Treats and Opportunities for the Luxembourg Alternative Investment Industry following Brexit

On 23 June 2016, the British people decided to leave the European Union (EU). Ultimately, this will lead to more differentiated regulations, also in the area of alternative investment funds.
In the aftermath of the 2007 credit crunch and the 2008 financial crisis Europe thoroughly reformed its regulatory framework for alternative investment funds through the Alternative Investment Fund Manager Directive 2011/61/EU (AIFMD).

Lack of Level Playing Field

Today, AIFMD offers a level playing field. It mainly aims to regulate the managers of Alternative Investment Funds (AIF), but it also contains provisions applicable to the AIFs themselves.
Luxembourg has a long established fund industry and benefits from an extensive experience in terms of supervision. Investment funds (UCI, SICAR, FIS) must indeed not only obtain a prior authorization but are also subject to an ongoing supervision by the Commission de Surveillance du Secteur Financier (CSSF). AIFMD now has added another layer of supervision, applicable to the manager of such funds. This results in making double applications for authorization (one for the fund and one for the manager) and in a double on-going supervision. Obviously, this is not only costly but it also has a negative impact on “time-to-market”.
In addition, this double layer of supervision does not exist in situation where the AIF is located in a jurisdiction that does not require authorization and/or supervision of the AIF. As investment fund structures become more complex and cross-border, the double supervision might constitute a competitive handicap for AIF-AIFM structures that are entirely based in Luxembourg.

Opportunity: Reserved Alternative Investment Funds (RAIF)

Bill N° 6929 on Reserved Alternative Investment Funds (RAIF or FIAR (fonds d’investissement alternative réservé)) aims to tackle this handicap. The main idea is to introduce a new fund regime that does not require prior authorization and ongoing supervision of the fund, without giving up advantages offered by traditional UCI, SICAR or FIS structures. The RAIF itself will not be regulated but it must qualify as a AIF and it must be managed by a qualified (and thus regulated) AIFM.
It is expected that the parliamentary vote will take place before mid June 2016.
Once voted, the RAIF will be of particular interest for foreign AIFMs, European and non-European. Luxembourg will become even more attractive for alternative investment fund structuring. Also Brexit should in principle increase our competitiveness, as Luxembourg would be on the stable side of the equation. Unlike the UK, it will not suffer from uncertainty.

Treat: Race to the Bottom

Brexit might, however, also challenge this competitive edge.
British policy-makers could shift to a more relaxatory regime to persuade business to stay. There is indeed a concern that the UK will move to (very) light touch regulation and corresponding supervision. And this could trigger a race to the bottom with permissive regulation, including fiscal.

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This release was published on openPR.