As European private equity fund executives returned from their holidays, some were still working through the implications of the new Markets in Financial Instruments Directive (MiFID II). Although the wide-ranging new European rules, which became effective on 3 January, had little direct impact for many, a significant number of European firms had to adjust their procedures and practices to accommodate new rules
that do not fit well with their business model. In the UK, the impact was more significant than elsewhere in the EU, because many of MiFID II’s rules were applied to alternative investment fund managers (AIFMs) – even though they were not in scope of the EU’s Directive.
But, with that exercise largely complete, compliance chiefs will be asking whether the regulatory onslaught that followed the financial crisis is finally over. As well as MiFID II, that onslaught included the hastily concocted Alternative Investment Fund Managers Directive, and a regulatory crackdown in the US.
Inevitably, the answer is: yes, and no.
MiFID II and the AIFMD, as well as some other legislation designed to protect retail investors but having a peripheral impact on the private equity and venture capital sector, are now fully effective and – although it will take years before the industry has adjusted to them – they are relatively stable. It is true that a scheduled review of the AIFMD is looming (and has already been delayed), but that is not expected to lead to a major overhaul in the near future, and the UK (even if it becomes free to change its regulatory regime in 2019, which is doubtful) is most unlikely to make significant changes. Meanwhile, the European Commission has chosen to ignore a pretty clear legislative requirement to provide a third country marketing passport to non-EU managers who decide to opt in to the Directive, and it remains unclear when (or even if) that will be forthcoming. Some changes to delegation arrangements (or at least further guidance on them) may also follow from the EU’s attempts to defend itself from regulatory competition, and some work on the disclosure of fees and charges may shine a brighter light on private equity’s charging structure. But, overall, little structural change is expected to mainstream European financial services regulation in the next few years.
Unfortunately, though, there is no rest for the compliance manager, as the saying should go.
A looming regulatory challenge for many – at least for those who have some regulated presence in the UK – is Brexit. The “successful” conclusion of the Phase I negotiations means that the main focus will now shift to negotiation of a transitional period. The most sensible outcome, and the most likely, is that the UK’s official leaving date of March 2019 will pass with relatively little change to the regulation and market access arrangements for UK private equity firms. Of course, such an outcome is not certain, and significant disruption in 2019 cannot be ruled out. In any event, unless clarity is achieved reasonably early in the year, firms will have to start working on the basis that no transitional period is agreed upon, to give themselves enough time to relocate. And, even if the disruption can be postponed by a transitional arrangement, it is very likely to come in the early 2020s, and funds will have to “Brexit-proof” their businesses by then.
Even more pressing, though, is the impending implementation of the EU’s General Data Protection Regulation (GDPR) in May. Preparations for that should be well underway by now, because for firms that hold significant amounts of data about EU resident individuals, there will be a lot to do. To begin with, the process of working out what data is held, and with what permissions, is quite time-consuming; the process of obtaining any required consents and updating staff training, compliance procedures and standard documents can take several months. For many firms, getting to grips with that – and the overlapping focus on cyber-security protection – will be a major task for the first half of this year.
A little further out, but worth having on the radar screen, are new European money laundering rules
(yes, more changes) that were agreed at the end of last year and which are expected to become effective in late 2019. The main implication of those is likely to be that all beneficial ownership registers will become public (as the UK’s register currently is), and enhanced due diligence checks for high-risk countries will be specified and harmonised. At around the same time, the UK will apply the Senior Managers and Certification Regime (SM&CR) to all UK-regulated firms, and that will inevitably involve some alterations to roles and responsibilities for UK fund managers and advisers.
There are some positive changes on the horizon as well, including liberalisation of the EuVECA regime, which provides a marketing passport for EU venture capital fund managers, from March; and expected liberalisations and clarifications for cross-border marketing more generally. In addition, the capital weighting for investments in private equity funds applicable to insurance companies regulated by the Solvency II rules may change when the European insurance regulator, EIOPA, gives its advice to the European Commission at the end of February.
2018 is unlikely to be a restful year for those charged with overseeing European regulatory projects, but – at least once GDPR is out of the way – there is the promise of some respite. Certainly for firms whose regulatory arrangements will not be sharply impacted by Brexit, there may be some time to bed down recent changes before the onslaught begins again.