On 18 July 2016 ESMA produced advice on its ongoing work on the extension of the AIFMD passport to non-EU AIFMs and AIFs in respect of 12 non-EU countries: Guernsey, Jersey and Switzerland (for which ESMA issued positive advice in July 2015); Hong Kong, Singapore and the United States (for which ESMA was not definitive in its July 2015 advice) along with Australia, Canada, the Cayman Islands, Japan, the Isle of Man and Bermuda (which ESMA identified as a second wave in October 2015).
The key question remains, as to whether or not the European Commission (the “Commission”), along with its co-legislators, the European Council and Parliament, consider that ESMA has given positive assessments of a sufficient number of qualifying third countries, in order to proceed with implementing legislation. The Commission may choose to wait for more countries to be assessed positively, or for the planned review of AIFMD from 2017, in which case there will still be no practical changes to the status quo in terms of marketing in Europe by non-EU AIFMs and by EU AIFMs marketing non-EU AIFs.
This advice is also pertinent for UK AIFMs and AIFs; as on the UK’s withdrawal from the EU, the UK is very likely to become a ‘third country’ and UK AIFMs ‘third country firms’ subject to the third country passport extension assessment, minimum compliance conditions (including the requirement for a co-operation agreement with ESMA) and general scrutiny of the UK’s regulatory framework. Although timing and access are uncertain at the moment, ESMA’s advice is heartening at least in that it contains positive advice for some of the non-EU countries considered. Whilst the UK position opposite the EU remains unclear, given that the UK has an AIFMD-compliant regime in place, provided that a co-operation agreement can be agreed in time, ESMA’s advice suggests that the extension of the passport to the UK should be relatively straightforward.
Key points of interest from ESMA’s advice are set out below.
- No significant obstacles exist to the extension of the AIFMD passport for Jersey, Guernsey, Canada, Switzerland, Japan and, subject to the ‘class order relief’ being extended to all EU member states, Australia.
- In Hong Kong and Singapore, ESMA found no significant obstacles other than in relation to retail funds (including UCITS), where only certain member states have regulatory recognition and thus are granted access.
- In the US, ESMA found no significant obstacles for funds marketed by managers to professional investors that do not involve any public offering. However, it raised concerns of an un-level playing field developing between EU and non-EU AIFMs on an AIFMD passport extension, as EU funds marketed to professional investors in the US, particularly those involving a public offering, would be subject to more onerous registration requirements under the US regulatory framework (which generate additional costs). ESMA suggests options to mitigate this risk, around restricting the AIFMD passport to specific types of US funds, for instance, granting the passport only to those US funds dedicated to professional investors to be marketed in the EU by managers not involving any public offering.
- ESMA could not give definitive advice for Bermuda and the Cayman Islands, which are both in the process of implementing new regulatory rules, including AIFMD opt-in regimes. Also, subject to the Cayman Islands implementing a legislative amendment on enforcement and a regulatory change expected to enhance its systemic risk monitoring. Similarly, no definitive advice was provided for the Isle of Man, where the absence of an AIFMD-like regime on a comparable basis made it difficult for ESMA to assess whether the investor protection criterion is met.
- The next batch of countries for ESMA’s assessment is likely to include any of the Bahamas, Brazil, British Virgin Islands, Curacao, Mexico, Mauritius, South Africa, South Korea and the US Virgin Islands, which ESMA has identified as the other most relevant domiciles for this process.
- ESMA also gave a welcome clarification, that once third country passporting is switched on, national private placement regimes are expected to continue to run in parallel, at least for a transitional period. This will allow more flexibility in future marketing strategies.
ESMA’s advice is grounded in the provisions set out in AIFMD which underpin its remit, both in terms of the list of significant obstacles for ESMA to consider (investor protection, market disruption, competition and the monitoring of systemic risk) and the conditions AIFMD prescribes for the passport extension. ESMA notes that the requirement for prior authorisation by a non-EU AIFM’s member state of reference may be more challenging where there are regulatory gaps between AIFMD and the regulatory framework of the third country. In particular, many non-EU AIFMs will need to adapt their remuneration and the depositary models, where they are currently operating under frameworks that would not be accepted for AIFMD-compliant funds.
The assessment also incorporates ESMA’s additional work at the Commission’s behest (as set out in its letter to ESMA of 17 December 2015). First, with regard to ensuring effective enforcement in the relevant non-EU countries (including those that ESMA looked at in its first advice), to provide a more detailed assessment of the capacity of each of the non-EU supervisory authorities and their track records in ensuring effective enforcement. For this, ESMA relied as much as it could on IMF assessments (for the purposes of its financial sector assessment programme). Second, so that potential market impact can be better assessed, to provide a preliminary assessment of the expected inflow of funds (by type and size) into the EU from the relevant non-EU countries. For this, ESMA relied on responses from the various non-EU authorities to its specific requests for information. ESMA highlights that the Commission and its co-legislators may wish to consider other potentially relevant issues, for instance fiscal matters and latest intelligence on anti-money laundering and terrorist financing regimes in each non-EU country.
The Commission and its co-legislators will now consider ESMA’s paper. In the meantime the status quo remains that marketing in Europe by non-EU AIFMs and by EU AIFMs marketing non-EU AIFs has to be carried out using the private placement regimes – where there are a wide range of different, complex, and in some cases, still evolving requirements that may apply.