Proposed changes to AIFMD — to be known as AIFMD II — are expected to be approved later this year, having been put forward in draft form last November by the European Commission. Jersey Finance’s Elliot Refson highlights why some jurisdictions are set to fare better from the upcoming Directive more than others
On 17 June 2022, the Council of the EU announced that it had agreed its general approach on the Alternative Investment Fund Managers Directive (AIFMD). Members of the European Parliament (MEPs) have now reviewed a draft report prepared by the AIFMD rapporteur and had until 27 June to submit amendments.
MEPs will now consider any amendments proposed and will potentially agree to a final text in the autumn.
Depending on how quickly the European Parliament can agree on its approach, trilogue will then commence in the fourth quarter.
In addition, the European Securities and Markets Authority also published an updated Q&A on the application of the AIFMD in May, as well as a consultation on notifications for the cross-border marketing and management of funds.
That consultation will close in September this year.
There is no doubt that the question around the impact of EU regulation on fund domiciliation has been raised again.
Looking back
It is almost a decade since the AIFMD came into force in the wake of the 2008 Financial Crisis.
As we emerge from an altogether different type of global crisis, AIFMD II is set to recalibrate the requirements for non-EU countries wishing to access EU capital.
What are those changes, and what could they mean for domiciles? There are a number of changes relating to the national private placement regime (NPPR) regime brought about by AIFMD II.
They include new requirements for non-EU alternative investment fund managers (AIFMs) to market EU or non-EU alternative investment funds (AIFs) through NPPR, and they will be added under Article 42 of AIFMD, as follows:
-The third country where the non-EU AIFM or the non-EU AIF is established is not listed on the EU list of non-cooperative jurisdictions for tax purposes
-The third country has signed a qualifying agreement on the exchange of information in tax matters with the Member State where the marketing takes place
-The third country is not identified as a high-risk country, according to the latest European laws against money laundering.
The same changes have been made to Article 36 (EU AIFMS marketing non-EU AIFs without a passport in the EU).
Clearly, this does not bode well for countries that are at risk of being blacklisted for EU tax or anti-money laundering (AML) purposes.
These requirements mean choosing a domicile with an excellent track record of complying with both EU and international tax, as well as AML standards, will certainly move higher up the checklist.
Domiciling onshore
In terms of domiciling ‘onshore’, the proposals under AIFMD II could actually have the consequence of adding further cost and complexity to establishing and operating in an EU jurisdiction where the full scope of the Directive applies.
The reality is that few managers actually need blanket access to all EU Member States — the European Commission itself in 2018 published figures that showed only 3 per cent of fund managers market to three or more EU Member States anyway.
Instead, opting for a reputable third country jurisdiction allows cost-effective, flexible access to the investors a manager really wants to target in the EU through NPPR, whilst at the same time enabling access to capital beyond Europe, without adhering to the stipulations of the AIFMD.
What’s in store for Jersey?
Jersey is well positioned in light of AIFMD II. Managers have shown faith in the jurisdiction for some time, with some 200 managers now opting to target EU investors via private placement regimes through Jersey — a figure that has grown around 58 per cent over the past five years.
They can, and are doing so, through a range of structuring and operational models from a ‘manager of managed entity’ approach to full relocation. Optionality has been key.
Jersey’s government remains strongly committed to compliance with international standards and as a result there is no expected negative impact on Jersey in relation to the proposed new rules.
Jersey is recognised by the EU as a co-operative jurisdiction for tax purposes, and has signed a qualifying agreement on the exchange of information in tax matters with EU Member States.
In addition, Jersey is not identified as a high-risk country, according to the latest European laws against money laundering.
All of the above should send a clear message of confidence to managers and investors that Jersey’s current model should continue to operate seamlessly and effectively under the AIFMD proposals.
If the proposals are agreed, there will be a two-year period with changes expected to take effect in 2024/25.
As we approach the tenth anniversary since AIFMD was implemented in the EU — with the European Parliament’s draft report and ESMA’s updated Q&A fresh in mind — this latest installment will certainly give managers food for thought this year.
Other domiciles, such as Jersey that have shown a commitment to cooperation, good oversight and strong regulation, will be well-placed to continue to support non-EU managers with ongoing access to investors within the EU.
