On 2 November 2011, the FSA published a speech given by Sheila Nicoll, FSA Director of Conduct Policy, on EU regulatory developments in the fund management sector.

Amongst other things, in her speech, Ms Nicoll commented on the Alternative Investment Fund Managers Directive (2011/61/EU) and some of the details of the regime that have yet to be finalised, one of the most important being the implementing measures. Following the consultation by the European Securities and Markets Authority (“ESMA”) over the summer, ESMA is due to provide its advice to the European Commission on implementing measures by 16 November 2011. The FSA has spent time with ESMA reviewing responses to the consultation, and considering the themes that have emerged. The most contentious issues relate to: 

  • depositaries, particularly the liabilities of depositaries in the event of the loss of assets; 
  • the definition and use of leverage; and
  • the treatment of third country funds and fund managers.

Ms Nicoll explained that although ESMA’s advice will not represent the final rules, and there may well be significant changes to ESMA’s proposals, its advice will provide firms with “at least the direction of travel”.

Ms Nicoll also referred to the recent EU legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC) (“MiFID”), (now commonly known as “MiFID II”). Points of interest include the following: 

  • MiFID II will impact on some of the matters the FSA has been dealing with through its retail distribution review (“RDR”), such as investment adviser independence and the risk of commission-biased advice. The FSA is pleased to note the similarities between MiFID II and some of the RDR requirements and it considers that the RDR requirements are compatible with MiFID II;
  • MiFID II will extend the scope of MiFID to catch a wider range of instruments and types of trading system. One of the challenges will be to ensure that the different elements of the marketplace are defined properly, to avoid unintended consequences. The FSA supports the proposal for robust risk controls to be put in place by firms involved in algorithmic trading, or which provide sponsored access to automated traders; 
  • the FSA broadly agrees with the proposals to broaden and re-categorise trading venues with a new organised trading facility (OTF) definition, but it is concerned that the definition is too broad in its scope, and there is a significant risk that it will catch methods of trading that are not truly organised or venue-like.