Top regulatory challenges currently facing the private equity sector

While the private equity (PE) market is benefiting from increased deal activity and high fundraising conditions, many PE houses are struggling to navigate and adapt to operating in this increasingly regulated environment.

The regulatory landscape is constantly evolving for the sector, with an enhanced focus on transparency, culture and governance, investor protection, financial crime prevention and reporting. This has resulted in significant investment by many private equity firms to ensure that compliance resource is appropriate and that the systems and controls in place are robust.  

Through the continued work our Regulatory Consulting team provides, we have identified some key observations and regulatory compliance challenges for firms in scope:
 
  • FCA permission profile: Many private equity fund managers are appointed to manage an AIF as well as conducting other AIFMD permitted activities. The accuracy of a Part 4A permission profile remains the firm’s responsibility, however our team have identified inconsistencies between activities conducted and those permitted by the FCA. This results in an unnecessary regulatory burden for firms that could be reduced by a Variation of Permission to reflect the true activities conducted.
  • Financial crime prevention: PE firms are required to assess the money laundering and terrorist financing risks relating to types of customers, countries or geographic areas - and particular products, services, transactions or delivery channels. This is not always straightforward for a private equity firm. For example, customers for AML purposes are not parties that a private equity firm would typically consider to be ‘customers’ from a regulatory perspective. This can lead to inadequate customer risk assessments and subsequent due diligence being obtained.
  • AIFMD: PE fund managers are still adapting to the internal requirements of the AIFMD, which is one of the most significant EU Directives impacting the industry. The European Commission is investigating the effectiveness and competitiveness of the AIFMD and considering how it should be updated, which will likely result in AIFMD II.
  • The Packaged Retail and Insurance-based Investment Products (PRIIPs) EU Regulation: Some private equity managers in scope may have overlooked the EU PRIIPs Regulation that took effect on 1 January 2018.
  • MiFID II: Certain PE firms fall within scope of MiFID II due to the regulated activities conducted. Whereas other UK firms are affected as the FCA decided to apply some parts of MiFID II to a wider range of financial services firms. Our team have identified instances where the relevant MiFID II provisions are yet to be sufficiently addressed by firms in the private equity sector.
  • SM&CR: The Senior Managers and Certification Regime will replace the current Approved Persons Regime. This will radically change how people working in financial services generally are regulated, and will be applicable to all private equity firms authorised and regulated by the FCA on a solo basis.
  • Brexit: The UK government have recently published a Brexit whitepaper. While the whitepaper provides a desiderata from the Government, the picture is still unclear as to what the post-Brexit UK/EU relations will look like. However, the paper does suggest that the UK will want to retain the right to diverge from EU financial services regulation, which in turn means passporting would no longer be possible and there will be no right of market access in either direction. Firms that market funds, provide cross border services or have an established branch in another Member State should ensure sufficient contingency planning.
Moore Stephens’ award winning Regulatory Consulting team is one of our fastest growing and dynamic departments. The team provide regulatory assistance to a number of private equity firms and our services include regulatory healthchecks, ongoing compliance, applications and permissions, regulatory returns and training.

For more information, please contact our Regulatory Consulting team.

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