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

CP12/32
Implementation of the Alternative Investment Fund Managers Directive
Annex 1 X
has been expressed, notably from the private equity industry, that the requirement will lead
to additional costs and complexity thereby reducing competition. The difficulty in finding
depositaries at a reasonable price for some types of AIF has been addressed in Chapter 9.
To facilitate competition in this market, the FCA intends to permit authorised professional
firms and other suitably qualified authorised firms to carry on the activity of acting as a ‘PE
AIF depositary’ as defined in Chapter 9.
60. In terms of one-off costs, AIFMs that will have to appoint a depositary are likely to incur
staff costs and costs of seeking external advice. Some respondents estimated legal costs for
reviewing and negotiating depositary arrangements in the range of £50,000-£100,000. The
depositaries that will have to seek new Part IV permissions or vary their existing
permissions may also incur one-off costs for authorisation. Acting as a depositary of
authorised funds is already a regulated activity for several firms (all of whom are members
of large banking groups), we therefore do not expect them to incur significant additional
costs unless they accept appointments to unauthorised funds. Firms wanting to act as PE
AIF depositaries that are not currently authorised depositaries, however, will incur costs
from seeking authorisation or varying their existing permissions, including FCA fees. We
have not quantified these costs, as at the time this CBA was carried out there was
significant uncertainty about how many firms may apply.
61. In terms of ongoing costs, AIFMs may need to hire additional staff to deal with depositary
matters, such as additional reporting and systems enhancements to allow the depositary to
have a full overview of the cash movements and to fulfil its oversight duties. Based on the
firm survey, for larger AIFs annual costs could amount to around £80,000-£300,000.
62. The most significant costs, however, will arise from the forthcoming Level 2 Regulation
that are likely to enforce quasi-strict liability provisions. AIFMs that responded to the
Deloitte survey said that depositary costs are ‘the most pressing concern’, and 78% of
respondents expected costs to be significant. Depositaries will most likely charge for the
additional liabilities taken, and are likely to pass on these costs to AIFs. As a result costs
for funds will increase, which will most likely translate to reduced returns for investors.
In some cases, the increase in costs might make a particular strategy no longer cost effective
affecting investors, AIFMs and any service providers.
63. Respondents to the FSA survey expected the costs to be significant and to affect their business
models, though at the time most were not able to estimate them due to uncertainty about the
Level 2 Regulation. To date few institutions had stated that they will offer depositary services
and had estimated the fees. A few firms provided ‘guestimates’ in the range of about 10-150
basis points (bps) of NAV, assuming fees are charged by reference to asset value or fund size.
It was noted that it is hard to estimate the actual costs, as these will vary greatly depending
on the nature of an AIF’s investments and risk profile, and the availability of specialised
depositary services. However, for some managers, the fee increases may be modest, either
because their assets are less risky, do not fall under the strict liability requirement in case of
loss (such as assets that cannot be held in custody) and/or there is a diverse group of
depositaries vying for such business.
A1:16 Financial Services Authority November 2012