Five Top Tips for AIFMD Risk Compliance

Now that the AIFMD deadline has passed and the enforcement phase begins we have put together “Five Top Tips for AIFMD Risk Compliance”:
1. Ensure your risk function is free from any conflicts of interest. It will be necessary to have a Chinese wall between the front office and the risk function.
2. AIFMD requires that the risk management function is now viewed as being of equal importance as the portfolio management function. The risk manager must also have autonomy and independence.
3. AIFMD is very prescriptive and broad. Make sure your risk function at least covers market, liquidity, counterparty and credit risk at a minimum.
4. Regulatory reporting under AIFMD (Annex IV) is burdensome. Ensure your regulatory reporting solution is comprehensive and robust. Approximately 60-70% of the required data is risk related so risk providers are a good place to start, in particular RiskSystem.
5. As attention switches from application to enforcement large fines for non-compliance with AIFMD are likely. It is vital to make certain that both your risk management function and reporting are robust and will survive regulatory scrutiny.
We believe that regulators will not be afraid to make an example of those managers of Alternative Investment Funds (AIFMs) who cannot effectively demonstrate their full compliance with the new regime. In our view AIFMD codifies what was effectively best practice in risk management. Investment managers no longer have a choice as to whether they should have a risk management function or not – risk management is hereafter enshrined in legislation. The transition period has given managers, regulators and investors time to prepare; however it is very apparent a large degree of unpreparedness and some confusion remains. This will not, however, be a sufficient enough excuse should the regulator come knocking. Managers may have ticked all the boxes but the regulators will be proactively looking for proof. It is easy to tick a box and say you have an independent risk function that is monitoring all risks at all times – it is a quite different proposition to demonstrate this to the regulator’s satisfaction.
We have no doubt that large fines are coming. The regulators are showing their mettle similar to how they have shaken up the European banking industry over the past few years e.g. with the banking stress tests and single supervisory mechanism (SSM) for the euro zone. A clear example of this is the recent fine of £26.5mm (£18.6 with a discount) for Invesco Perpetual by the FCA, due to breaches of investment limits – see our recent post here. This is indicative of a lack of tolerance for those attempting, consciously or not, to avoid their regulatory requirements.