In a world where the regulatory burden on fund managers continues to increase while cost pressures tighten, the straightforward approach taken by AIFMD II was something of a relief. Indeed, the more broadly discussed elements relating to loan originating AIFs or LMTs only relate to certain funds on an opt-in basis and the changes to delegation are relatively minor.
Ever since the UK voted to leave the European Union in 2016, there has been concern around the delegation model. Any political punishment of the UK would have wider implications for sponsors on a global scale. In 2017, the European Commission published its Review of the European Supervisory Authorities (ESAs), which indicated a desire towards a more centralised approach to regulation. In particular, in that case, was a concern that delegation arrangements would have to be signed off by ESMA on an individual basis, rather than being under the auspices of the relevant national competent authorities (NCAs).
The Commission was concerned about regulatory arbitrage, but surely that could be dealt with by ESMA, in its role as a regulator of regulators, rather than forcing a divestment of those powers from NCAs? In the end, the proposals were scrapped and there has been little evidence to support claims of regulatory arbitrage. As a smatter of fact, the market appears to have regulated itself, with more successful fund domiciles being those that can offer LPs more comfort on regulatory scrutiny.
So, what aspects of the delegation regime are changed by AIFMD II?
As far as the end user is concerned, very little. The previous requirements for the AIFM’s ongoing responsibilities for compliance, oversight, and being able to effectively monitor, instruct and withdraw the delegation remain. And the delegation must still be structured so the AIFM can continue to act in the best interests of the fund and its investors. Furthermore, there is no change to the requirements around cooperation agreements between the relevant NCA. and third-country regulators.
AIFMD II does not create a new notification regime for third-country delegation, it simply requires more detailed information at authorisation and in ongoing regulatory reporting. But the reporting obligations apply to delegation arrangements generally, whether the delegate is in the EU or outside it. AIFMD II expands periodic reporting to NCAs for portfolio and risk management delegation arrangements. The added data points include whether the delegate is authorised or regulated for asset management, the delegate’s supervisory authority, the AIFM’s staffing used to monitor delegation, the number and dates of due diligence reviews and any links to the AIFM.
More generally, there are more granular asset reporting requirements for AIFMs so, taken as a whole, there is an increase in the compliance burden of the AIFM, which may ultimately have a cost impact that will need to be passed on.
So, what is the threat?
The threat of ESMA’s centralisation of fund supervision has not gone away. In the Commission’s Savings & Investments Union (SIU) Action Plan, published in March 2025, the spectre of direct ESMA supervision reappeared. So, while AIFMD II’s changes in this area seem benign, the increase in regulation and additional data gathering risk driving momentum towards that outcome.
This should be avoided at all costs. Yes, in its various oversight exercises, ESMA finds various shortcomings in the activities of NCAs, but it then holds them to account. The model works. NCAs are ultimately funded by their member states, which have an aligned interest with the industry to be competitive and pragmatic. A centralised regulator would not have this, nor would there be effective oversight of its activities. Such a move would erode the knowhow that has been developed by the NCAs over numerous market cycles and regulatory changes.
Added to which, to be blunt, ESMA isn’t necessarily very good at many of the things it does right now. You only have to look at the debacle with the Level II RTS for SFDR, which were not only delayed but then found to be mission creep, with ESMA creating new substantive requirements beyond its mandate. Furthermore, documents issued by ESMA often include drafting inconsistencies; whilst that may sound pedantic, it points to quality control concerns.
In short, it’s not unreasonable to fear a centralised approach to fund regulation in the EU.
What can we do about it?
The obvious answer is to ensure that your delegation arrangements are compliant and support your AIFM in its meeting its own compliance obligations. However, market participants may also wish to contribute to industry bodies in consultations and responses to ESMA. Ultimately, if the system continues to work as intended, then there will be less will to expend political capital changing it.
The author is a funds lawyer with City law firm Fieldfisher
