Passport to nowhere

Advice from the European Securities and Market Authority (ESMA) on extending the Alternative Investment Fund Managers Directive’s (AIFMD) so-called “passport” to non-EU funds was met with surprise then a shrug.

The regulator’s recommendation in late July that “no obstacles” exist to the extension of the passport to Guernsey and Jersey, and its belief that Switzerland would remove any barriers with new legislation, raised the eyebrows of those expecting ESMA to comment on the issue of third-country passporting across the board.

Instead, ESMA assessed only six jurisdictions on a country-by-country basis. Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the US were measured against a criteria including investor protection, competition, potential market disruption and the monitoring of systemic risk.

“Going jurisdiction by jurisdiction was not required by the directive. It was an impossible task given the timescale,” says Tamasin Little, financial regulation partner at King and Wood Mallesons.

However, it was not such a surprise that Guernsey, Jersey and, to some extent, Switzerland passed muster, while ESMA said it reached “no definitive view” on the remaining three, including significantly, the US market.

“The two Channel Island jurisdictions are mirror regimes of the AIFMD, and the lesser mirror of Switzerland has to make only one change,” says Little.

ESMA has stalled on the remaining three countries on the basis of “concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria”, it said.

With the US, the prospect of offering blanket access to European markets with an AIFMD passport hinges on the thornier issue of reciprocity. “If you allow passports to be available, you would expect the same for EU managers, but ESMA has not received sufficient assurance from the US authorities that access for US managers to European investors would be reciprocated,” says Alix Prentice, partner at Taylor Wessing.

So what happens next? Anointed by ESMA, when will Guernsey, Jersey and Switzerland be admitted into the European club? The answer seems to be not any time soon.

ESMA’s recommendation to the European Commission, Parliament and Council, who will legislate to activate third country passporting, came with a caveat. It advised them to wait until it delivers “positive advice” on more non-EU jurisdictions “to avoid any adverse market impact” that extending the passport to a handful of non-EU countries might have.

ESMA aims to complete its assessment of Hong Kong, Singapore and the US “as soon as practicable”.

Having gone the country-by-country route, ESMA seems keen to avoid instigating a patchwork approach that could raise issues for individual regimes, notably Germany where the national private placement regime (NPPR) currently used to admit non-EU funds would dissolve upon the introduction of passporting.

So, until the Commission decides, it is business as usual for the Channel Islands, Switzerland and everyone else beyond the EU’s regulatory borders.

“In general the NPPR route is working,” says Dechert partner Gus Black. “Where a fund’s target investors are and how those countries have implemented AIFMD determines the pain and the cost [of fundraising in Europe].”

That breathing space might not be a bad thing for EU jurisdictions still trying to get up to speed with the year-old full implementation of AIFMD.