AIFMD passport decision should be taken by year-end

The European Commission should decide by December whether to grant AIFMD passports to the countries whose applications were recently given the all-clear by the bloc's financial regulator.

Under the directive, the commission is required to make a decision within three months of receiving advice on the matter from the European Securities and Markets Authority.

This advice, delivered by ESMA to the commission in its entirety at the beginning of September, said 12 non-EU countries including Canada, Guernsey, Japan, Jersey, and Switzerland should be given a passport without any conditions being attached.

ESMA also said the passport should be extended to the US, but not to all funds. This is because market access conditions applying to US funds dedicated to professional investors in the EU are different from the market access conditions applicable to EU funds dedicated to professional investors in the US.

The European regulator said the commission should consider restricting the application of the passport to a number of special cases, for example granting the passport only to US funds dedicated to professional investors to be marketed in the EU by managers not involving any public offering.

The commission is currently reviewing ESMA’s advice, and can at its discretion take other sources of information into account in drawing a conclusion, a source with knowledge of the matter told pfm.

An affirmative decision would require the commission to table a legislative proposal, known as a delegated act. The document will then pass through the European law making process, which involves scrutiny by the European Council and the European Parliament.

Both bodies must approve the proposal in its entirety before it becomes law, so the passports are not likely to be granted until at least mid-2017.

Unable to advise

ESMA said it could not advise on the extension of the passport to a number of countries, including the Cayman Islands and Bermuda, on the grounds that their financial regimes were incompatible with those in Europe.

The government of the Cayman Islands is expected to complete imminently an overhaul of its financial services laws, which will bring them in closer alignment with those of Europe.

ESMA declined to comment on if, or when, it would re-examine the country's application following these reforms.

The advice did not mention the UK which, as a result of the vote to leave the EU in June, will have to apply for a passport in order to participate in the European market.

The country’s financial regime is already AIFMD-compliant so legally it should be straightforward to extend the passport to the UK. But the political fall-out of the vote could result in some difficulties in the application process.