Styperson POPE

Strategy & Compliance for Investment Firms

The Small Registered UK AIFM Regime for Property Funds

It sounds like another exciting one doesn’t it!  Actually, it’s very useful and still surprisingly unknown.


When the European Union introduced the Alternative Investment Fund Managers Directive (“AIFMD”), it brought UK fund managers (”AIFMs”) within the scope of European law… all except for “small” ones.  Small AIFMs are still within the scope of domestic law and the UK took the opportunity presented by AIFMD shake up to introduce a new, lighter-touch, regime for small AIFMs running property funds.

There are various types of small AIFM for funds of different structures investing in different asset classes but our focus here is only on property funds.  In order for an AIFM to access the lighter-touch regime, various conditions apply:

  • Value of funds under management (i.e. what counts as “small”?);
  • Fund structure;
  • Assets (i.e. what counts as “property”?); and
  • Appointment of an FCA Authorised Operator.


So what counts as a “small” AIFM? There are two thresholds, depending on whether any of the funds being managed by the AIFM contain any debt (leverage / borrowing / gearing—choose your preferred term!).  If any of the funds managed by the AIFM contain debt, the threshold is €100m (note Euros, not GBP) of gross assets under management but if none of their funds contain debt, the threshold is €500m.  That seems counterintuitive but makes sense when you consider that the intention is to push riskier fund managers (i.e. those who use debt to leverage their investors’ returns) into the full scope of European Law.  Note that I’ve said “if ANY of the funds contain debt”.  This threshold isn’t applied at the level of the fund but at the level of the manager and £1 of debt in any of their funds means the lower level threshold  applies to their total assets under management.  


This regime only applies to managers of Unregulated Collective Investment Schemes.  Without going into the painful detail of this, it essentially means the fund must be structured as a Limited Partnership, LLP or Trust and it rules out funds structured as a limited company (external fund managers of funds structured as investment companies can’t access the lighter-touch regime and these AIFMs must be FCA authorised).  The good news is that because Limited Partnerships, LLPs and Trusts are all tax-transparent, they’re the preferred vehicle for most property investment in the UK.


The fund can only own property (or shares in a company through which it owns property) and certain types of property-related assets like insurance.  It can of course hold cash but must have invested most of it within the first six months and must distribute or reinvest it after selling the property so that the majority of the fund’s value remains in property.

Because the fund can’t own units in a collective investment scheme, the previous structure permitting SIPP investment (an Exempt Property Unit Trust over a Limited Partnership) no longer works but an alternative, slightly more complicated but still very usable, structure exists.


The final requirement is that the AIFM must appoint an FCA Authorised Operator to establish, operate and wind up the funds it manages.  We’d be more than happy to introduce you to some Operators if needed.


If all the above conditions are met and as long as the management are reputable, the AIFM can “register” with the FCA which is a much lighter-touch, quicker and cheaper process than becoming “authorised” by the FCA.

Once registered with the FCA (which can take up to three months), the fund manager can carry on regulated activities directly related to the management of its funds.  This includes the promotion and management of the fund; do note however that restrictions still apply to these activities, it’s not an unfettered licence, just a lighter touch regime!

How is an EIS Fund Structured (and is it really a “fund”)?

What is an EIS fund?

Well, functionally, it’s an arrangement through which less experienced and time-poor investors can put money into unquoted companies which qualify for Enterprise Investment Scheme tax reliefs. This offers investors diversification in their portfolios and the higher level of risk is mitigated (to an extent) by the income and capital gains tax reliefs they get. (See the HMRC website for more detail on Enterprise Investment Scheme tax advantages and qualifying investments.)

When looking at the tax reliefs, there are two types of EIS fund; approved and unapproved.  These are not regulatory terms but refer to whether the fund has been approved by HMRC.  If it has, the investors qualify for relief when they invest in the fund, if it is not, they only qualify for relief when the fund itself makes an eligible investment.  The predictability of the former makes them attractive to some investors but they’re less flexible than unapproved funds and have a limited time in which to make their investments.  Always remember that ‘approved’ EIS funds, have not been approved by the FCA.

Is an EIS fund really a fund?

Well, it depends what you mean by a ‘fund’!  Most funds have a particular structure (e.g. a partnership, or an investment company) but EIS funds don’t because the structure would block the tax reliefs for the investors.  An EIS fund is therefore normally a number of parallel investment management agreements between individual investors and the manager.

However, in other respects, EIS funds look like a fund, sound like a fund, and act like a fund.  It’s therefore FCA guidance (and common sense) that EIS funds fall within the European law definition of an “Alternative Investment Fund” and in that respect at least, they’re very much funds.

How do EIS funds work?

Typically, the initial investment is held in cash  by the manager as ‘client money’. The manager will then commit a portion of each investor’s cash into each investment in a qualifying company (in line with the investment strategy and the investment management agreement).  The resulting shares will typically be registered in the name of a nominee owned by the manager and shareholder duties (like voting on resolutions) will be carried out by the manager throughout the life of the fund.

Is an EIS fund a Collective Investment Scheme?

If you think EIS funds sound like “collective investment schemes” (a domestic law regulatory category), we can understand why.  However, the Treasury have the power under the Financial Services & Markets Act 2000 to create exemptions to the definition of a collective investment scheme and they have created one specific to EIS funds (as long as they meet certain complying fund conditions, mainly related to withdrawal rights).  There’s another, wider, regulatory category of “Non-Mainstream Pooled Investments” from which EIS funds are also specifically excluded.  This allows them to be promoted slightly more freely than they otherwise could be, but there are still considerable restrictions because of their high risk nature.  Ultimately, EIS funds are not for ordinary retail investors and can only be promoted to investors who have the benefit of advice from an authorised person (typically an IFA) or who qualify and certify as High Net Worth or Sophisticated Investors.

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The UCIS / AIF Boundary in UK Fund Structures

I know, it sounds fun, right? OK, this one’s a bit technical but I seem to have had this conversation a few times recently…

Since the introduction of AIFMD back in 2013, the EU-derived definition of a fund (or “AIF”) have had to map onto our similar but subtly different UK-derived definition of a collective investment scheme (“CIS”). So when is an AIFM required rather than (or, in one case, as well as) an Operator?

For this purpose, we’ll only consider Unregulated CIS (“UCIS”) so we’re excluding the bigger funds which are sold to the public and focusing instead on private fund structures.

‘Alternative Investment Funds’ are defined in the Alternative Investment Fund Managers Directive and there are a few limbs to that definition:

  • They are “undertakings”—while some have argued that this excludes certain, unincorporated arrangements, the consensus seems to be it is a broad enough concept to capture pretty much any arrangements, incorporated or otherwise, and in writing or otherwise.
  • They are “collective”—this means that the risk and reward are pooled among the participants.
  • They are “managed”—meaning arrangements where all of the participants have ‘daily’ control are not AIFs but if that control is passed to a manager, which may be one of the other participants, it will be.
  • They “raise capital”—this means that arrangements between a small number of individuals which don’t then raise capital from others are unlikely to be an AIF.

‘Unregulated Collective Investment Schemes’ are defined in the Financial Services & Markets Act 2000 and again, there are a few limbs to that definition (some of which will look a little familiar):

  • They are “arrangements” for income or profit—so, pretty much the same as ‘undertakings’ from the AIF definition.
  • They are “pooled”—so, pretty much the same as ‘collective’ in the AIF definition.
  • They are “managed”—there’s a very subtle distinction between the UK concept of ‘day-to-day’ control as defined by case law and the EU’s definition of ‘daily’ control as defined by ESMA guidance but that’s too fine grained to worry about here!

So what’s the problem? Other than AIFs needing to “raise capital” they sound the same as UCIS? Ah, but then there are all the exemptions!

AIF Exemptions
There are few exemptions to the definition of AIFs and they’re all pretty practical, these ensure that holding companies, companies with a general commercial purpose, central banks, securitisation SPVs and employee share schemes don’t get caught up in the definition, generally because there is other EU legislation covering these areas.

UCIS Exemptions
Thee exemptions to the definition of UCIS are much more numerous and have evolved over the years to address particular circumstances and market effects the Treasury wanted to influence. This means that some arrangements and structures which would otherwise be a UCIS are subject to an exemption. In the fund context, this includes:

  • All bodies corporate—i.e. any limited company (meaning that unregulated UCIS are generally LPs, LLPs or Trusts); and
  • EIS or SITR funds.

AIFs but not CIS
So, the main categories of investment structure which are AIFs but not UCIS are:

  • Investment Companies;
  • EIS funds; and
  • SITR funds.

These all require an authorised (or, in some cases, registered) AIFM with the regulatory permission of Managing an AIF to run them, even though they didn’t need the services of an Operator prior to AIFMD.

UCIS but not AIFs
And the main categories of investment structure which are CIS but not AIFs are:

  • UCIS which don’t raise capital; and
  • “Grandfathered” AIFs (being fully invested prior to AIFMD coming in).

These all require the appointment of an authorised Operator with the regulatory permission of Operating, Establishing & Winding Up an Unregulated Collective Investment Scheme.

Both UCIS and AIFs
To keep it simple, the Treasury introduced a regulation to say that if a fund’s manager has the permission to Manage an AIF (i.e. they’re an AIFM) this covers all regulated activity relating to their management of an AIF. This means that where a fund is both an AIF and a UCIS, the AIFM doesn’t require a separate permission to act as an Operator.

Small UK Property Funds
There is also one structure which requires both an operator and an AIFM.

When the UK implemented AIFMD in 2013, the Treasury took the opportunity to make some consequential changes to the UK’s local regime for smaller managers to whom AIFMD doesn’t apply. This resulted in them creating the concept of a Small UK Registered AIFM. The ‘registration’ required is a lot less onerous than the full ‘authorisation’ process and so this is a lighter-touch regime designed to reduce barriers to entry for some smaller fund managers.

These funds include property funds structured as a UCIS, i.e. a UCIS which holds the majority of its assets (save for their first and last six months) as land and does not hold any shares derivatives, bonds, fund units (save for shares in a company owning the property). The definition of small is derived from AIFMD and is applied to the manager, not the fund; small means less than €500m or less than €100m where any fund under management uses debt.

The trade off for this lighter-touch regime is that the registered AIFM for such a fund must also appoint an authorised Operator. This is the only scenario which requires both an AIFM and an Operator.

UCIS AIF Boundary

Brexit & the UK AIFM

I was surprised to see, looking back, that I wrote my first Brexit regulatory analysis for a UK fund manager a full four months before the referendum. It considered two scenarios: 1) some deal covering financial services (be that no Brexit, Single Market membership, joining the EEA, or a Free Trade Agreement covering services—all of which seemed unlikely); or 2) a “Hard Brexit”. The rest was just timing. And nothing has changed since.

Now however, we find ourselves so much closer to the date on which the UK is due to leave the EU and, with not much more to go on than we had two and half years ago, every Board meeting I attend is taken up with speculation and discussion about where we’ll be in six months, two years, three years, five years.

So, what can we say?

On the day we leave the EU the current law, derived from Directives and Regulations, will all be preserved in UK law. AIFMD will still govern UK fund managers who will need to comply with all its detailed requirements, including the need to retain a Depositary. However, UK AIFMs will lose the right to passport their management, and market their funds, into other EEA jurisdictions. These rights may be extended from 29 March 2019 to 31 December 2020 if a transitional deal can be agreed but if it’s a ‘no deal’ Brexit, the rights will be lost within months.

But if the EU marketing passports can’t be used, there are two other options, right? We can apply for ‘Third Country’ access to the passporting regime or we can market under the National Private Placement Regimes. Right? Right?!

Well… maybe… and probably not straight away.

Third Country access requires that we have an ‘equivalent regime’ (surely nobody can deny that) but it also requires that ESMA assess us (a process which has not yet started) and that the EU Commission accept ESMA’s advice to turn on the passports for us. It’s this third part which presents the biggest stumbling block. Given that the EU Commission have, for two years, declined to accept ESMA’s advice to turn on the passports for Canada, Guernsey, Japan, Jersey and Switzerland, it seems unlikely that they’ll bend over backwards to accommodate the UK, least of all amid what they will no doubt see as the frustrating recalcitrance of a no deal Brexit.

So there’s always the NPPRs, patchy and complex as they may be. Well, there may not even be those. The NPPRs rely on a cooperation agreement existing between the relevant EU Member State and the Third Country but while we’re in the EU we don’t need these, so we don’t have them. And there doesn’t seem to be much of a rush among the 27 EU regulators to put them in place. It’s almost like Germany doesn’t see the benefit of letting all their pension funds and insurance companies put their money into the UK instead of, say, Germany.

So what do we do?

Given that it’s (probably) too late to set up a second AIFM in the EU and, in any case, the combination of having to provide substance and shifting senior staff around is unattractive, it’s probably best to keep the principal activity in the UK and move from being an AIFM to being an Investment Adviser, at least until the dust has settled. This means buying in the services of an AIFM based outside the UK. While such AIFM platforms in the EU (typically Luxembourg and Dublin) have ready access to the marketing passports, it may also be worth considering working with a provider in a non-EU jurisdiction such as the Channel Islands which can then market into the EU under the established NPPRs. This is trade off between access and costs and will depend on which countries the fund is to be marketed into.

For some of our clients the regulatory aspects of Brexit just aren’t a big deal—usually because they are not using their passports (or can’t because they’re a Small AIFM) and they have no plans to. They’re definitely the lucky few!

Well, my personal hope is that the UK will, over time, consider introducing a lighter-touch regime for AIFMs of funds which will never be marketed in the EU. We already have plenty of funds with UK assets, marketed only to UK investors. We could maintain an equivalent regime for anyone wanting to access the (eventual) Third Country passport and develop a lighter touch which would avoid, even large AIFMs needing to comply with the valuation, depositary and other onerous requirements of AIFMD. The big advantage would be a more cost-effective, and therefore competitive, funds environment in the UK

But don’t hold your breath! The Treasury may have a few other things on their post-Brexit plate ahead of deregulation for fund managers.

The Role of a Depositary under AIFMD

The Alternative Investment Fund Managers Directive (AIFMD) is due to be transposed into law on 22 July 2013 and while some Alternative Investment Fund Managers (AIFMs) will want to make use of the transitional year to avoid implementing changes straight away, others (for instance those marketing outside the UK) will want to comply from day one.  And on day one, they’ll need a Depositary.

The UK implementation of AIFMD allows for two types of Depositary (ignoring for the moment the ‘Depositary Lite’ model used  for non-EU AIFs).  These are the full blown Depositaries, the market for which is likely to be served by the established custodian banks, and the Private Equity AIF Depositary which is (albeit slowly) attracting some new entrants to the market.

Some prospective PE AIF Depositaries, generally existing, regulated fund administrators and third-party operators, are starting to put their head above the parapet and talk about their proposed services (and a little more reticently, their proposed pricing) but what does the Depositary role entail?

Cash Flow Monitoring
The Depositary is required to monitor all significant cash flows and quickly identify any that are inconsistent with the usual operations of the fund.  They must also reconcile all cash flows on a daily basis, although they may do so less frequently where cash movements are infrequent.

The Depositary will receive information about subscription payments the same day they are received by the fund, the AIFM or a transfer agent.  The Depositary is then responsible for ensuring that the payments are booked into accounts in the name of the fund, the AIFM or the Depositary.

Safekeeping (Verification and Record Keeping)
Other rules apply where a Depositary is holding custodial assets but for non-custodial assets (such as real estate) the Depositary must verify the ownership of the assets and keep appropriate records.  What will create more complexity is the Depositary’s duty to ensure procedures are in place which prevent the assets being assigned, transferred, exchanged or delivered without the Depositary being informed, particularly as the Depositary’s responsibilities are on a ‘look through’ basis which limits the extent that these controls can be put in place in respect of structuring vehicles only.

AIFM Risk & Process Oversight
The most widely ranging responsibility of the Depositary, and the one which will require the most expertise and thought, is the duty to assess the risks of the fund’s strategy and the AIFM’s organisation and implement ongoing controls and verifications of the AIFM’s processes and procedures.

AIFM Instructions
The oversight functions of the Depositary extend to verifying the instructions of the AIFM to ensure compliance with the fund’s rules, offering documents and applicable law.

The Depositary is required to ensure that procedures are in place for the valuation of the fund’s assets and that these are implemented effectively on an ongoing basis and reviewed periodically.

The Depositary must ensure that the fund’s net income is handled in accordance with its rules, including ensuring that auditors’ reserves are taken into account and that any distributions are correctly made.

Many of these processes will be familiar to (better or more risk averse) regulated fund administrators and third-party operatorsSTYPERSON POPE has assisted a number of these firms to create and implement operational procedures, ensure appropriate governance, and identify and manage the risks involved in providing these services.

Alternative Investment Fund Managers Directive (“AIFMD”) Texts, Papers & Links

AIFMD is a major new Directive affecting (to a greater or lesser extent) pretty much all alternative investment fund (“AIF”) managers (“AIFMs”) of institutional funds and operators of UCIS.

Quite a bit of our time is being spent on AIFMD implementation projects, particularly early implementation for clients marketing funds around Europe after July 2013 (when the Directive is transposed into national law).  Other clients are planning to take advantage of the transitional year (between transposition and July 2014).  Careful structuring is needed to ensure that funds’ costs don’t increase unnecessarily, so called ‘grandfathering’ funds aren’t dragged into full compliance where other options are available, and existing tax effects are preserved.

We’re also assiting Depositaries making an entrance into the new market that AIFMD creates for their services.

The one certainty is that this will be a year for change and it will present considerable strategic challenges to existing business models, especially to the professional, third party operator model under which many smaller UCIS and institutional funds are managed in the UK (a model that’s unique in Europe).

Here are a few links to the key documents defining the UK’s implementation of the Directive.

European Union Commission: 

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