As part of the implementation of the AIFMD, changes were made to the Regulated Activities Order (RAO) so that firms that were managers of UCITS and AIFs were deemed not to carry on any specified activity other than ‘managing a UCITS’ or ‘managing an AIF’ as appropriate. As a result, such firms would not require any other regulated activities such as ‘managing investments’ etc. on their Part 4A Permission (although, of course, if such firms also carried out permitted MiFID-type activities outside of managing a UCITS or AIF then they would need the appropriate activities added).
A consequence of this is that AIFMs are not deemed to be carrying on the activity of ‘safeguarding and administering investments’ (which for Permission purposes is sub-divided into ‘arranging’ and ‘without arranging’). On the face of it this should not be an issue because the AIFMD requires a Depositary to be appointed to hold the AIFs’ assets. However this created a loop-hole because small AIFMs are not required to appoint a Depositary so we currently have a situation where a small AIFM can hold the assets of an AIF and yet not be subject to the regulatory requirements of CASS 6 (‘Custody Rules’).
The FCA proposes amending the Handbook to include a new definition: “excluded custody activities”. This will be activities that would have amounted to ‘safeguarding and administering investments’ if it was not for the exclusion arising from the amendment to the RAO. Following this, CASS 6 (and CASS 10 – “CASS resolution pack”) will be amended so that it captures a small AIFM carrying on ‘excluded custody activities’ and so closing the loop-hole.
The Handbook changes can be found in Appendix 4 of Quarterly Consultation CP14/18.
The consultation period ends 5 November.
