A lethargic Alternative Investment Fund Managers Directive (AIFMD) take-up, coupled with a preference for private placement regimes, means that alternative investment funds are not turning their cheek from Switzerland just yet. One recent piece of news saw BNP Paribas launching depository services in Switzerland—a country that is not AIFMD compliant, and is instead using its Collective Investment Schemes Act (CISA) to offer a regime that purports to be equivalent— but which experts describe as having much looser regulatory controls.
The French bank launched trustee and depository services in the UK last year, with James McAleenan, head of BNP Paribas Securities Services UK, commenting at the time: “This launch reinforces our continuous commitment to the UK market.” The bank has continuously expressed its belief that the AIFMD will establish a strong European standard for alternative funds and improve investor trust.
However, it seems that the lure of the Swiss market is too strong, with BNP Paribas, UBS and SIX Securities Services all pursuing clients in this lucrative space.
AIFMD, which came into effect in July 2013, requires all non-UCITS and alternative investment funds in Europe to appoint a depository bank to provide safekeeping, cash monitoring and services covering the valuation of complex products and alternative assets.
The directive was implemented as a direct reaction to the financial crisis, and was formulated in order to provide greater protection for investors as well as the wider global economy.
The Swiss equivalent is CISA, regulated by the Swiss Financial Market Supervisory Authority (FINMA), and obligated to reach the same level of regulation to safeguard European market access for Swiss investment fund managers and products. How equivalent CISA actually is remains a point of contention, but its implementation undoubtedly increases Switzerland’s appeal.
Theodor Härtsch, an attorney at Baker & McKenzie in Zurich, says: “CISA is more comprehensive as a regulatory body, though the actual levels of regulation required by AIFMD are much higher. While the CISA is very attractive to potential clients, other factors such Switzerland’s beneficial tax regime should not be underestimated”.
While Switzerland, as a non-EU state, is not obligated to implement AIFMD itself, the country has nevertheless amended its legal framework to account for AIFMD provisions on third countries. On 1 March 2013, the Swiss parliament voted for a revision of CISA, which meant that all managers of collective investment schemes, rather than just managers of Swiss schemes, would now be required to register with FINMA.
Asset manager and asset owner clients with funds domiciled in Switzerland can now use the pan-European expertise of big banks for their depository services, while still benefitting from the country’s inherent advantages, such as tax. The total assets under management in Switzerland amounted to almost €70 billion as of December 2013.
While prospective clients’ decision-making process has to take a great deal of factors into account, in terms of a favourable location, Switzerland remains an appealing location to consolidate their depository and custodial needs. However, AIFMD does have its proponents in the country, some of which have reportedly decided to re-incorporate their AIFs into jurisdictions such as the UK.
Alexander Merriman, head of market policy for SIX Securities Services, says: “There are two aspects [in clients’ decision making process]. The first is that our clients are interested in how SIX SIS, although not a depository (and therefore not subject to the liability provisions of AIFMD), can facilitate their adherence to AIFMD and can enhance their investors’ protection”.
“The second is that what seems to matter increasingly is whether the alternative investment funds can be marketed cross border in the EU. The anecdotal evidence suggests that a number of Swiss-based companies have chosen to re-incorporate their alternative investment funds for this purpose in a jurisdiction such as the UK, where there is already a hard core of alternative fund activity.”
“In other respects we hear that, Europe-wide, registration under the AIFMD has been slow, and that AIFs have expressed a preference—where they can— to continue to offer products to investors via the private placement route. This mechanism is also available to alternative investment funds based in Switzerland”.
In any case, many experts believe that the way in which 2014 unfolds will play a large part in defining Switzerland’s position among the elite fund domiciles in Europe. Olivier Stahler, a partner with Swiss law firm Lenz & Staehelin, predicts that the future of the industry will be determined by increasing obligations from Markets in Financial Instruments Directive (MiFID) standards, which aim for better protection for investors.
Time will tell regarding which set of regulations will prove to be the most influential across Europe, but what can be agreed on is that the next 12 months will be crucial.
André Valente, managing director and head of UBS Fund Services Switzerland, says: “Switzerland’s national regulations could still present hurdles in terms of distributing Swiss alternative investment funds into Europe, but this year will be instrumental. By the end of this year you will have clarity on what will and what will not be possible within AIFMD, from a Swiss location.”