FROG: the AMF updates its policy on the asset management delegation

Launched in February 2016 on the initiative of the Autorité des marchés financiers (the “AMF”) and the French Asset Management Association (the “AFG”), the FROG workshop (French Routes and Opportunities Garden) described in a report published in October 2016¹ seven innovative proposals for the regulation of the French asset management industry.

As stated in its report, the FROG’s strategic ambition for the Paris financial marketplace is to “offer both French and foreign players a choice to domicile their investment funds in France under optimal conditions for their international development”.

Moreover, in the context of the Brexit, FROG aims to reinforce the attractiveness of the Paris financial centre, since it was predicted that certain British players would relocate their activities in Paris, in order to “continue to benefit from the marketing and cross-border management mechanisms provided for in the texts of the European Union (passport)”.

Therefore, the FROG report proposed to expand the possibilities for French management companies to delegate their financial management functions not only to other management companies authorised to manage AIF and UCITS but also to other entities authorised to provide the discretionary portfolio management services.

Moreover, it was proposed to allow French management companies to fully delegate their financial management function, provided that they maintain internally the essential risk controls.

On 8 March 2017, the AMF amended the articles 313-77² and 318-58³ of its General Regulation, taking into account the proposals provided for in the FROG report. Pursuant to these articles, it is also permitted to delegate the financial management to another authorised entity established in a third country, provided that there is effective cooperation between the AMF and the supervisory authorities of the relevant country.

On 15 March 2017, the AMF updated its policy (AMF instructions and positions) in order to take into account the new expanded delegation possibilities.

The AMF’s position 2012-19 on the programme of activities of management companies now enables the delegation of financial management function to any entity “authorised for the purposes of asset management. Is namely considered authorised on this basis: any person authorised to manage collective investment schemes by a public authority or to provide portfolio management services”.

The AMF also recalls that “certain cases of delegation of financial management involve the need to put in place a permanent risk management function which is hierarchically and functionally independent of operational units”⁴. Moreover, when an asset management company delegates the financial management to an entity not belonging to its management group, it is namely required that “the delegating asset management company has control risk function with suitable experience on strategy and the underlying assets and required capabilities to ensure an efficient control”, and the delegating management company is still required to be “qualified and capable to take over the delegated functions”. However, the AMF does no longer require that the “asset management company justify the added value retained by this type of format”⁵.

Therefore, the full delegation of financial management by a French management company is authorised provided that the internal resources dedicated to the risk management function are enhanced. In some cases, management companies would be required to implement an independent risk management function.

As pointed out in the FROG report, “management teams, whether they are French or foreign, rarely possess all the sectorial expertise and all the management styles and methods”. Thus, the expansion of possibilities to delegate financial management functions would allow French management companies to widen the range of investment strategies that they offer, through greater flexibility in the organisation of management.

Any French management company may now rely on specific expertise hold by another authorised French or foreign entity, which would enable it to develop a diversified offer of products in terms of strategies and underlying instruments. However, delegating management companies will still have to keep in mind that a full delegation of financial management is only possible if strengthened risk controls and risk management are implemented and to the extent the French management company does not become a letter-box firm.

¹7 extra reasons to choose Paris – A joint AMF / AFG FROG report for an increased visibility and a better distribution of French funds at a global scale
² Regarding the delegation of financial management of a UCITS
³ Regarding the delegation of financial management of an AIF
⁴ AMF’s Position n°2012-19, article 3.2.6.2 – Risk management
⁵ AMF’s Position n°2012-19, article 3.2.8.3, a) – Specific conditions for delegating portfolio management