25th July 2016
David England, Client Director for Langham Hall in Jersey, reports on the latest ESMA advice on the extension of the AIFMD passport.
On 19 July, the European Securities and Markets Authority (ESMA) published what it describes as its final advice on the application of the AIFMD passport to non-EU AIFMs and AIFs in 12 territories. This work builds on the earlier advice issued within which ESMA reported that only two jurisdictions – Jersey and Guernsey – had regulatory and legal regimes such that no obstacles exist to the extension to them of the passport.
After the publication of that initial advice to the European Commission, ESMA was asked to assess additional countries and to provide more details on the supervisory authorities in relevant jurisdictions and their ability to supervise AIFs and AIFMs.
Taking into account the expanded criteria of this review, positive advice is now provided in respect of five jurisdictions, with Canada, Japan and Switzerland being added to Jersey and Guernsey. The advice observes that several other jurisdictions – including, most notably, the United States – have suitable investor protection regimes, but do not offer equivalent regulatory regimes in their home jurisdictions to EU funds, giving rise to potential for a less-than-level competitive position.
The Jersey and Guernsey regulators are given a positive report – the Jersey Financial Services Commission is stated to have given assistance to 21 EU regulators, and each jurisdiction has been subjected to on-site visits from EU regulators. The joint Channel Islands Financial Ombudsman also receives a mention. Some relatively minor variances were noted in relation to the Depositaries regime in each jurisdiction, but the report also notes that, notwithstanding those differences, a Depositary of an AIF would still be required to comply with AIFMD in full.
The “final” advice does leave some questions unanswered. At present, non-EU funds may be marketed into some European jurisdictions under a National Private Placement Regime (NPPR). ESMA “sees merit in clarifying” the continuance of NPPR after the passport has been activated. This matter will be of great importance to all managers currently using NPPR or considering using the regime in the future.
We believe there is little appetite for switching off NPPR in the short term as the European Commission itself believes that the EU needs more investment so making that harder seems unlikely. In any case the AIFMD itself sets out a three year minimum term following the commencement of the passport under which the NPPR will remain available.
The advice also notes a potential gap in the registration of sub-threshold AIFMs under the passporting regime. ESMA says that it will be important that EU member states have a common understanding on the treatment of these. However, bearing in mind our experience on the wide range of approaches being taken in relation to NPPR, developing that common understanding would appear to be a significant exercise.
ESMA’s advice can be found online via this link.
The original AIFM Directive set out a three month period following receipt of positive advice, during which the European Commission shall adopt a delegated act setting out the timetable for implementation of the passport.
It may be that having only five jurisdictions with an equivalent regime will be deemed insufficient. By its own admission the European Commission had underestimated the amount of work that would be required to effectively introduce the passport so progress may well continue to be slow for the time being.
As a result, we would not recommend any specific actions for fund managers using Jersey and Guernsey at the moment. The existing framework of NPPRs will remain in place at least until 2019 and possibly significantly longer. However, not all of Europe opted to introduce an NPPR regime so the passport may well open new markets in time – the Commission’s delegated act will dictate when that time comes.
The clock is ticking once again and the Channel Island funds industry will be keen to see the outcome of the process to help map out the future of marketing into the EU.