The extension of the pan-EU marketing passport to third countries under the Alternative Investment Fund Managers Directive (AIFMD) will happen in two or three waves, and the National Private Placement Regimes (NPPR) will not be shut off until the third country passport scheme is fully working, according to the European Commission (EC).
The European Securities and Markets Authority (ESMA) is currently assessing whether third countries meet regulatory equivalence to attain the passport, which will enable investment managers in those jurisdictions to freely distribute their products across the EU. ESMA has so far said it saw no reason why Guernsey, Jersey and Switzerland cannot avail themselves to the passport. ESMA said it needed more time to review Hong Kong, Singapore and the US. Nonetheless, ESMA is currently reviewing more jurisdictions.
“ESMA is currently reviewing 21 countries, although we expect a decision on 12 jurisdictions to be made in 2016. There are likely to be two or three waves of passport extensions. It is important to stress that not having the passport does not mean those non-EU managers will not be able to access the EU through NPPR. NPPR will be phased out but the passport is not yet in place so the clock is not ticking. The introduction of the passport will take between one year and one a half years. Only then will we begin to phase out the NPPR,” said Sven Gentner, acting head of unit for asset management, DG FISMA, at the European Commission, speaking at the Private Equity Forum AIFM Directive 2015 Conference in London.
If this is the case, then it is likely NPPR could be in place beyond 2020. ESMA is currently assessing a number of criteria to determine whether third countries meet equivalence. These include the ease of access to third country markets available to EU managers soliciting capital. Most non-EU managers will welcome the status-quo.
The EC will also review restrictions around cross-border marketing in the EU in 2018, according to Gentner. This comes as a number of asset managers, particularly UCITS, have complained that certain member states have thrown up regulatory barriers which has made marketing a complex process. For example, Germany and Austria subject fund managers to additional tax transparency requirements, while other regulators have extra reporting and fee obligations. This is despite the passage of UCITS IV, which was designed to simplify cross-border marketing.
A study by The New City Initiative, a think tank representing asset managers, in conjunction with Open Europe estimated a UK based fund manager marketing and distributing in all of the other 27 EU member states plus Switzerland would face initial costs of over €1.5 million. Total on-going maintenance costs – allowing for the continuation of cross-border marketing – could be near €1.4 million per year.
“In our analysis, we need to overcome barriers such as regulatory fees. We are looking to review marketing channels for asset management firms in 2018, and we are going to be assessing all of the requirements. Furthermore, we recognize that distribution channels will undergo major changes with the growth of digitization. As such, we realize that online platforms can sell products cross-border, and regulators need to be prepared for these technological advances,” commented Gentner.
There is also a growing focus on the Capital Markets Union (CMU), a pan-EU initiative designed to boost non-bank lending in the real economy as a means to stimulate the sluggish euro-area recovery. Gentner said regulators were assessing the state of play of loan origination funds, which have proliferated across a number of EU member states.
AIFMD did not fully account for loan origination funds but several EU countries have adopted rules governing the asset class. Germany’s BaFIN recently allowed German funds to issue or restructure loans without needing to obtain a credit license. Meanwhile, Ireland launched Qualifying Investor Alternative Investment Funds (QIAIFs), which also participate in direct loan origination. Gentner said there was no firm decision yet on whether to have a cross-border framework governing loan origination funds.