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FSA may face £5m hit from implementation of alternative directive

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FSA may face £5m hit from implementation of alternative directive

Implementing new requirements as part of the Alternative Investment Fund Managers Directive (AIFMD) could cost the regulator up to £5 million, the FSA has estimated.

The estimate forms part of the FSA's consultation paper on the implementation of the EU's AIFMD, which lays out rules for alternative investment funds and managers, including the requirement for funds to disclose leverage levels and changes to leverage within alternative funds.

The directive also requires alternative managers to have remuneration policies which promote effective risk management and will introduce a remuneration code for alternative investment firms for the first time.

In its cost benefit analysis, the FSA estimated one-off costs associated with implementing the directive would amount to around £5 million for the FSA and its successor the Financial Conduct Authority (FCA), which it said would cover the need for additional supervisory staff and developing new systems to cope with changes.

It also anticipates one-off costs for the alternative investment fund management industry concerning operating requirements could reach £480,000, coupled with ongoing costs up to £1.2 million.

Introducing a remuneration code could cost alternative managers up to £447,000 in one-off payments and up to £185,000 ongoing, with one-off costs up to £185,000 estimated with implementing the leverage aspect of the rules, alongside up to £195,000 ongoing.

The FSA noted that ‘almost all respondents found it difficult to provide meaningful and detailed cost estimates’ owing to uncertainty about the impact of the rules.

The FSA emphasised that it has ‘little scope for discretion’ in terms of how it implements the Aifmd regulations, which must be in force by 22 July 2013, with each EU state allowed a limited number of options or changes to the standard package of rules.


Forming part of the proposals, the FSA said alternative investment managers would need to disclose when they make changes to the maximum level of leverage in their funds.

‘AIFMs [will be required] to demonstrate to the [upcoming regulatory body] FCA that the leverage limits of each AIF are reasonable and that they comply with those limits at all times,’ the regulator said.

‘An AIFM making changes to the maximum level of leverage must in future disclose this to investors,’ it added, saying it considered giving fund managers some leeway in the level of over-leverage that they could accrue before informing investors, but ultimately decided that any push beyond fund leverage limits ought to be disclosed.


Remuneration is also under the spotlight as the AIFMD includes specific requirements around the implementation of remuneration policies. As a result, the consultation paper is proposing disclosure of the total amount of remuneration paid by an alternative manager to its staff and policies, which include factors such as performance-related pay, guaranteed variable remuneration, and remuneration linked to units and shares in funds that are managed.

The FSA said it would move to produce further guidance on the EU’s Remuneration Code to help alleviate the burden on some Aifms who would be caught up by several sets of rules.

In its consultation paper, the FSA said it had ascertained there is at least £179.5 billion in assets held in alternative investment funds (Aifs).However, since preliminary research scouting out potential Aifms saw a response from just 36 groups, 22 of which are expected to have Aifms within their UK structures, the figure could well be higher.

The Association of Investment Companies (AIC) recently called for the July 2013 implementation date to be pushed back to 2014, arguing it is ‘possibly impossible’ for firms to comply with the rules in time.

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