The European Securities and Markets Authority (Esma) released its advice on the Alternative Investment Fund Managers Directive (AIFMD) fund distribution passport on July 30.
Interested parties eagerly digested the material, which prompted dramatic headlines such as “Esma excludes Cayman from AIFMD Passport”. These reports painted a rather scandalous picture of protectionism, with the perception of an unfair bias towards neighbouring non-EU jurisdictions (Switzerland and the Channel Islands).
Taking a more objective view, Esma’s advice is a 52-page assessment beginning with a list of 22 jurisdictions that are key domiciles for alternative investment fund managers as defined by the directive. Esma screened those 22 jurisdictions on the basis that they had sufficient information on the regulatory regime of each to make a proper assessment. A total of six jurisdictions (the US, the Channel Islands of Guernsey and Jersey, Switzerland, Singapore and Hong Kong) were assessed, but only the Channel Islands and Switzerland received positive advice to extend the passport.
In defence of Esma’s decision not to include the Cayman Islands in the initial 22 jurisdictions, there are two factors at play. First, the Cayman Islands are a significant domicile for funds, but not for fund management activities as a whole. Second, when Esma began the information-gathering exercise in November 2014, the Cayman Islands did not have a dual regime in place for governing alternative investment fund managers operating from the islands. That said, the Cayman Islands government is close to finalising an AIFMD-equivalent dual regime at the time of writing.
With regards to the US, Singapore and Hong Kong, the rationale for not providing a definitive decision relates to unresolved discussions surrounding competition, regulatory gateways for information, and smoothing the differences in the regulatory regimes governing alternative funds and managers. Esma is, however, hoping to complete the assessment of these three jurisdictions in the coming months.
In essence, the long-awaited advice and opinion proved to be lacklustre due to its incompleteness. The delivering of advice and opinion to the European Parliament, Council and Commission is one component of the already lengthy European legislative process and, in a communication to the Ministry of Finance, Esma has suggested those European institutions may wish to wait until further positive assessment has been made on a sufficient number of non-EU jurisdictions before triggering the legislative process.
The fact that three jurisdictions have been given the green light is arguably misleading, as we are only now entering into the real assessment, where Esma and these three domiciles will need to find common ground. They will need to work together on what could be a defining moment for global fund distribution and regulatory convergence to create the foundations for a truly level international playing field.
Nicola Le Brocq is regulation and compliance market analyst at Confluence
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