The UK, post-Brexit, has the opportunity to resolve an issue for our AIF industry stemming from Article 19 (10) of the Alternative Investment Fund Managers Directive (AIFMD), implemented works across the EU and is now domesticated in the UK. The solution enables our industry to operate more efficiently and in accordance with long-established investor protection and corporate governance practices.
Article 19 (10) (see box below) provides that an external assessor has unlimited liability to an Alternative Investment Fund Manager (AIFM) for any loss suffered by the manager due to the negligence of the manager. external expert or the intentional omission of his duties.
This provision must be reformed so that “negligence” is interpreted as a serious error (and not a simple one). The industry should engage with the UK regulator, the Financial Conduct Authority (FCA), and persuade it to implement appropriate legislative reform. At EU level, the EU regulator, the European Securities and Markets Authority (ESMA) in the context of the European Commission’s AIFMD review, has already recognized the problem of Article 19 (10) , of the AIFMD and supports the search for a solution to the problem of liability of the expert for the funds.
Focusing on Article 19 (10) of the AIFM Directive, there is no harmonized negligence standard in the EU, and therefore the interpretation of the limit of potential unlimited liability. In the UK (and several EU Member States) negligence – sometimes also referred to as ‘simple negligence’ – is interpreted to mean relatively minor errors and is distinguished from ‘gross negligence’ (often used as the language of negligence). market and meaning “serious error”), which means relatively more serious errors.
As a result, in the UK, many real estate appraisers, for example, adopting the professional guidelines of their professional body, the Royal Institution of Chartered Surveyors (RICS), are unwilling to accept unlimited liability for mere negligence. They therefore refuse to accept the role of external expert for buildings in the portfolios of real estate funds. This is unfortunate, as external real estate investment appraisers have long been a recognized means of ensuring that the appraisal of real estate in funds is carried out to industry standards by independent qualified and licensed third parties.
Article 19 (10) EU / UK AIFMD
“AIF managers are responsible for the proper valuation of the assets of the AIF, for calculating the net asset value and for publishing this net asset value. The manager’s responsibility towards the AIF and its investors is therefore not affected by the fact that the manager has appointed an external appraiser.
Notwithstanding the first paragraph and regardless of any contractual provision providing to the contrary, the external appraiser is liable to the manager for all losses suffered by the manager due to the negligence of the external expert or the intentional non-performance of his tasks. “
Professional liability insurance in the UK is not available for unlimited liability related to actions found to be less than serious error. As a result of Article 19 (10) – for the purposes of the AIFMD and (since 31 December 2020) of the UK AIFMD – many UK managers have been forced to perform the evaluation function internally – this’ that is, to operate with internal evaluations rather than independent external evaluations. It also adds unnecessary costs.
The representative organizations of the sector Association of Real Estate Funds (AREF), British Property Federation (BPF) and European Association for Investors in Non-Listed Real Estate (INREV) usefully support the need for legislative reform of the AIFMD in the United Kingdom. United with a submission this month to the FCA. They argue that, pending any primary legislative reform of the UK AIFMD on this and other issues (i.e. justified due to the combination of this and other issues), a pragmatic solution is through consultation with the FCA (then guidance) that Article 19 (10) of UK AIFMD should be interpreted on the basis that “the external assessor is subject to unlimited liability to the manager for any loss suffered by the manager solely because of a serious error by the external evaluator or the intentional non-performance of his tasks ”.
The United Kingdom would be entitled to proceed with such a reform given the flexibilities for the United Kingdom under the EU-UK trade and cooperation agreement of 24 December 2020. Nikhil Rathi, CEO of the FCA, also in a speech this month, recognized this increased flexibility and signaled that the UK intends to use its autonomy to regulate for the benefit of UK financial markets.
Hopefully the FCA will engage with representative organizations and find a solution to this much needed reform of Article 19 (10) of the UK AIFMD.
Assuming that this reform progresses, the European Commission could be persuaded by reform – and combined with ESMA support – to the legislative reform of Article 19 (10) of the ISA. This could be an example of a post-Brexit EU / UK regulatory benchmarking dynamic – in which the reform of the AIFM in the UK also influences a welcome improvement of the AIFMD. Such an influence would be an ironic consequence of Brexit.