The Importance of an Alternative Investment Fund Managers Directive (AIFMD) Compliant Insurance Policy

The Alternative Investment Fund Managers Directive (AIFMD) is a regulatory framework that was introduced by the European Union (EU) to regulate the management, administration, and marketing of alternative investment funds (AIFs).

This directive came into effect on the 22nd July 2013 to improve investor protection. The implementation of AIFMD in the United Kingdom, Switzerland and Monaco has been incorporated into domestic law and regulation. Since it’s inception AIFMD has faced criticism for certain regulatory gaps and issues that must be addressed. In response to this feedback, the European Commission proposed AIFMD II, which is set to come into force 15 April 2024. EU members states have 2 years after publication to transpose the rules into national law.  It is expected that AIFMD will apply from 16 April 2026.

AIFMD II aims to close the regulatory gaps and address the issues identified in the original framework. The new directive introduces key changes that will impact AIFMs operating in the EU and beyond. One of the main changes introduced by AIFMD II is stricter rules on delegation. AIFMs will need to review their delegation arrangements to ensure compliance with the new requirements set out in the directive.

Additionally, AIFMD II will bring about harmonised rules on marketing of alternative investment funds within the EU. Streamlining the process for AIFMs looking to market their funds across different EU member states. The directive also includes enhanced transparency and reporting requirements, which will require AIFMs to provide more detailed information on their activities and risk management practices.

AIFMs will need to review and potentially update their operating models, delegation arrangements, and marketing strategies to comply with the new requirements set out in AIFMD II. This will require careful planning and consideration to ensure a smooth transition to the new regulatory framework.

It is important to note that AIFMD II will impact both EU and non-EU AIFMs that manage or market alternative investment funds in the EU; the new directive will apply to any funds that  wish to access the EU market.

In conclusion, AIFMD II represents a significant milestone in the regulation of the alternative investment fund industry in the EU. By staying informed and proactive, AIFMs can navigate the regulatory changes brought about by AIFMD II and continue to operate successfully in the evolving regulatory landscape.

How does the directive impact insurance?

There are specific rules and requirements in place to ensure that the AIFM’s have adequate cover in place to protect them from potential liabilities arising from their professional activities. This is where we focus on the Professional Indemnity Insurance and how we as a broker ensure that, you as a client comply with the directive and ensure suitable coverage is afforded under your insurance policy.

How does this translate into practise?

Below we have highlighted the key elements of the directive which are a key consideration when purchasing insurance.

Professional Indemnity Insurance (PII) Requirement

AIFMs must either:

• Hold professional indemnity insurance covering liability risks arising from professional negligence, or
• Provide additional own funds to cover these risks.

Minimum Coverage Amount

If an AIFM chooses to hold PII, the insurance must meet the following minimum coverage requirements:

• For each claim: The coverage must be at least 0.7% of the AIFM’s qualifying assets under management (AUM).
• For aggregate claims per year: The coverage must be at least 0.9% of the AIFM’s qualifying AUM.

What if you decide not to purchase PII? As a Financial Institutions Broker, we would always advise to purchase PII to comply with the directive as the ring-fenced insurance policy provides a higher level of protection for investors than holding own funds. However, if an AIFM opts to provide additional own funds instead of PII, these funds must be:

• 0.01% of the AIFM’s qualifying AUM: These additional own funds are separate from the minimum initial capital requirements.

What if you are a registered AIFM but also manage funds which are not subject to the directive?

This is where the terms qualifying and non-qualifying assets comes to the fore and where we have seen confusion amongst a small number of clients therefore we have included a working example below for you:

You are an Investment Manager with a total AUM of EUR 1,000,000,000 but only 50% of these are qualifying assets. In this instance the limit required would be EUR 4,500,000 which is 0.9% of EUR 500,000,000. There can be a common misconception that you would need EUR 9,000,000 to be compliant, but this is not the case here.

Specific AIF Compliant Insurance Policies

If an AIFM decides to purchase insurance to meet the requirements of the directive, the policy must be placed on a compliant policy form. There are strict conditions around elements of cover that must be provided, the requirement for a reinstatement of the limit and minimum cancellation terms.

How do you ensure your insurance policy in compliant and suitable?

In short, ask you broker. Your broker should be able to provide you advice around the directive and answer any concerns you may have around minimum requirements and AIFMD compliant language.

With over 300 years’ combined experience from a team of 18 dedicated Financial Institutions experts, please do get in touch with a member of our team today to discuss any insurance requirements or questions you may have relating to AIFMD.

_{The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.}