The European Securities and Markets Authority (“ESMA”) yesterday published its advice on extending the AIFMD passport to twelve non-EU countries: Australia, Bermuda, Canada, Cayman Islands, Guernsey, Hong Kong, Japan, Jersey, Isle of Man, Singapore, Switzerland and the United States. In this alert we summarise the findings and attempt to draw some general conclusions about the future of marketing alternative investment funds (“AIFs”) within the EU.
Yesterday’s advice is derived from Article 67 (1) of the AIFMD, which envisaged the opening up of marketing AIFs across the EU through the use of a “passport” – the principle that being authorised to market in one member state gives you the right to market in them all. This has been available solely to the EU AIFMs of EU AIFs since AIFMD came into force in 2013 but the original expectation was that this would gradually be opened up to non-EU AIFMs and AIFs alike.
This announcement builds on the advice provided by ESMA almost twelve months ago in respect of six countries, together with its initial assessment on the effectiveness of the existing AIFMD marketing passport and its parallel, the National Private Placement Regime (“NPPR”), also sometimes referred to as the Article 36 and 42 regimes. For further details please see here
ESMA notes that the existence of a Memorandum of Understanding (“MoU”) with each national authority is a necessary pre-condition of a positive assessment since only this can deliver the required information and provide evidence that co-operation is working. Beyond that, there are four assessment criteria (unchanged since the last assessment):
- The adequacy of investor protection arrangements;
- The likelihood of existing EU AIFMs and AIFs being disadvantaged by new entrants;
- Corresponding barriers in entry in the third country;
- The effectiveness of monitoring of systemic risk.
The findings of the advice
Yes: the following countries are found to have no significant obstacles to extending the passport to their jurisdictions (confirming, in three cases, last year’s assessment):
Qualified yes: the following countries are given generally positive assessments, but with significant outstanding obstacles (in brackets):
- Australia (the “class order relief” for AIFMs and UCITS is currently only available to UK and German managers)
- Hong Kong (uneven application of access for UCITS to retail investors)
- Singapore (same)
- United States (an “uneven playing field” between US and EU managers marketing funds which involve a public offering)
Not yet: the following countries cannot, say ESMA, be given definitive assessment, either because new regulatory regimes are in the process of being implemented:
- Cayman Islands
or the complete absence of an AIFMD-equivalent regime:
- Isle of Man
Advice on a further seven countries was originally sought from ESMA: Malaysia, Egypt, Chile, Peru, India, China and Taiwan. ESMA has deferred making assessments for the time being, citing either the absence of the pre-requisite MoU with the relevant national authority, or that the current level of marketing activity from such jurisdictions is extremely low.
Where does the process go from here?
The ESMA assessment is but the first stage of the process of extending the passport to AIFMs and AIFs in these jurisdictions. As set out in Article 67 (6) of AIFMD, the European Commission must adopt a Delegated Act to extend the passport within three months of a positive assessment. We assume that this would apply only to the five countries with unqualified approval at this stage, but neither the advice, nor AIFMD itself, is definitive on this point. In the final analysis, therefore, the decision to extend the passport still resides with the Commission and, we further assume, that has yet to be taken.
What next for marketing AIFs in the EU?
ESMA’s advice provides, in our opinion, only a limited advance on the position presented in July 2015. The judgement on the United States in particular, although clearly signalled twelve months ago, will be particularly disappointing to many, along with the only partial assessment of the Cayman Islands which is critical to the business model of a significant number of AIFMs.
Does Brexit make a difference?
Whilst it is tempting to view the scepticism expressed by ESMA about several countries as a foretaste of the approach it will take to UK if and when it is treated as a non-EU country, the Referendum was in reality very close to the publication of this advice and is most unlikely to have been affected by it.
However, the UK’s exit from the corridors of power in the EU almost certainly, in our view, leaves the future of the AIFMD passport more uncertain. The current position is effectively a compromise between the Anglo-Saxon and continental versions of capitalism in respect of the latter’s traditional hostility to alternative investments, and the UK’s exit represents a significant tilt in this direction. Whether this signals a further slowdown to the extension of the AIFMD passport, or a dead-end for the political will to achieve this, only time will tell.
Notwithstanding this, the current NPPR represents a workable solution for EU and non-EU AIFMs who wish to market in at least a number of EU jurisdictions, and we expect this to continue for the future – not least in the UK itself which is expected to at least maintain an “equivalent” AIFMD regime.