The UK, post-Brexit, has the opportunity to resolve an issue for our AIF industry stemming from Article 19 (10) of the Alternative Investment Fund Managers Directive (AIFMD). implemented across the EU and now domesticated in the UK. The solution enables our industry to operate more efficiently and in accordance with long-established investor protection and corporate governance practices.
Article 19 (10) (see box below) provides that an external assessor has unlimited liability to an Alternative Investment Fund Manager (AIFM) for any loss suffered by the AIFM due to the negligence of the external evaluator or his intentional failure to perform his duties.
This provision must be reformed so that “negligence” is interpreted as a serious error (not a simple one). The industry should work with the UK regulator, the Financial Conduct Authority (FCA), and persuade it to implement appropriate legislative reform. At EU level, the EU regulator, the European Securities and Markets Authority (ESMA) as part of the European Commission’s AIFMD review, has already recognized the problem with Article 19 , paragraph 10, of the AIFMD and supports the search for a solution to the external problem of the assessor’s liability for funds.
Focusing on Article 19 (10) of the AIFMD, there is no harmonized standard of negligence across the EU, and therefore the interpretation of the threshold of potential unlimited liability. In the UK (and in several EU member states) negligence – sometimes also referred to as ‘simple negligence’ – is interpreted to mean relatively minor errors and is distinguished from ‘gross negligence’ (often used as jargon of market and meaning “serious error”). , which is used to mean relatively more serious errors.
As a result, in the UK, many real estate appraisers, for example, adopting the professional guidelines of their professional body, the Royal Institution of Chartered Surveyors (RICS), are unwilling to accept unlimited liability for mere negligence. They therefore refuse to accept the role of external appraiser of buildings in the portfolios of real estate funds. This is unfortunate, as external real estate investment appraisers have long been a recognized means of ensuring that valuation of property in funds is performed to industry standards by independent qualified and licensed third parties.
EU / United Kingdom AIFM Article 19 (10)
“The managers are responsible for the proper valuation of the assets of AIFs, the calculation of the net asset value and the publication of this net asset value. The manager’s liability towards the AIF and its investors will therefore not be affected by the fact that the manager has appointed an external assessor.
Notwithstanding the first paragraph and regardless of any contractual arrangement providing to the contrary, the external appraiser is liable to the manager for any loss suffered by the manager as a result of the negligence of the external expert or his willful failure to perform the task. its tasks.
Professional liability insurance in the UK is not available for unlimited liability related to actions deemed less than serious error. Due to Article 19 (10) – for the purposes of the AIFMD and (since 31 December 2020) the UK AIFMD – many UK AIFMs have been forced to perform the evaluation function internally – c that is, to operate with internal evaluations rather than independent external evaluations. It also adds unnecessary costs.
The representative organizations of the sector, the Association of Real Estate Funds (AREF), the British Property Federation (BPF) and the European Association for Investors in Non-Listed Real Estate (INREV) usefully support the need for legislative reform of AIFMD in the UK with a submission this month to FCA. They argue that, pending any primary legislative reform by the UK AIFMD on this and other issues (i.e. justified due to the combination of this and other issues), a pragmatic solution is to resort to FCA consultation (then guidance) that Article 19 (10) UK AIFMD should be interpreted on the basis that “the external assessor is subject to unlimited liability to the AIFM for any loss suffered by the AIFM solely because of a serious error by the external evaluator or an intentional failure to perform his duties ”.
The United Kingdom would be entitled to proceed with such a reform given the flexibilities for the United Kingdom under the EU-UK trade and cooperation agreement of 24 December 2020. Nikhil Rathi, CEO of FCA , in a speech also this month recognized this increased flexibility and signaled that the UK intends to use its autonomy to regulate for the benefit of UK financial markets.
Let us hope that the FCA will engage with the representative organizations and find a solution to this essential reform of Article 19, paragraph 10, of the British AIFMD.
Assuming that this reform progresses, the European Commission can be persuaded by reform – and combined with ESMA support – the progress of the legislative reform of Article 19 (10) of the AIFMD. This could be an example of a post-Brexit EU / UK regulatory benchmarking dynamic – in which the UK AIFMD reform also influences a welcome improvement of the AIFMD. Such an influence would be an ironic consequence of Brexit.