CP12/32: Implementation of the Alternative ... - BVCA admin

November 2012
CP12/32
Implementation of the Alternative Investment Fund Managers Directive
• remunerating risk management staff in accordance with the performance of the risk
management function, independently from the performance of the other business areas
in which they are engaged;
• independent decision-making;
• the same degree of authority for the risk management and portfolio management
functions; and
• segregating conflicting duties.
7.41 We expect the Level 2 Regulation to require an AIFM’s governing body to review
regularly the effectiveness of any such safeguards and take timely remedial action to
address any deficiencies.
7.42 Some responses to DP12/1 noted that the requirements for the functional and hierarchical
separation of the risk management function could present challenges for smaller fund
managers and those managing private equity, venture capital and property funds. 71 In
assessing the efficacy of risk management practices and controls, the FCA will take account
of any such safeguards used by an AIFM.
Risk management systems
7.43 FUND 3.7.5R and 3.7.6R will transpose the Level 1 requirements 72 for AIFMs to
implement adequate risk management systems to identify, measure, manage and monitor
appropriately all risks relevant to each AIF’s investment strategy and to which each AIF is
or may be exposed. We would expect these systems to include at least an appropriate due
diligence process when investing on behalf of the AIF, appropriate stress-testing procedures,
and a process to ensure that the AIF’s risk profile corresponds to its size, portfolio
structure, investment strategies and objectives.
7.44 We expect that the Level 2 Regulation will specify the appropriate frequency at which any
such reviews must be undertaken by an AIFM, and the circumstances that might trigger a
review by an AIFM. For example, a review will be required where material changes are
made to the risk management policies and procedures or the investment strategy and
objectives of the AIF.
Risk limits
7.45 In DP12/1 we asked why use of qualitative risk limits might be in the interests of AIF
investors. Respondents cited examples of where qualitative risk limits might be more
informative than quantitative limits, for example where assets are illiquid or hard to value. 73
71 Question 13 of DP12/1.
72 Article 15(2) AIFMD.
73 Question 14 of DP12/1.
Financial Services Authority 55