Brexit could bring halt to AIFMD third-party determinations

Delays or even abandonment of the third country passport under AIFMD should be expected following Brexit.

By Charles Gubert

Delays or even abandonment of the third country passport under the Alternative Investment Fund Managers Directive (AIFMD) should be expected following Brexit, according to a senior member of the French financial services regulator.  

The Brexit vote appears to have dented the enthusiasm for European regulators to extend equivalence. Full passporting rights can only be granted once it receives sign off from the European Commission, the European Council and European Parliament. 

“Brexit has created new issues and there is an opportunity now for EU members to re-discuss the regimes they would like to offer non-EU actors, and the extent to which reciprocity should be taken into account,” said Mathieu Lucchesi, deputy head of asset management regulation at the Autorite de Marches Financiers (AMF, speaking at the Association of the Luxembourg Fund Industry (ALFI) European Alternative Investment Funds Conference in Luxembourg. 

It has been almost 18 months since Guernsey, Jersey and Switzerland were notified by the European Securities and Markets Authority (ESMA) that their domestic regulatory regimes were equivalent to those of the EU. Other major markets including the US, Hong Kong, Singapore and Japan have since been given a similar verdict albeit with one or two recommendations by ESMA for areas of improvement.

Sean Tuffy, senior vice president and head of regulatory intelligence at Brown Brothers Harriman (BBH), acknowledged Brexit created complications for AIFMD equivalence.

“The AIFMD passport extension – which was already a long shot – is clearly on the backburner post-Brexit. It is important to stress equivalence was never designed with the UK in mind. The long-term impact of Brexit will be that the Financial Conduct Authority (FCA) will have to withdraw from ESMA, and that will be a big loss for the industry, as the UK regulator has been a pragmatic force. It is a big knowledge loss for the EU if the FCA is not at the policy table,” he said.

Any slowing down on equivalence talks with third countries will not bode well for UK-EU negotiations on fund passporting post-Brexit. It will also antagonise numerous third countries, who fear their funds industry will no longer be able to access EU markets. Marcus Mecklenburg, head of legal at the Bundesverband Investment und Asset Management (BVI), a German investment industry group, said it was likely national private placement regimes (NPPR) would expire. Should this occur, some non-EU managers, particularly US hedge funds already stung by AIFMD remuneration disclosure rules, may disregard European investors altogether.

Extending the passport to third country AIFMs has divided the industry. ALFI, for example, urged caution back in 2015 stating it was premature to consider third country managers until NPPR was scrapped. Meanwhile, the Alternative Investment Management Association (AIMA), a hedge fund industry group, said in 2015 that it welcomed ESMA’s positive opinion of the first batch of third countries, but advised the process be expedited. It is clear that the decision to offer a positive opinion to certain countries has stirred divisions within ESMA, and that the European Commission is probably not going to make AIFMD equivalence a priority.

“The European Commission has a lot of priorities on its desk including the Capital Markets Union (CMU), the Packaged Retail and Insurance Based Investment Products (PRIIPS), the Markets in Financial Instruments Directive II (MiFID II), and its review of AIFMD and UCITS V,” said Jean-Marc Goy, counsel for international affairs at the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg.

Meanwhile, panelists at ALFI’s conference broadly agreed the review of AIFMD next year was not going to result in major changes to the Directive. “My view of the AIFMD review is that the framework works and that changes should only be made to the extent necessary. Furthermore, any changes should take into account work on liquidity risk done by international bodies such as the Financial Stability Board (FSB) and the International Organisation of Securities Commissions (IOSCO). It is crucial that the AIFMD review does not reopen previous debates such as manager remuneration,” commented Lucchesi.