14 Financial services: long term investment
funds~
| (35168)
12044/13
+ ADDs 1-2
COM(13) 462
| Draft Regulation on European long-term investment funds
|
| Legal base | Article 114 TFEU; co-decision; QMV
|
| Document originated | 26 June 2013
|
| Deposited in Parliament | 10 July 2013
|
| Department | HM Treasury
|
| Basis of consideration | EM of 11 August 2013
|
| Previous Committee Report | None
|
| Discussion in Council | Not known
|
| Committee's assessment | Politically important
|
| Committee's decision | Not cleared, further information requested
|
Background
14.1 In July 2012, the Commission published a public consultation
document on possible future amendment to the Undertakings for
Collective Investments in Transferable Securities (UCITS) Directive.
This included a series of questions regarding a possible regulatory
framework for investment funds that invest primarily in long term
assets that benefit the real economy such as infrastructure, unlisted
SMEs, and social schemes.[33]
The document
14.2 This draft Regulation would create an optional framework
that would permit firms already authorised under the Alternative
Investment Fund Managers Directive (AIFMD) to establish and manage
an investment fund and market it under the name "European
Long Term Investment Fund" (ELTIF). An ELTIF would be established
in a European Economic Area (EEA) state and would have to be authorised
by the competent authority of the jurisdiction in which it was
established. The fund manager would have to apply to the ELTIF's
competent authority for approval to manage the fund. This authorisation
would be separate from the AIFMD authorisation of the firm managing
the ELTIF.
14.3 An ELTIF would have to abide by the following
requirements:
- adherence to certain investment
rules, in particular 70% of the fund's capital to be in "qualifying
portfolio undertakings" which are undertakings that are neither
financial undertakings nor admitted to trading on a regulated
market or multilateral trading facility, no more than 10% of the
ELTIF's capital to be invested in a single undertaking or any
individual real asset and no fund of funds structure (that is
where an ELTIF invested exclusively or predominantly in other
ELTIFs);
- borrowed cash not to exceed 30% of the capital
of the ELTIF, not to be secured on the ELTIF's assets and to be
borrowed only for the purpose of acquiring a participation in
qualifying assets;
- the ELTIF to be established for a set life cycle
and investors not to redeem their units or shares before the end
of the life of the ELTIF ¯
instead investors would be expected to invest for a set period
of time and would typically receive a dividend payment during
the life of the ELTIF and it could, however, permit investors
to trade their units or shares on a secondary market; and
- the ELTIF to produce a prospectus that would
include, at least, a statement setting out how the ELTIF's investment
objectives and strategy for achieving these objectives qualified
the fund as long term in nature, any costs to be borne directly
or indirectly by investors and other information required to be
disclosed by closed-ended collective investment undertakings in
accordance with the Prospectus Directive.
14.4 If these requirements were met, the ELTIF could
be marketed to professional investors, as defined in the Markets
in Financial Instruments Directive, throughout the EEA. Additionally
it could be marketed to retail investors if it met certain additional
requirements:
- it could not be structured
as a partnership;
- a two week cooling off period
during which investors would have their investment returned to
them with no penalties;
- the rules of the ELTIF to provide for equal treatment
for all investors; and
- retail investors to be provided with a Key Information
Document in accordance with the Regulation on Key Information
Documents for Investment Products (PRIPs).
The Government's view
14.5 The Economic Secretary to the Treasury (Sajid
Javid) says that:
- the Government agrees that
creation of a standalone ELTIF scheme is a more appropriate way
of creating a European brand for funds investing in infrastructure,
unlisted SMEs and other long term illiquid assets, rather than
incorporating new investment rules into the existing UCITS framework;
- investment in liquid assets and immediate redemption
are fundamental principles of UCITS funds and introducing new
rules for long term investment in this framework would undermine
the UCITS brand; and
- the proposed Regulation is optional and firms
will only have to fulfil the requirements if they wish to market
funds as ELTIFs — therefore it would not force any UK firms
or business models to adapt unnecessarily.
14.6 The Minister comments further that:
- while the proposal will not
cause any detriment to UK firms, it is unlikely to offer any new
opportunities in its current form;
- the Government does not expect that many UK firms
will opt to manage "professional only" ELTIFs;
- equally it does not expect that ELTIFs established
in other EEA jurisdictions will bring new investment opportunities
for UK professional investors in any significant way;
- firms may already manage funds with such an investment
strategy and market them to professional investors in the EEA
with an AIFMD authorisation and without having to also seek an
ELTIF authorisation and having to comply with the other ELTIF
regulatory requirements;
- from discussions with stakeholders, the Government
does not believe that there is widespread demand from retail investors
for such a scheme;
- certain institutional investors, in particular
pension funds, are, however, commonly required under their investment
mandates to invest only in retail products;
- there already exist less onerous means of setting
up retail schemes investing in long term asset classes under existing
UK regulation; and
- the draft Regulation might, however, make it
easier for UK firms to market to such investors on a cross border
basis.
14.7 The Minister then discusses three aspects of
the draft Regulation — appropriateness for retail, investment
restrictions and supervision and enforcement.
Appropriateness for retail
14.8 The Minister says that:
- while an ELTIF would be a specialist
product, the Government does not believe that it would necessarily
be inappropriate for retail investors to participate in such a
scheme as part of a diversified investment portfolio;
- given the long term nature of the scheme with
no possibility of redemption, there must be sufficient safeguards
in place to ensure it is only sold where appropriate; and
- existing UK safeguards in this regard will continue
to apply and protect UK investors, in particular the Financial
Promotion Regime.
Investment restrictions
14.9 The Minister says that:
- some of the product rules and
investment restrictions in the draft Regulation are quite restrictive
and could damage the attractiveness of the regime;
- it is not clear why the proposals do not allow
for funds of funds;
- institutional investors often do not have the
expertise or resources to seek a diversified range of investment
funds to place capital, so they instead seek out a fund of funds
structure, as it is a simpler method of achieving diversification;
- permitting a fund of funds in ELTIFs would make
it easier to get institutional participation and make the regime
more likely to succeed;
- it is also commonplace for infrastructure funds
in particular to secure lending on assets — the key restriction
applied in the UK is that any borrowing secured on a single asset
must only be used to invest in and improve that asset;
- the European Venture Capital Fund Regulation
and European Social Entrepreneurship Regulation both had a similar
70/30 ratio of qualifying investments and non-qualifying investments;[34]
- in those cases, however, the substantive requirement
was that the fund should not invest more than 30% of its capital
in non-qualifying investments;
- for ELTIFs, the substantive requirement would
be that the ELTIF must invest 70% of its capital in qualifying
investments;
- it is unclear why this new less flexible approach
has been proposed; and
- this could, in particular, lead to an ELTIF being
forced to make rushed investments simply for the purpose of reaching
the 70% threshold.
Supervision and enforcement
14.10 The Minister says that:
- if the ELTIF does not have
its own legal personality, the text is ambiguous as to whether
the competent authority of the ELTIF would investigate and sanction
the ELTIF or the AIFMD authorised firm managing it;
- if it is the former, it is
unclear how the ELTIF could be sanctioned without using investor
capital to pay any pecuniary sanctions;
- the latter would be a more sensible approach;
- there is, however, no detail of how this would
work in practice — it is unclear what powers the Financial
Conduct Authority (FCA) would have to investigate or sanction
an AIFMD authorised firm in another EEA state that managed an
ELTIF authorised in the UK or what powers another EEA regulator
would have against FCA authorised managers operating ELTIFs in
other jurisdictions; and
- greater detail, possibly based on the equivalent
provisions in the UCITS Directive, would give greater legal certainty
and ensure any regulatory breaches could be addressed in a timely
and consistent manner with fewer disputes.
14.11 Finally the Minister notes that Council working
group consideration of the draft Regulation is unlikely to begin
until next year.
Conclusion
14.12 Whilst the Government does not believe that
there is much in this proposal for UK firms, it does not think
it would lead to any detriment for them. However we note the various
matters, in relation to appropriateness for retail, investment
restrictions and supervision and enforcement, which, if addressed,
would improve the proposal. So before considering the draft Regulation
again we should like to hear about progress in Council working
group consideration of these matters. Meanwhile the document remains
under scrutiny.
33 For the consultation and responses see http://ec.europa.eu/internal_market/consultations/2012/ucits_en.htm. Back
34
(3353) 18491 + ADDs 1-2 (33535) 18499/11 + ADDs 1-2: HC 428-xlvii
(2010-12), chapter 15 (18 January 2012), HC 428-xlix (2010-12),
chapter 9 (1 February 2012), HC 428-l (2010-12), chapter 6 (8
February 2012), HC 428-lii (2010-12), chapter 12 (29 February
2012) and HC 428-lvi (2010-12), chapter 9 (21 March 2012). Back
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