What’s the latest on AIFMD 2?

By Fèmy Mouftaou, Managing Director, IQ-EQ Fund Management, Luxembourg/Head of Fund Management, France, and Justin Partington, Global Head of Fund and Asset Managers

Earlier this year, a hugely important set of financial rules were quietly published by the European Union. Indeed, after a long period of intense negotiations between the European Commission, the Council of the EU and the European Parliament, the text of the directive to amend AIFMD, dubbed AIFMD 2, was published in the Official Journal of the EU on 26 March this year. 

Just 20 days later the new rules, which bring with them a host of key changes that participants in private markets will need to abide by, came into force.

Member states have 24 months to transpose the provisions into national law, meaning that AIFMD 2 will not in reality take effect until the spring of 2026.

Nevertheless, the rules have immediate and important ramifications for the market and, at the very least, participants will need to begin familiarising themselves with the changes in advance of the go-live date.

UK to go its own way

For starters, as the UK is no longer part of the EU, the new rules mean that the AIFMD regime in the UK will now differ materially from the EU for the first time. This change will take place once AIFMD 2 is implemented by EU member states in the run up to 15 April 2026.

What’s new?

AIFMD 2 introduces a new loan origination funds passport, makes changes to liquidity risk management and establishes new portfolio management delegation rules – changes that will not be reflected in the UK.

And it doesn’t look like this will alter any time soon, with the UK not proposing – at least not publicly – to adopt the AIFMD 2 adjustments within its own framework. The Financial Conduct Authority (FCA), the UK financial regulator, is in the middle of a review of the rules governing asset management, and UK AIFMD will be examined as part of this. The FCA has said its objectives are to ensure the regime for AIFMs and investment firms is more proportionate to encourage the competitiveness of the UK as a jurisdiction for asset managers.

While AIFMD 2 will not apply to AIFMs from the UK, it will impact UK managers that use the services of host AIFMs in the EU and will have implications on their cross-border business models when marketing into the EU and acting as delegates.

Some EU member states, such as Luxembourg, Ireland and France, meanwhile, are expected to embrace the new rules with little fuss.

Luxembourg was the first nation to transpose the original AIFMD into law in 2013, which gave the jurisdiction an important competitive advantage, and so regulators in the Grand Duchy are well aware of the benefits of moving quickly when it comes to the latest iteration of AIFMD and adopting the new version of the directive sooner rather than later.

Meanwhile in Ireland, the Central Bank of Ireland established the domestic loan-originating qualifying investor AIF (LQIAIF) regime in 2014. The amendments to AIFMD 2 related to loan origination borrow heavily from the existing LQIAIF regime and therefore shouldn’t present any significant surprises for existing managers of such Irish funds. As such, it’s expected that Ireland’s reputation as a domicile for loan origination funds will continue to go from strength to strength.

So, what’s changed with loan origination?

AIFMD 2 now explicitly enables EU AIFMs to engage in loan origination and EU AIFs run by an EU AIFM will be able to carry out loan origination across all EU member states, covering off current inconsistencies in some countries.

There are several rules that AIFMs must comply with in relation to loan origination. The principal rules include:

• AIFMs engaged in loan origination must have effective policies, procedures, and processes in place for assessing credit risk and administering and monitoring their loan portfolio. AIFMs will have to keep those policies, processes, and procedures updated and review them annually
• Loan-originating AIFs will have to disclose all costs and expenses linked to the administration of the loans to investors
• In terms of leverage thresholds, meanwhile, AIFMs must now ensure that the leverage of an AIF does not exceed 175% if the AIF is open-ended and 300% if it is closed-ended
• And, in relation to concentration, there will be a 20% limit on loans to a single borrower if the borrower is a financial undertaking, an AIF, or a UCITS

No expectation of stringent local requirements

These measures will be more restrictive and create more work but, crucially, it’s very likely that the regional EU member state governments will adopt the new regulation without adding more stringent local requirements and be pragmatic in the interpretation of the new requirements.

Lending has become a vital alternative source of financing for the real economy, especially since traditional lending channels have become less accessible. The hope is AIFMD 2 will make all of this much easier, simpler and more uniform across the EU.

About the authors

Fèmy  is Managing Director, IQ-EQ Fund Management, Luxembourg and Head of Fund Management, France for IQ-EQ. Fèmy has over 20 years of experience in the financial services industry, including senior roles with international fiduciary and fund administration providers in Luxembourg and a ‘Big 4’ audit firm.

Justin  is IQ-EQ’s Global Head of Fund and Asset Managers, based in Luxembourg. Justin has international experience in the alternative fund services sector, including senior postings in Canada, UK, the Cayman Islands and Guernsey. He’s an expert in the operation, delivery and marketing of fund and investment administration in the alternative asset space.