ESMA approves extension of AIFMD passport

Introduction

On 19 July 2016, the European Securities and Markets Authority (ESMA) published its further Advice on the application of the AIFMD passport (the Passport) to non-EU AIFMs and AIFs.

ESMA has sent the Advice to the European Commission, the Council of the EU and the European Parliament, which will now consider its contents.

Key points

In July 2015, ESMA submitted its initial Advice (the 2015 advice) and an Opinion to the European Commission (Commission), Council of the EU and European Parliament (together, the EU Institutions) on whether the management and marketing passport available under AIFMD should be extended to non-EU AIFMs and non-EU AIFs. The 2015 Advice - which had been eagerly expected by industry - was delivered late, covered only six jurisdictions, gave unqualified advice in respect of only half of these and was generally felt to have been somewhat underwhelming.

One year later, on 19 July 2016, ESMA submitted its further Advice to the EU institutions.

This time, the Advice (which was again delivered late) covers six additional jurisdictions, gives five countries a clean bill of health (although three of these had already been included in the 2015 Advice), offers a qualified opinion on the others (including the US, the Cayman Islands, Hong Kong and Singapore), appears to consider issues which lie outside its mandate (such as the access afforded to UCITS in Hong Kong, Singapore and the Isle of Man) when reaching its conclusions and, once again, fails to provide the certainty for which non-EU AIFMs were looking on the central issue of what funds they can market to investors in the EU and the means for doing so (ie, through the Passport or via national private placement regimes (NPPRs)).

By way of summary, ESMA’s conclusions are that, in respect of:

• Jersey, Guernsey, Switzerland, Canada and Japan - there are no significant obstacles preventing the application of the Passport to these jurisdictions
• United States - there are no obstacles in relation to investor protection or the monitoring of systemic risk. However, in respect of market disruption and competition, ESMA notes differences of approach especially in the case of funds marketed in the US by public offering and suggests that the EU Institutions might wish to consider extending the Passport to the US on a limited basis, making it available only to specified fund types
• Cayman Islands - ESMA offers no definitive advice and will not be able to do so until (a) Cayman’s new AIFMD-like regime for AIFMs has been introduced, (b) a legislative amendment has been enacted which would allow the local regulator to impose administrative fines for rule breaches and (c) a macro-prudential framework is in place. Since these steps are expected to take a further 12 to 18 months, it is difficult to see that the Passport will be extended to Cayman in the immediate near future
• Bermuda - as with the Cayman Islands, ESMA is waiting for (a) the new AIFMD-like regime to be introduced in Bermuda and (b) legislation to be adopted in light of the Bermuda Monetary Authority’s Investment Funds and Management review. Both are expected to be in place in the next few months.
• Hong Kong and Singapore - although there are no significant obstacles preventing the application of the Passport in respect of AIFs, ESMA notes differential treatment locally of UCITS established in different EU Member States in respect of market access for funds being marketed to retail investors. ESMA does not make clear why it considers this to be a matter to be taken into account in its assessment, given that its mandate under Article 67 of AIFMD appears restricted to the position in respect of non-EU AIFs and non-EU AIFMs
• Australia - there are no significant obstacles to the extension of the Passport provided the Australian Securities and Investments Commission extends the availability of class order relief from the requirement for foreign financial services providers to obtain a local licence to all EU Member States rather than just the UK and Germany as at present
• Isle of Man - the absence of an AIFMD–like regime makes it "difficult [for ESMA] to assess whether the investor protection criterion is met."

As to what happens next, AIFMD states clearly (at Article 67(6)) that the Commission must adopt appropriate delegated legislation within three months of receipt of positive advice from ESMA. The Advice, however, suggests (as did the 2015 Advice) that the EU Institutions may wish to wait until ESMA has delivered positive advice in respect of a "sufficient" (but unspecified) number of non-EU countries before triggering legislation.

However, it is important to note that an AIFM in a non-EU state to which the Passport had been extended would still only be able to make use of the Passport to market in the EU (a) EU AIFs and/or (b) non-EU AIFs established in a jurisdiction to which the Passport has also been extended. To market non-EU AIFs established in a jurisdiction to which the Passport had not been extended, the AIFM would have to rely on a NPPR.

It is unclear at this stage what, if anything, should be read into ESMA’s Advice by UK AIFMs looking ahead to the UK’s eventual exit from the European Union. The exact basis on which UK AIFMs would have access to EU investors following Brexit will be the subject of, no doubt, intense negotiations over the next two years but some in the asset management industry already see political, rather than purely economic, considerations driving a number of ESMA’s conclusions. On the face of it, given the fact that the UK has already implemented AIFMD, it would seem to be a straightforward matter for ESMA to advise, in due course, that there would be no significant obstacle to extending the Passport to the UK on the grounds of investor protection, market disruption, competition or the monitoring of systemic risk (or that the UK regime met an ‘equivalence’ test for third countries similar to that under MiFID if this ended up as the model to be followed). Whilst this might allow UK AIFMs to use the Passport to market EU AIFs and AIFs from other non-EU jurisdictions to which the Passport had been extended, it would also mean that the UK AIFM (a) would need to swap the FCA for the regulator of its Member State of reference for the purposes of authorisation and (b) it would still have to rely on the existence of NPPRs in order to market AIFs from non-EU jurisdictions which had not had the Passport extended to them.

Contents

This article examines the following issues (please click on the box below to view the relevant section):

• What is the Passport and why does it matter?
• Why ESMA has published the Advice?
• What has ESMA looked at when assessing these third countries?
• ESMA’s conclusions:
  • Countries assessed, or partly assessed, in ESMA’s advice of July 2015
    • Jersey and Guernsey
    • Switzerland
    • United States
    • Hong Kong and Singapore
  • Countries not assessed in ESMA’s advice of July 2015
    • Canada and Japan
    • Australia
    • Cayman Islands
    • Bermuda
    • Isle of Man
• What does the Advice mean for Cayman Islands AIFs and AIFMs?
• Will all NPPRs be switched off at the same time?
• Next steps
• Conclusion