an obligation which will no longer apply under the new regime, that obligation will automatically cease on the date from which the new regime is applicable. Equally, where the regime creates an obligation which did not previously apply, that obligation will apply automatically from the date the new regime goes live. This is without prejudice to the need for AIFs to take the necessary actions, including obtaining investor approval where necessary, if it is intended to avail of the enhanced flexibility afforded under the new regime.
What is the deadline for making submissions?
All stakeholders are invited to address any of the questions posed by the Central Bank in the Consultation Paper or to provide comments on any aspect of the draft AIF Handbook by 11 December 2012. William Fry would obviously be happy to include any comments you may have in our overall response to the consultation exercise.