ESMA’s recommendations for AIFMD passporting were the talk of the summer, but whether today’s choice is tomorrow’s success story depends on much more than popularity
For anyone trying to market funds in to the EU, the Alternative Investment Fund Managers Directive (AIFMD) passport is the hottest ticket in town right now. In July, the European Securities and Markets Authority (EMSA) was the popular kid handing out invites at the school gates, as it revealed the A-listers who would be the first allowed in the club.
The decision to recommend Jersey, Guernsey and (sort of) Switzerland was met with puffed-up pride and self-congratulation from those awarded with a ticket, while reactions among the not-so-lucky ranged from knowing nods and complacency to outright tantrums.
In a press release, law firm Carey Olson called the decision to recommend Jersey and Guernsey a “testament to their international importance”, drawing attention to the islands’ joint assets under management of £500 billion. At the other end of the scale, Paul Schott, CEO of the Investment Company Institute in the US, went so far as to say the decision not to recommend the US for passport extension would “discriminate against US managers”.
Ed Smith, a partner at law firm Linklaters is a tad more pragmatic, however, suggesting that the recommendation is more to do with Jersey and Guernsey’s existing AIFMD-friendly regimes.
He says: “These countries have all introduced new legislation specifically to address compatibility with AIFMD, so it was easier for ESMA to conclude that regulatory regimes were suitably equivalent.”
Tim Thornton, chief data officer at MUFJ, adds to this, saying that Jersey and Guernsey’s regulatory frameworks have already prepped for passporting. Over the last two years, he says, both islands have created voluntary opt-in regimes, allowing firms to comply with AIFMD rules, even though they’re not obliged to.
“Managers, funds and depositories domiciled there have been able to opt in to the AIFMD rules and effectively they comply already. The framework was already there, the reporting and the regulatory oversight was already there—it was already very similar to the European onshore jurisdictions.”
Thornton also points out that this was arguably a logical step for the islands. Now, funds domiciled in Jersey and Guernsey have much more choice than their onshore counterparts: they can take advantage of their imminent AIFMD passporting privileges, or use their previous solution, the national private placement (NPP) regime, which allows them to set up relationships for marketing in to individual EU member states, one at a time. Alternatively, they can choose not to bother with marketing funds in Europe full stop, avoiding all the complications of the continent.
At the time of ESMA’s announcement, Jersey funds partner for Carey Olsen, Dan O’Connor, said: “We have seen many fund managers significantly reduce operational costs and disclosure requirements by choosing Jersey and Guernsey funds and marketing to potential EU investors using NPP regimes.”
“We expect this announcement to provide further comfort to fund managers and their advisers that Jersey and Guernsey funds provide the best of both worlds.”
This choice means that firms can not only choose which way to go—rather than being forced down a particular route—they can also choose what is most cost-effective for them. While the NPP may be the best route for marketing in to one or two jurisdictions, AIFMD might work better for those trying to access many.
Thornton says: “The passport means complying with just one set of reporting requirements. Although it carries extra costs, those costs are probably going to be outweighed by the savings in not having to report to multiple regulators, as they would under the NPP.”
While Jersey and Guernsey are feeling rather pleased with themselves, less sure, or at least less vocal, is Switzerland, the jurisdiction that ESMA recommended on the condition that it removes “any remaining obstacles with the enactment of pending legislation”.
According to Thornton, ESMA isn’t actually being very clear about what the requirements for passporting are. It may be frustrating for those jurisdictions that haven’t been recommended to be left in the dark over how they can achieve compliance, especially when the circumstances surrounding Switzerland remain veiled.
“It would be helpful to know what exactly they’re testing against, and what the gaps are that regulators have to fill. That would help a lot of people—both regulators and people in the industry—to work to close those gaps where appropriate,” says Thornton.
While ESMA has announced its intent to consider the Cayman Islands, Canada and Australia for AIFMD passporting, and a willingness to refine its assessment of Hong Kong, the US and Singapore, there is no indication of time-scale. Despite the Alternative Investment and Management Association (AIMA) saying ESMA should be making faster progress and the ICI strongly criticising the rejection of the US, others believe that further extensions shouldn’t necessarily be the top priority.
Steve Slessor, managing director at MUFG Investor Services, who is based in Canada, says: “It is imperative for regulators to get it right now before going any further with passport extensions. While there is frustration, it was not surprising that no clarity has been provided to date.”
Thornton suggests that, now Jersey and Guernsey have been recommended, the next step for ESMA should be to turn its attention elsewhere. He says: “Looking at the client base and the popular jurisdictions, ESMA has to be looking towards Cayman as a very popular jurisdiction for funds, particularly for European managers. I would imagine that they would start here and then follow on, by way of popularity, to Bermuda, Hong Kong and Singapore.”
On the other hand, however, Thornton is of the same opinion as Slessor when it comes to priorities, believing that actually, ESMA should focus on tidying up its own house before extending invitations cross-border.
“So far, there’s not a lot of harmonisation between the different EU jurisdictions,” he says.
“It would be nice if the passporting regime moved more quickly, but when ESMA is dealing with so many different member states, it has to come up with recommendations and put them through various parliaments, then the national regulators have to implement it. This means there are significant differences in the rules in different states despite the driver for the regulation being to harmonise the rules. It was always going to take some time.”
AIFMD was intended to lead to a more harmonised Europe, and until that can be achieved, it is arguable that extending the passport is at best a little bit pointless, and at worst hasty and ill-thought out.
As Smith points out: “There are still uncertainties around how the member state of reference process would actually work in practice for alternative investment funds if they don’t already have a European economic area (EEA) nexus, such as a UK- or other EEA-authorised alternative investment fund manager.”
Industry bodies have expressed doubts over the decision, or lack thereof, regarding the US. The ICI, whose members represent about $18.2 trillion in assets under management in total, was particularly put out.
CEO Schott said at the time that the advice “inappropriately confuses the regulation of mutual funds with the regulation of funds sold to professional investors in the US.”
He added: “Currently in the US, EU managers can readily sell funds to professional investors on the same terms as US managers, and across the entire US marketplace. Unfortunately, the impact of ESMA’s advice would be to discriminate against US managers by denying them comparable access to the entire EU marketplace.”
“EU policymakers must correct this error and apply the appropriate legal analysis before they take additional action on the potential extension of the AIFMD passport to the US.”
While AIMA was a little less harsh, it too questioned ESMA’s indecisiveness. In a statement, CEO Jack Inglis said: “While we would have wished ESMA to adopt a more streamlined and speedier assessment of all important jurisdictions, as there is no need for an equivalence assessment in the AIFMD, we welcome the clarity on which jurisdictions are to be assessed in the coming months.”
Slessor, however, preaches patience. From his point of view, the US market isn’t ready for AIFMD passporting yet, in fact, he suggests that they’re still wading through the abundance of other regulation that’s affecting day-to-day business, both from within the US and from across the Atlantic.
“The decision not to extend the passporting to the US is not a discriminatory one,” he says. “Regulators are already struggling to iron out the requirements set out in the EU. Adding another large jurisdiction at this time would only lead to more confusion, backlogs and uncertainty about the future of AIFMD.”
He adds: “Any passporting extensions will require adjustments to the US regulatory environment. Until clear, definite guidance is provided, US managers are not planning to spend significant time or resources on AIFMD, and administrators are not able to develop solutions to help US managers until the scope of the regulation is finalised.”
Although ESMA’s recommendation has lent to some impatience and foot-stamping, the majority appear to be taking it in their stride—reacting with the kind of patience that’s appropriate for such a long and complex process. However much Jersey and Guernsey pat themselves on the back, it is still important to remember that the recommendation is only a recommendation. By definition, this decision is not set in stone.
Not only is the extension of the passport to Jersey and Guernsey, or anywhere else for that matter, not a definite conclusion, it could also still be subject to an indefinite delay. It certainly doesn’t appear that ESMA is inclined to rush anything through.
In fact, as Smith says: “It is worth highlighting that ESMA expressly comments in its advice that the European Commission may wish to consider delaying the legislative triggers, which would actually extend the passports until ESMA has provided its advice for a greater number of non-EU countries, given the potential impact an extension of the passports might have on the market.”
A perfect guest list takes plenty of time and much calculation. Jersey, Guernsey and Switzerland may have been extended a preliminary invitation, but they’ll have to make sure they’re wearing the right shoes if they want to get further than the threshold.
