3. Key elements of Directive (EU) 2024/927

Summary

Directive (EU) 2024/927 addresses some shortcomings in the original AIFMD which were either not sufficiently addressed in 2011 or have arisen due to market changes since that time. The AIFMD is amended with a view to:

• harmonising the rules for AIFMs managing AIFs which originate loans;
• ensuring equal treatment of entities providing custody services;
• improving cross-border access to depositary services;
• enhancing the disclosure of information to investors both before and post investment;
• clarifying the standards and rules applicable to AIFMs that delegate their functions to third parties;
• facilitating the use of liquidity management tools (“LMT”);
• providing for a broader range of permitted activities for AIFMs;
• optimising supervisory data collection; and
• improving supervisory cooperation and effectiveness.

Directive (EU) 2024/927 also amends the UCITS Directive to provide for the availability and use of LMTs, to expand the range of permitted activities, to enhance supervisory reporting and to clarify delegation arrangements. Several significant changes introduced by the amending Directive are explored in more detail below.

Loan origination framework

Loan origination funds, which provide credit as sole or primary lenders to borrowers, could offer a valuable alternative source of financing for the real economy. Loan origination by AIFs is currently permitted in the majority of Member States, subject to varying conditions.[1] Several Member States (including Ireland) have established a domestic framework to regulate loan origination by funds, while others have no specific rules in this area.

Directive (EU) 2024/927 sets out a harmonised European framework for loan origination by investment funds in order to address the risk of regulatory arbitrage and inconsistent investor protection that may arise from divergent national approaches. Under the Directive, AIFMs managing AIFs which originate loans will be subject to a common set of rules and requirements in relation to, inter alia, risk retention, concentration limits, leverage limits and restrictions on lending.

While the new rules aim to harmonise the regime applicable to AIFMs that manage the AIFs originating loans, Member States are not prevented from laying down national product frameworks with more restrictive rules. Specifically, Member States have the discretion to prohibit loan origination by AIFs to consumers in their territory – discussed in more detail under Discretion 2.

Delegation

Delegation is the practice whereby fund managers delegate functions such as asset management and other activities to third party entities or sometimes to other entities within the group structure. It enables fund managers to increase their efficiency and effectiveness by tapping into specialist expertise, ultimately to the benefit of investors and of the EU economy as a whole.

The AIFMD and the UCITS Directive permit fund managers to delegate core (portfolio or risk management) or non-core functions (fund administration, marketing or record keeping) to third parties, under strict conditions and without diluting the responsibility of the AIFM or the UCITS management company for the performance of the delegated function. These rules were designed to ensure that the delegate is controlled effectively and the delegation mandate is properly executed.

In order to address the divergent interpretation and application of the AIFMD and UCITS Directive rules for fund managers delegating their functions to third parties, Directive (EU) 2024/927 clarifies the standards applicable to AIFMs and sets out more detailed rules and requirements for UCITS management companies. The Directive also introduces enhanced reporting obligations on fund managers who will be required to report delegation arrangements as part of their standard regulatory reporting to National Competent Authorities (“NCA”).

Liquidity management tools (LMT)

To manage their liquidity profile and risks effectively, fund managers incorporate LMTs into their portfolio management. The effective and proper use of LMTs can protect investors, reduce liquidity pressure on the fund and mitigate against broader systemic risk implications in situations of market-wide stress. 

Neither the AIFMD nor the UCITS Directive provide for a minimum harmonised set of LMTs available to fund managers that would enable managers in every Member State to deal with redemption pressures. Only the suspension of redemptions by a NCA, a measure of last resort, is explicitly provided for under both Directives.

Directive (EU) 2024/927 requires AIFMs to select and include in the AIF rules or instruments of incorporation at least two LMTs, in line with the fund’s investment strategy, liquidity profile, and redemption policy. The activation and deactivation of the LMTs must be supported by detailed policies and procedures. Similar amending provisions also apply to the UCITS Directive.

Depositary services

The AIFMD requires that an AIF’s depositary be established, for EU AIFs, in the home Member State of the AIF or, in the case of non-EU AIFs, in the third country where the AIF is established or in the AIFM’s home Member State. However, the Commission’s 2020 report on the application and scope of the AIFMD acknowledged that, in markets with a limited number of depositary service providers, this requirement may lead to increased costs for AIFMs and a less efficient market for AIFs.

In order to increase competition for depositary services provided to AIFs, Directive (EU) 2024/927 allows NCAs in markets where depositary services are limited the possibility to permit AIFMs to use a depository established in other Member States. However, the appointment of such depositary services is subject to strict conditions and a case-by-case assessment of the lack of relevant depositary services in the home Member State of the AIF.