The European Securities and Markets Authority today announced that it is backing the extension of the EU’s Alternative Investment Fund Managers Directive passport to five key non-EU countries and jurisdictions, and said no “significant obstacles” seemed to stand in the way of another four being fit to participate in the scheme.
ESMA said it was unable to give specific advice on Bermuda and the Cayman Islands at present, as both countries were in the process of implementing new regimes, while in the case of the Isle of Man, “the absence of an AIFMD-like regime” made it “difficult to assess whether the investor protection criterion is met”.
The other nine jurisdictions whose fitness to participate in the AIMFD passporting regime was studied were Australia, Canada, Guernsey, Hong Kong, Japan, Jersey, Singapore, Switzerland and the United States.
Formal extension of the AIFMD passporting rights to any of these 12 of these countries would need to be approved by the European Commission, Parliament and Council. However, industry experts note that ESMA’s endorsement of a jurisdiction is an indication that it is likely to be approved.
Under the AIFMD, those countries deemed to meet the AIFMD standard for monitoring and supervising risks would be permitted to market and manage alternative investment funds throughout the EU.
Currently, non-EU countries which aim to market alternative funds in Europe are required to comply with each EU country’s national regime, a time-consuming and expensive process that makes their products less competitive than those that are able to passport.
‘No significant obstacles’
It its advice published today, ESMA stated that it sees “no significant obstacles” currently impeding the application of the AIFMD passport to Canada, Guernsey, Japan, Jersey and Switzerland.
With respect to Hong Kong and Singapore, ESMA said that while there were no significant obstacles standing in the way of their AIFMD passporting regime applications, both jurisdictions at present “operate regimes that facilitate the access of UCITS from only certain EU member states to retail investors in their territories”.
Similarly, ESMA noted that passporting into the European market would also likely be possible for Australian alternative investment fund managers, provided that the country’s regulator, the Australian Securities & Investments Commission (ASIC), were to extend to all EU member states the “class order relief” from having to comply with certain Australian regulations that it currently extends to fund managers from just a few EU member states.
‘Market access risks in US’
As for the United States, ESMA distinguished between funds marketed there which don’t involve a public offering and those that do, and noted that because of this, extending the AIFMD passport to funds originating there could risk creating “an un-level playing field between EU and non-EU AIFMs”.
“The market access conditions which would apply to these US funds in the EU, under an AIFMD passport, would be different from, and potentially less onerous than, the market access conditions applicable to EU funds in the US, and marketed by managers involving a public offering,” ESMA noted. EU institutions, therefore, might need to “consider options to mitigate this risk”, ESMA added.
Today’s ESMA comments represent the authority’s second commentary on the AIFMD passport applications of six non-EU jurisdictions – Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the US – the first having been issued in July 2015. The European Commission subsequently asked it to assess a further six countries, and to provide more detail on the capacity of non-EU supervisory authorities and their track record in ensuring effective enforcement, including those six non-EU jurisdictions that it initially considered.
The European Commission also asked ESMA to provide data on the expected inflows of funds by type and size into the EU from the different non-EU countries.
To read ESMA’s 106-page report in full, on the ESMA website, click here.
Good news for Jersey, Guernsey
ESMA’s comments that it saw “no significant obstacles” standing in the way of permitting Jersey and Guernsey alternative investment fund managers to passport into Europe was welcomed by officials from both Channel Islands jurisdictions.
“What ESMA’s latest announcement shows is that satisfying ESMA’s criteria is not straightforward for all jurisdictions, and that Jersey’s foresight in creating an AIFMD equivalent regime is now putting it in a very strong place,” said Jersey Finance chief executive Geoff Cook.
He noted that the “certainty of European market access that Jersey is offering to alternative fund managers” had been reflected in the recent growth of that industry on the island.
Guernsey Finance chairman Lyndon Trott, who also serves as Guernsey’s deputy chief minister, said ESMA’s comments with respect to the island demonstrated “confidence and trust in our regulatory framework and supervisory practices, and in our track record as a jurisdiction that meets the highest international standards”.