AIFMD Review – ESMA’s Proposals on Delegation and Substance

According to a recent letter from ESMA to the European Commission (the “Letter”), practical experience has shown “many areas of the existing AIFMD framework that could be improved”. The Letter sets out ESMA’s key recommendations for improvements, which touch on a range of general issues in the legislative framework and key reporting issues. The Letter includes several recommendations regarding the rules applicable to delegation and substance, which are the focus of this briefing.

Background and Overview

Article 69 of AIFMD requires the European Commission to start a review of AIFMD by 22 July 2017 and, once its review is finalised, to submit a report to the European Parliament and the Council, including any proposed amendments to the directive (the “Report”).

To prepare this Report, the European Commission tasked KPMG to provide a comprehensive assessment of the AIFMD (the “Study”). The Commission then published its Report on 10 June 2020, together with a Commission Staff Working Document (“SWD”) which provides further information on the conclusions set out in the Report.

The Letter aims to contribute to the review of the AIFMD framework by outlining key areas for improvements, based on national competent authorities’ (“NCAs”) practical experiences in supervising firms in accordance with the relevant requirements. In all, the Letter sets out 19 areas for improvement, touching on both the legislative framework and reporting issues. In addition to delegation and substance, the Letter makes recommendations regarding harmonising the AIFMD and UCITS regimes; liquidity management tools; leverage; the AIFMD reporting regime and data use; and the harmonisation of supervision of cross-border entities.

Delegation and Substance

Several of the recommendations set out in the Letter concern delegation and substance arrangements under AIFMD, as follows:

Extent of Delegation – to ensure that authorised AIFMs and UCITS Management Companies maintain sufficient substance in the EU, ESMA recommends further legal clarifications on the maximum extent of permitted delegation. In this context, the Letter states that the Commission may in particular wish to reconsider and/or complement the qualitative criteria set in Article 82(1)(d) of the Commission Delegated Regulation (EU) No 231/2013, with clear quantitative criteria or provide a list of core or critical functions that must always be performed internally and may not be delegated to third parties.

Applicable Regime – to avoid regulatory arbitrage and protect EU investors, legislative amendments should ensure that the management of AIFs and UCITS is subject to the regulatory standards set out in the AIFMD and UCITS frameworks, irrespective of the regulatory license or location of the delegate.

Secondment Arrangements – the existing legislation should be clarified to address when secondment arrangements are in line with the substance and delegation rules set out in the AIFMD and UCITS frameworks.

Distinction between Collective Portfolio Management and Supporting Tasks – there are divergent views on when certain supporting tasks constitute collective portfolio management functions, which are subject to the delegation rules set out in AIFMD and the UCITS Directives, and when those tasks fall outside the scope of those rules.  Accordingly, ESMA sees merit in implementing legislative clarifications in line with the interpretation supported by ESMA in Section VIII of its Q&As on the application of the AIFMD (here).  According to this interpretation, the AIFM is responsible for all of the functions listed in Annex 1 of AIFMD and any delegate appointed by the AIFM to undertake such functions (whether under point 1 or point 2 of Annex 1).

White-Label Service Providers1 – to the extent that such providers are permissible, ESMA is advocating that they be governed by more specific regulatory provisions, in particular to address the distinct and significant conflicts of interest associated with such providers.

Harmonisation of AIFMD/UCITS Frameworks – while the provisions on delegation are rather similar (although not identical) in the UCITS Directive and AIFMD, there are no granular Level 2 provisions in the UCITS framework, while this is the case in the AIFMD framework (Section 8 of Chapter III of the Commission Delegated Regulation (EU) 231/2013). ESMA is advocating for greater harmonisation of the two frameworks.

List of Permissible Business Activities – NCAs have taken diverging approaches to the lists of permissible business activities set out under Article 6(4) of AIFMD and Article 6(3) of the UCITS Directive raising the need for further legislative clarifications on the scope of these activities.  Moreover, while certain activities falling within the scope of such lists are subject to specified provisions in the MiFID Directive, their precise application can be unclear. For example, it is unclear to what extent MiFID and/or AIFMD/UCITS rules apply when the relevant business activities are not being provided in respect of a MiFID financial instrument, such as real estate. NCAs have also taken different views on whether the investment management of UCITS/AIFs on a discretionary basis is discretionary portfolio management subject to MiFID rules or collective portfolio management subject to the AIFMD/UCITS Rules. Consequently, ESMA sees merit in clarifying the AIFMD, UCITS and MiFID frameworks to ensure that AIFs/UCITS and their managers and MiFID investment firms always remain subject to the same regulatory standards, while providing the same type of services.


While it is clear from the Letter that delegation remains an area of focus for ESMA, several of its recommendations are a natural extension to its 2017 Opinion to support supervisory convergence in the area of investment management in the context of Brexit.  Moreover, the Letter should be read in the context of long-standing legislative and supervisory support for delegation arrangements, both in the legislative framework itself and in more recent measures designed to ensure that the requisite co-operation arrangements are in place to allow delegation to the UK post-Brexit (see our related briefing here).

It is so far unclear to what extent ESMA’s recommendations will be taken on board by the European Commission and/or the European Parliament and the EU’s Council of Ministers.  In this respect, it is noteworthy that, according to the SWD:

Overall, it can be concluded that the AIFMD rules regarding delegation arrangements are proportionate within the imposed limitations. The provided safeguards in place to respond to supervisory and competitive concerns are deemed to equip supervisory authorities with a relevant toolkit.

Similarly, the Study evaluated the existing rules as being effective, coherent and relevant, observing that:

The evidence indicates that the AIFMD delegation provisions have imposed effective controls on the activity of delegating AIFM functions, thereby limiting and managing key operational risks for AIFs and AIF investors, and have done so in an efficient manner. Moreover, the delegation rules generally meet the goal of being effectively applied and taken into account by AIFMs when taking decisions about the delegation of management activities. The provisions especially assure that effective and appropriate governance and risk management obligations with respect to the delegation of functions are imposed on AIFMs.

The Commission is expected to publish a consultation on AIFMD in September 2020 and a legislative proposal amending AIFMD is targeted for publication in Q2 2021. This proposal will then have to be considered and adopted by the European Parliament and the Council meaning that it could be close to three years before any new rules come into force.

Irish funds have, for many years, operated with strong delegation arrangements in place which has ensured that a “best in class” product is available to fund investors. Its delegation model has proven robust and efficient and ensures effective governance and management controls are in place for the benefit of investors. To the extent that any adjustments are made, as a market leader in ensuring effective controls and safeguards are put in place by AIFMs/UCITS ManCos with respect to any delegate appointment by them, Ireland should be very well placed to react quickly and efficiently to implement any such adjustments.

  1. Fund managers that provide a platform to business partners by setting up funds at the initiative of the latter and typically delegating investment management functions to those initiators/business partners or appointing them as investment advisers or informally following their guidance/instructions.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.