Breakfast Briefing: German regulatory law - loan funds and distribution matters

Transcription

1 Breakfast Briefing: German regulatory law - loan funds and distribution matters Dr Harald Glander Oliver Kittner Norman Mayr 28 April 2016

2 Agenda UCITS V and loan funds German Master-KVG structure Solvency II Performance data Inducements 1 / L_LIVE_EMEA1: v1

3 Overview UCITS V Implementation Act implements UCITS V (which amends UCITS IV) into German law. Generally, 1:1 implementation of UCITS V into German law UCITS V takes into account market developments and the experience of market participants and supervisory bodies arising from the financial crisis and aims to continue to ensure investor protection and market integrity In addition to the 1:1 implementation, the following requirements were implemented into German law Apart from selected changes to the German Capital Investment Code (the KAGB ) and the German Banking Act (the KWG ), the KAGB was amended to reflect the new European law requirements in the investment sector The provisions on remuneration policy, the responsibilities and liability of depositaries and sanctions were harmonised through UCITS V 2 / L_LIVE_EMEA1: v1

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5 Loan funds Position of BaFin before 12 May 2015 KWG licence (i.e. banking licence) required for the origination of loans Banking licence was not available for ManCos or foreign funds Generally also applicable when acting on behalf of funds (exception for shareholder s loans) KWG licence (banking licence) also required for restructuring of existing loans (i.e. when amending the loan agreement in respect to duration, terms and interests, etc) Solution: Using a fronting bank ; however, restructuring was still not possible 4 / L_LIVE_EMEA1: v1

6 Loan funds (ctd) German closed-ended Spezial-AIF Granting of loans by German KVGs on behalf of German closed-ended Spezial-AIFs, if leverage up to an amount of 30%; loan may not be granted to consumers a loan to a single borrower may not exceed 20% of the NAV Granting loans by German KVGs on behalf of German closed-ended Spezial-AIFs as shareholder loans, lower requirements apply Max. 50% of fund capital to be used as shareholder capital (previous draft: 30%) Shareholder loan may not exceed twice the value of the investment in a company (previous draft: ( ) value of the investment in a company) 5 / L_LIVE_EMEA1: v1

7 Loan funds (ctd) Granting of loans by non-german AIFM/AIF EU AIFM and EU AIF: (+), if the banking business includes only the collective portfolio management (including granting loans) or in addition only services pursuant to article 6(3) UCITSD or article 6(4) AIFMD 6 / L_LIVE_EMEA1: v1

8 Loan funds (ctd) Granting of loans by non-german AIFM/AIF Non-EU AIFM and non-eu AIF: (+), if the distribution of the relevant fund is permitted due to the KAGB (i.e. EU or non-eu AIF has been registered for distribution to semi-prof. investors or retail investors! A registration for distribution only to prof. investors is not sufficient) and the banking business includes only the collective portfolio management (including granting loans) or in addition only services pursuant to article 6(3) UCITSD or article 6(4) AIFMD 7 / L_LIVE_EMEA1: v1

9 Loan funds (ctd) Acquisition of unsecured loan receivables Investments in unsecured loan receivables by a German ManCo on behalf of a German open Spezial-AIF are (still) permitted up to an amount of 100% of its NAV Same concept as under current German law Restructuring of acquired loan receivables is permitted by open-ended Spezial-AIF (i.e. changing or reorganisation of loans does not constitute banking business) 8 / L_LIVE_EMEA1: v1

10 Agenda UCITS V and loan funds German Master-KVG structure Solvency II Performance data Inducements 9 / L_LIVE_EMEA1: v1

11 Managed assets in billion euro (special/public funds) 10 / L_LIVE_EMEA1: v1

12 Master-KVG structure 11 / L_LIVE_EMEA1: v1

13 Legal relationships Sub-delegated third party asset manager US Subdelegation agreement, SLA, Investment guidelines Delegated third party asset manager UK IMA, SLA, Investment guidelines Master-KVG Relevant fund segment Fund rules Investor Cross-border portfolio management Special fund 12 / L_LIVE_EMEA1: v1

14 Supervisory relationships SEC FCA BaFin Supervision Supervision Supervision Sub-delegated third party asset manager US Cross-border portfolio management Delegated third party asset manager UK Cross-border portfolio management Master-KVG 13 / L_LIVE_EMEA1: v1

15 What is relevant for German KVGs Main legal sources: Contractual basis (third-party): Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing AIFMD (Level 2-Regulation) Investment management agreement (IMA) German Capital Investment Act (KAGB) General and special fund rules German Derivatives Regulation (DerivateVO) Investment guidelines Investment Conduct- and Organisation Regulation (KAVerOV) Investment Minimum Requirements for the Risk Management (InvMaRisk) Minimum Requirements for the Compliance Function and Additional Requirements Governing Rules of Conduct, Organisation and Transparency for Investment Services Enterprises (MaComp) BVI Conduct of Business Rules (BVI Rules) Further BaFin-Guidance 14 / L_LIVE_EMEA1: v1

16 Agenda UCITS V and loan funds German Master-KVG structure Solvency II Performance data Inducements 15 / L_LIVE_EMEA1: v1

17 Chronology on EU- and GER-level 17 Dec 2009 Directive 2009/138/EC (Solvency II) 16 April 2014 Directive 2014/51/EU (Omnibus II) 1 April 2015 German Act to Modernize Financial Supervisory on Insurer 1 Jan 2016 Implementation Solvency II - amendment of VAG Parliaments Acts 7 March 2015 amended AnlV 23 Sept 2015 Draft new AnlV / PFAV 1 Jan 2016 Repeal of AnlV 22 April 2016 AnlV/ PFAV German ordinances 16 / L_LIVE_EMEA1: v1

18 Current legal regime: VAG - AnlV - Solvency II VAG/Solvency II Insurance companies Re-insurance companies VAG/AnlV - PFAV Pension funds ( Versorgungswerke ) Pensionskassen Burial funds ( Sterbekassen ) VAG = Versicherungsaufsichtsgesetz AnlV = Anlageverordnung PFAV = Pensionsfonds-Aufsichtsverordnung 17 / L_LIVE_EMEA1: v1

19 Structure of AnlV Section 1: Investment principles and investment management Section 2: Types of investments (Anlageformen) Mutual funds Domestic special funds with solid conditions Other domestic investment funds Section 3: quantitative restrictions General mix quotation max. 50% Special mix quotation max. 7.5% Section 4: obligor-related restrictions (diversification) 18 / L_LIVE_EMEA1: v1

20 Solvency II impact on investment decisions Asset classes Capital requirements Fixed quotes Prudent Person - principle Factual quotes? 19 / L_LIVE_EMEA1: v1

21 Indirect investment Look-through -principle Mandate approach (Mandatsansatz) Privileged funds (39%): European social entrepreneurship funds (art. 3(1)(b) Regulation (EU) 346/2013) Venture capital funds Closed-ended and non-leveraged AIFs Registered seat in the EU or distribution approval according to Art. 35 v 40 AIFMD Insurance Company Insurance Company 39% 39% 39% 39% 39% 20 / L_LIVE_EMEA1: v1

22 Look-through - principle Insurance Company Insurance Company Equity type 1 39% Bond BBB (15) 25% 25% 25% 25% 25% Real Estate 25% Bond AA (10) 8,4% Equity type 2 49% 25% 25% 25% 21 / L_LIVE_EMEA1: v1

23 Mandate approach (Mandatsansatz) No information Insurance Company Insurance Company 20% Equities (listed) 39% 50% Bonds (AAA; < 5y) 0.9% 20% Commodities 49% 10% Hedge funds 49% 49% 22.95% 22 / L_LIVE_EMEA1: v1

24 Solvency II - What does it mean for sales and marketing? Information Request for information on products Higher detailed product analysis Eligibility (confirmation/proof/support) Scope of proof and confirmation Standard confirmation letters Clear restriction on proof Reporting Report on asset allocation Information on single assets Tailor-made reporting vs. standard reporting Principle of equal treatment of investors 23 / L_LIVE_EMEA1: v1

25 Agenda UCITS V and loan funds German Master-KVG structure Solvency II Performance data Inducements 24 / L_LIVE_EMEA1: v1

26 Marketing material Issues Sufficient and comprehensible presentation Up-to-datedness of presentation Presentation of benefits and risks Presentation of performance Tax information Consistency of marketing and product information Statements with reference to the supervisory authority Documentation of marketing communications 25 / L_LIVE_EMEA1: v1

27 Marketing material Presentation of performance (gross/net values) Para. 4(4) no. 4 WpDVerOV Information on the past performance of a financial instrument, a financial index or an investment service ( ) and must where the information refers to gross performance, disclose the effect of commissions, fees or other charges. MaComp, BT : Impact of commissions, fees and other charges Requirements also available in respect to net presentation 26 / L_LIVE_EMEA1: v1

28 Example: Past performance presentation 27 / L_LIVE_EMEA1: v1

29 Agenda UCITS V and loan funds German Master-KVG structure Performance data Solvency II Inducements 28 / L_LIVE_EMEA1: v1

30 Distribution - inducements MIFID II increases requirements for (valid) reception and payment of inducements Currently MiFID permits firms to give or receive fees, commissions and non monetary benefits (referred to as "inducements"), subject to satisfying certain conditions. Under MiFID 2 a firm providing investment advice on an independent basis/portfolio management would not be permitted to accept / retain any fees, commissions or any monetary benefits from a third party. Minor non-monetary benefits will be permitted subject to satisfying certain criteria including a requirement that they are capable of enhancing the quality of service to the client and are properly disclosed. Firms will also be subject to a new rule which seeks to ensure that staff of investment firms are not remunerated or assessed in such a way that would conflict with the firm s duty to act in the best interests of its clients (eg through packages that incentivise staff to recommend products other than those which would best meet a client s needs). Firms inducement disclosures will need to explain how the benefit is to be passed onto the client. 29 / L_LIVE_EMEA1: v1

31 Payment and receipt of inducements A new quality enhancement test for nonindependent channels? ESMA has modified its draft advice in relation to the quality enhancement test. Language dropped which suggested test would not be met if payment essential for recipient firm in ordinary course of business could act as effective ban. Retention of inducements must: be justified by the provision of an additional or higher level of service to the relevant client, proportional to the level of inducements received (eg. wide range of suitable financial instrument, on-going review service, access to better deals/information through on-line channel) Must not directly benefit the recipient firm its shareholders or employees without tangible benefit to the relevant client For trail, there must be an on-going benefit for the client. these situations aim, inter alia, at encouraging the provision of (and client s access to) high quality nonindependent advice.. ESMA s Final Report Para 41 ESMA Guidelines and Recommendations to follow on this 30 / L_LIVE_EMEA1: v1

32 Payment and receipt of inducements Monitoring and enforcing the quality enhancement test? Need to be able to demonstrate that any payments made are designed to enhance the quality of the service to the client: Keeping lists of commissions paid Recording how recipient will use payments/benefits to enhance the quality of the service provided to clients What are we seeing? Review of distributor take-on process Rigorous DDQ exercise Consideration of distribution agreements different arrangements for different channels Building distribution review function 31 / L_LIVE_EMEA1: v1

33 Payment and receipt of inducements MiFID II model Inducement Independent service no Portfolio management yes yes Minor non-monetary benefits? no No inducements allowed Art. 24 (7)b Art. 24 (8) no yes disclosure of the existence, nature and amount of the fee, commission, benefit or method of calculation designed to enhance quality does not impair compliance with the investment firm s duty to act honestly, fairly and professionally in accordance with the best interest of its clients

34 Inducements forecast 7 April 2016: European Commission published a Delegated Directive supplementing MiFID II with regard to Safeguarding of financial instruments and funds belonging to clients Product governance obligations Rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits Directive must be implemented by the Member States into national law Date of application: 3 Jan 2018 Simmons & Simmons LLP Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 33 / L_LIVE_EMEA2: v1

35 Scope of Delegated Directive Inducements (1) Requirements on quality enhancement A number of conditions which must be met Positive list of examples (but a lot of undefined legal terms) On-going benefit for the client Conditions must be fulfilled on an on-going basis (2) Inducements in the context of independent investment advice and portfolio management services Obligation to implement inducement policies Generally, hospitality of a reasonable de minimis value is allowed Information obligations to client (3) Inducement in relation to research Simmons & Simmons LLP Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 34 / L_LIVE_EMEA2: v1

36 Delegated Directive What will be the impact? Positive and negative list for types of inducements Gives more clarity for distribution and distribution channels Certain scenarios may be identified as valid Research payment account Commission sharing agreements More clarity on legal wording However, a lot of undefined legal terms (room for interpretation) Higher compliance requirements and monitoring tasks (new policies and procedures required) Be well prepared! Check your business model! Simmons & Simmons LLP Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. 35 / L_LIVE_EMEA2: v1

37 Thank you for your attention! Dr Harald Glander Oliver Kittner Norman Mayr simmons-simmons.com elexica.com This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmonssimmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. 36 / L_LIVE_EMEA1: v1