ESMA recently published their recommendations regarding the review of the Alternative Fund Managers Directive AIFMD. The full letter can be read here.
Within the letter ESMA suggests that more specific requirements on white-label service providers would be advisable specifically as some member states raised doubts as to whether those business models would be in line with the AIFMD and UCITS.
White Label Service Provider are necessary for diversification within the European Fund Industry
In our opinion White-Label providers play an important role in the European Fund Landscape. Specifically smaller asset managers cannot afford setting up the whole infrastructure for a fund management company and their access to the market of launching investment vehicles relies on White-Label service providers. So when it comes to the question whether these business models shall be permissible on the European Market my answer is a 100% YES.
Having said that I share the concerns that White-Label providers are subject to a specific set of conflicts of interest. Whereas the manager of an AIF or UCITS shall operate in the best interest of the investors, a white label provider will be conflicted between its client – the asset manager commissioning the manager to set up and run the fund – and the investors. A specific conflict of interest arises in the delegation of functions, because obviously a manager will not delegate the investment management function to the asset manager it thinks does the best job in doing so, but to the client. There might also be a conflict when supervising the activities of the investment manager as any replacement of the investment manager being the business partner would lead to loosing this client and thus income for the White Label Service Provider. Furthermore there is a conflict of interest in cases where the client not only wants to use a White Label Platform to enter the fund management industry, but to refinance his own business activities or creating a pool of assets to support other of his business lines. This might be the case when the client in its capacity as an investment manager invests heavily in securities issued by group companies of itself. Or securities group companies act as Lead Manager for and thus their placement generates hefty fees for the Lead Manager.
The Answer has to be Full Disclosure
However, most of these conflicts of interest can be addressed by disclosure. A White Label Service Provider therefore should clearly and fully state which entity has commissioned it to set up and run the fund. If the delegation of the investment management function, or any other function of asset management, got delegated and this delegation is on request of the client this should be clearly stated as well. In regard to clients using the funds and thus investors money to finance group companies I would welcome a ban on these activities. A fund should be a pool of assets managed for the benefit of the investors paying into that pool and not a refinancing facility for a group of companies. For refinancing activities asset-backed securities are the by far better instrument than funds.
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