Address by Head of Markets Policy, Martin Moloney to the 4th AIFM Directive Conference

26 February 2013 Speech

‘A brief update on the progress of implementation of the Directive at national level’


Our approach in Ireland seems to have been somewhat different from the approach in other countries. We have prioritised the development of the detailed regulatory requirements which will be issued by the Central Bank. We prepared a first draft of this in advance of the Commission Delegated Regulation (“Commission Regulation”). We have now published a comprehensive re-draft embodying our policy decisions. The text of the final, formal, legally proofed version should be available by end-March.

This is consistent with the target we have set ourselves to be in a position in April, May and June to receive and process applications.

Progress with Legislation

In parallel, the legislation to transpose the AIFMD into Irish law is being prepared. A separate public consultation has been completed and the drafting work is under way. While there are some discretions to be decided on as part of that legislative process, Ireland has taken the view that the transposition of the Directive was less time-critical for industry than the clarification of regulatory policy.

Separately, in March 2012 the Minister for Finance approved the development of legislative proposals for a new corporate structure for the Irish funds industry. This new structure will be similar to the OEIC structure in the UK. The Department of Finance is preparing draft legislation for this new corporate structure.

Consultation process

Following extensive pre-consultation engagement with industry representatives, we issued our AIFMD consultation paper and the first draft of the AIF Handbook on 30 October 2012. This consultation document sought views on a range of proposed changes to our regime for regulating non-UCITS investment funds.

In particular, it proposed a range of changes for retail AIFs which involved ending our previous approach of shadowing the levels of protection available for UCITS. In this way, we have sought to create a space for non-UCITS retail products which places greater reliance on disclosure and less reliance on hardwired risk-lowering rules. It will be a matter of time to see whether there is a market appetite to move into this space.

Secondly, we proposed removing a number of requirements which existed for QIFS because the AIFMD provided better protections.

We had a shortened consultation period of 6 weeks which concluded on 11 December 2012. We received 17 responses. We issued our feedback statement together with the second draft of the AIF Handbook on 1 February 2013.

We have already flagged to industry, and I want to repeat this today, that draft 2 of the AIF Handbook is now subject to a technical review. This review is likely to result in the shape and feel of the final AIF Handbook being somewhat different, but the policies set out should not be changing. Our intention now is to issue our final AIF Handbook at the end of March 2013. Of course, this will not become effective until 22 July 2013.

AIF Handbook

Now let me explain a little bit about our new AIF Handbook. We currently have a series of Non-UCITS Notices and separate Guidance Notes which set out the conditions which we impose on non-UCITS funds and their service providers. Conditions are also set out in Central Bank policy notes, letters to industry and the non-UCITS application forms. We have sought to consolidate all of these into one document – the AIF Handbook – and to remove duplications

We have now arranged these conditions by entity and, so, the AIF Handbook is divided into 7 chapters - one each for Retail Investor AIF (“RIAIF”); Qualifying Investor AIF (“QIAIF”); Alternative Investment Fund Managers (“AIFMs”); AIF management companies; Fund Administrators; and AIF Depositaries. There is also a chapter on Grandfathering Arrangements.

AIFMs and delegation

The AIFM chapter in the first draft of the AIF Handbook was drafted on a best efforts basis as the European Commission had not yet published its Commission Regulation. When the Commission Regulation was published in December 2012, we reviewed the delegation provisions against the first draft of the AIFM chapter. While we were happy that our general approach was not inconsistent with the Commission Regulation delegation rules, we identified modifications which we felt would help ensure that our regime is closely and accurately married with the intention of the AIFMD.

These changes included the specification of 6 additional managerial functions, bringing to 16 the number of managerial functions for which the board of an AIFM is directly responsible as a whole. We also introduced a specific requirement that delegates must be appointed by the board of the AIFM acting independently. It is especially important for the board of the AIFM to ensure that the terms of all appointments are robust from an investor perspective.

These ‘tweaks’, as I might call them, to our existing approach to delegated structures substantially strengthen the role of directors. When read with the ‘designated persons’ regime which applies in Ireland and which ensures continuity of oversight between board meetings, they constitute our substantial response to the legitimate concerns which underpinned the extensive reflection on Article 82 of the Commission Regulation, which occurred prior to its finalisation.

We have also recently announced a programme of themed inspections, including compliance by depositories with our outsourcing requirements and also the post-authorisation implementation of programmes of activity or, as we have called them, business plans, by management companies of authorised investment funds. This puts us in a strong position to engage within Europe in any further review of arrangements in this area and which, I would suggest, should focus on risks suggested by supervisory practice.

Master/feeder rules

One area where our AIF Handbook benefited greatly from the consultation process is our Master/Feeder rules. On the one hand, the AIFMD only imposes look-through requirements on underlying funds where one AIF invests at least 85% in another AIF. There is an argument that this leaves the AIFMD open to circumvention where one AIF invests, for example, 84% in another AIF. To address this, we had proposed continuing with our current requirement that prohibits QIAIFs from investing more than 50% in any one unregulated fund. A derogation from this limit was available in very limited circumstances.

This approach was challenged in the consultation process. After significant debate, both internally and externally, we decided to retain the existing 50% limit but to disapply this for QIAIFs in circumstances where the feeder QIAIF (i) has a minimum subscription limit of €500,000 and (ii) includes detailed item-by-item prospectus disclosure which identifies those QIAIF requirements which do not apply to the underlying unregulated AIF.

Small QIAIFs

A second area which required a lot of consideration was in relation to small QIAIFs. The issue here is that a number of the new flexibilities for QIAIFs (for example the removal of the promoter requirement) were introduced because QIAIFs will now have an authorised AIFM. For small QIAIFs, however, there will not be an authorised AIFM. How should these be treated?

In draft 1 of the AIF Handbook, we proposed to apply many of the AIFMD requirements to small QIAIFs even though they did not have an authorised AIFM. The proportionality of this was questioned in the consultation process. Respondents emphasised the need not to smother new QIAIFs with regulation before they have a chance to become established. We took this on board and the second draft of the AIF Handbook now gives start-up QIAIFs a two year start-up period during which most of the AIFMD requirements will not apply. The AIFMD depositary regime will apply except for the AIFMD depositary liability regime – instead the current domestic non-UCITS depositary liability regime will apply during the two year start-up period. After this, the QIAIF must appoint an authorised AIFM.

Promoter requirements and directors of AIFs in difficulties

We flagged our proposal to discontinue with the promoter requirements in our consultation paper and consultation respondents were universally positive about this. The reason we have decided now to drop the promoter regime is because (i) the market conditions which allowed and/or motivated promoters to support investment funds in difficulty have weakened; (ii) it was not sufficiently transparent; and (iii) the investor protections in the AIFMD are more robust.

In conjunction with removing the promoter requirement, we have elaborated on what we expect from directors of AIFs in difficulties. The reason for this was because our experience tells us that the actions of these directors are one of the key drivers behind achieving a good outcome for investors in these AIFs. We have retained this in the second, current draft of the AIF Handbook despite strong questions being raised in the consultation.

A final comment on promoters, we have been asked to consider removing the promoter requirements for UCITS. We are open to considering the point in the future. However, we are currently focussing on issues concerning non-UCITS and the implementation of AIFMD, so it will be the second half of this year at the earliest before we can turn our attention to this.

Appointment of prime brokers

Under current rules, the appointment of prime brokers is subject to a number of requirements including eligibility criteria, for example, a minimum credit rating of A-1 and minimum capital. QIAIFs will not be subject to Central Bank imposed requirements with regard to prime brokers or indeed any other counterparties. Rules in relation to the selection and appointment of counterparties and prime brokers are set out in Article 20 of the Level 2 Regulation.

Transitional arrangements

Questions have been raised around the interpretation of Article 61(1) concerning transitional arrangements. We hope that ESMA will provide guidance on the transitional arrangements for those provisions of the AIFMD.

From our perspective, we can see that transitional issues have the potential to drain a huge amount of time and energy. It is our experience that transitional periods inevitably expire very quickly and we certainly expect that 22 July 2014 will arrive very quickly indeed. Our focus is on ensuring that ‘new’ funds aiming to be authorised for July 2013 are ready for authorisation. We recognise the logistical difficulties that will arise, particularly for depositories. There is no advantage to anyone of reaching the point where regulators would ask the impossible from funds service providers. Therefore, we hope that ESMA will articulate an approach that facilitates the orderly adaptation by depositories to the requirements of the AIFMD in a feasible and timely way.

We have been asked whether we will consider reviewing applications for authorisation under AIFMD and bringing these to a ‘no comments’ stage in advance of July 2013 so that these entities could be authorised as soon as the AIFMD is implemented. We are happy to facilitate this. We are working towards having authorisation processes and procedures in place well in advance of 22 July 2013. It is planned that these will be in place by the end of quarter 1 of 2013.

Professional Investor Funds

Following the redesign of the RIAIF and QIAIF products, we have decided to discontinue the PIF regime as we do not see there being any investor demand for it. Existing PIFs will be allowed to continue. However, they are encouraged, but not obliged, to convert to RIAIFs or QIAIFs.

Existing PIFs will not be allowed to create new sub-funds and are required to comply with the terms of their prospectuses. Of course, each existing PIF will have to have an AIFM and that AIFM will be subject to the AIFMD.

Piecemeal introduction of new flexibilities

We have been asked whether we could introduce some of the new flexibilities which are not AIFMD-dependent in advance of July 2013. We are not going to do this. There is interdependency between all of the provisions of the AIF Handbook. This means that it cannot be unpicked to introduce certain provisions now while introducing others later. For example, the new ability for QIAIFs to have share classes with different dealing arrangements was introduced because QIAIFs will have authorised AIFMs and authorised AIFMs are subject to rules regarding the fair treatment of investors. Clearly, we cannot allow QIAIFs to start establishing share classes with different dealing arrangements without the AIFMD requirements also being in place.


We have more work to do in Ireland to finalise our approach to the introduction of the AIFMD. But we are, we think, on the home stretch. The AIFMD has challenged us to review our whole approach to the non UCITS investment fund sector. We believe we have redefined our risk appetite in a sensible way that facilitates investors, while still giving them strong protection against a range of dangers they face in this market place. But we will continue to refine and develop our new AIF Handbook, as the market develops.