7th August 2015
David England, newly appointed Client Director and head of Depositary of Langham Hall in Jersey speaks about ESMA’s recent opinion on the extension of the AIFMD passport and what it may mean for fund managers.
As many of you are no doubt aware, the European Securities and Markets Authority (“ESMA”) gave its advice late last month on the application of the Alternative Investment Fund Managers Directive (“AIFMD”) passport to non-EU AIFMs and AIFs. Of the six non-EU territories reviewed, ESMA considered that only two – Jersey and Guernsey – had regulatory and legal regimes such that no obstacles exist to the extension to them of the passport.
The AIFMD itself directs the next steps in the process. Within three months, and whilst taking into account the overall objectives of the AIFMD, the European Commission should adopt a delegated act specifying the date when the EU passport would be extended to non-EU AIFs and non-EU AIFMs. But what might that mean for those just setting out on the long road of setting up a fund?
Set up of manager – passporting in practice
Some of the considerations around AIFM set up are going to be unchanged by the AIFMD passport as the factors which dictate the identification of the AIFM are not altered. The AIFM will remain responsible for risk management and portfolio management and the option to delegate the operation of some of those functions (typically the portfolio management) is still available.
However, once the passport has been switched on for non-EU jurisdictions, fund managers are going to have some additional choices. The passport will mean that there should be little difference between the respective regulatory regimes of EU and non-EU territories therefore there may be some additional opportunities in relation to administrative and taxation strategies.
Furthermore, fund managers with existing offshore structures which are currently marketing into the EU under National Private Placement Regimes (“NPPRs”) are going to find that there is a possibility of new EU markets becoming open to them. Those currently utilising the services of fund managers and administrators in the Channel Islands may find they can benefit from synergies by housing the AIFM with their existing administrator and taking responsibility for risk management and reporting.
Passporting vs NPPRs
The NPPRs themselves were the subject of another report from ESMA but this concluded that delayed implementation of the AIFMD has meant that there was insufficient data to be able to form any conclusions. Our experience from the past year is that NPPRs vary greatly across jurisdictions and in some cases do not exist at all. The AIFMD passport will offer some certainty and consistency where the NPPRs did not.
Particularly in the case of smaller fund managers, there will still be some concern whether the EU investor market is worth the inevitable costs that will be incurred. It remains to be seen exactly how the passport might co-exist with the NPPRs, but at the moment, after the implementation of the passport for non-EU AIFMs, we expect that those AIFMs will be able choose to ignore the EU entirely, market into the EU under private placement (noting the broad range of requirements and costs that vary from jurisdiction to jurisdiction) or opt into the full-scope passport regime.
For an existing AIFM marketing under NPPRs, the effect of the passport may depend on the jurisdictions used. A fund manager marketing into Germany or Denmark will already have appointed a depositary, and may therefore find that the step up to full-scope is more palatable than for an AIFM currently only marketing into a lighter-touch NPPR regime such as that in the UK.
The reporting regime under a passport is likely to be more streamlined and centralised via the local National Competent Authority (“NCA”) of the AIFM, rather than the highly dispersed regime under NPPR where a separate, possibly different, report is required to the NCA of each jurisdiction the fund is being marketed into.
One must also recall that the NPPR was designed to be a transitional regime, lasting no less than three years, while the passport becomes an established feature of the AIFMD. It remains to be seen how long after July 2018 the NPPR will continue to co-exist with the extended passport.
Appointing a service provider
Even only thinking about the limited considerations above – we have not touched on tax for example – it is clear that the passport will offer more choice for non-EU fund managers, more opportunities to access EU investor markets (and indeed potentially more choice for those investors) but it will also potentially bring with it additional costs, which the fund manager and its prospective investors will want to minimise.
Jersey and Guernsey have a well-developed mature regulatory regime, and ESMA has reported highly favourably on the AIFMD-compliant steps taken in each. Each jurisdiction also has a successful fund administration industry so it may make sense for AIFMs to place all of their management and administration functions with a single provider.
The Channel Islands have also been active in the depositary field. For example, Langham Hall has added to its existing London depositary business by creating a Jersey depositary function, leveraging from the experience gained over the past two years of operation in London for 40 clients and 75 funds, combining the benefits of a stable, regulatory regime in a well-respected jurisdiction, with the highly qualified, client relationship-focused approach that is a hallmark of the Langham Hall professional services offering.
A fund manager might consider that, where there is a requirement for a depositary either under NPPR or the future passport, there may be a benefit for the service to be provided by a party who understands the nature of the fund which it is acting for, and preferably understands the specific processes and procedures under which it operates. That understanding can bring about efficiency and therefore potentially cost savings against a fully outsourced depositary.
Working towards the future
The Jersey and Guernsey regulators and funds industries were rightly elated at receiving the highest possible recognition from ESMA in their reports. The islands now have the potential to be able to serve fund managers across the world who wish to access EU investors.
That potential however still has to be unlocked by way of ensuring that the European Commission passes the corresponding delegated acts. ESMA’s press release gave some cause for caution – noting that introduction of the passport could be delayed until ESMA has delivered positive advice on a sufficient number of non-EU countries.
There is therefore much political work to be done in order to bring the passport into being and we will continue to monitor and report on developments, and what they may mean to the industry.