A regulatory headache for family offices

Since the Global Financial Crisis, governments around the world have cracked down on financial markets. Not before time, say those involved in family businesses — many of whom believe that the financial world, or at least parts of it, has become too unruly and, indeed, too big.

But the crackdown might have unexpected consequences for family businesses, or, at least, for family offices managing the wealth generated by large family businesses.

For the most part, single-family offices fall outside the scope of the more stringent aspects of financial regulation. They are, after all, private investment offices for one family, with no outside investors. So it might be assumed that regulators would take the view that family offices have little bearing on world financial markets.

However, judging by a piece of European legislation called the Alternative Investment Fund Managers Directive (AIFMD), this may not be the case. Indeed, the AIFMD could be a worrying development for many single-family offices.

The AIFMD is a dense and sometimes difficult to interpret piece of legislation. Here are some important points about it:

  • The directive is a response to the financial crisis. It is based on the assumption that managers of alternative investment funds (AIFs) can exercise an important influence on financial markets and, as the directive says, “may also serve to spread or amplify risks through financial systems.”
  • The directive defines an AIF as any non-UCITS (undertaking for collective investment in transferable securities), managed or marketed in the EU that raises capital for the purposes of collective investment, involving “some kind of communication.”
  • In addition to being authorised by the relevant regulator, managers of AIFs will be subject to extensive reporting, governance and remuneration obligations.

Helpfully, family investment vehicles and offices are specifically exempted from the AIFMD in circumstances where “the investment [is] in an undertaking by a member of a group of persons connected by a close familial relationship …” In other words, the directive shouldn’t affect a single-family office if that office deals solely within the family.

However — and here is the crucial point for a single-family office — if an office enters into an investment alongside other investors (where no such family relationship exists) the office could come under the directive’s remit. The reason for this is that any such arrangement could be viewed as a collective investment undertaking and the raising of capital from third party sources (therefore within the scope of the AIFMD), even if the family office would not normally consider itself as a multifamily office.

This is where it gets a bit complicated. A co-investment deal should fall outside the directive if:

  • It has no fund manager overseeing it.
  • No communication or promotion of the investment has taken place.

But if there is some structure that can be construed as a collective investment scheme (i.e. pooling of capital with a view to generating a return), it will be considered an AIF.

At the very least, the AIFMD is going to increase costs for single-family offices, which must now ensure either that they are AIFMD compliant or, that they don’t fall under it. And, as they pass the compliance costs on to the end user, funds in the EU are likely to become more expensive — a big headache for family businesses and those who run family offices.

The above is meant only as a guide. We recommend that any family office with concerns should seek professional advice on the directive’s consequences for its business.

Peter Brock, Head of Family Office Services, EY Germany, Switzerland and Austria

Karl von Bezing, Manager, Wealth Management, EY UK

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