A European Union passport regime for selling alternative investment funds should be extended to the Channel Islands and Switzerland while three other prominent jurisdictions will have to wait for this status. And no reference was made to the Cayman Islands.

A European regulatory body has recommended that Guernsey, Switzerland and Jersey can market funds across the European Union under the EU’s alternative investments funds regime, while they have not yet reached a hard decision on the US, Hong Kong and Singapore. No reference was made the Cayman Islands, domicile to thousands of hedge funds - a fact that provoked surprise.

The European Securities and Markets Authority published advice on whether passports under the Alternative Investment Fund Managers Directive, or AIFMD, should be extended to the six jurisdictions. There have been concerns that the directive, which tightens controls on managers of hedge funds, private equity, and other “alternative” assets, will freeze out managers based outside the EU from marketing their funds.

The AIFMD came into force in the wake of the 2008 crisis as policymakers said that alternative investments were insufficiently regulated and posed a potential threat to the financial system, although critics have claimed the measures – such as tightening requirements on disclosure and investor protection – were unnecessary and motivated by a desire to stifle non-EU competition.

ESMA’s recommendation will be considered by the European Commission, Parliament and Council, it said in a statement today. It said it carried out a country-by-country assessment, looking at issues such as investor protection, competition, potential market disruption and the monitoring of systemic risk.

“The advice concludes that no obstacles exist to the extension of the passport to Guernsey and Jersey, while Switzerland will remove any remaining obstacles with the enactment of pending legislation. No definitive view has been reached on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria,” ESMA said.

ESMA said European lawmakers may want to wait until ESMA has delivered positive advice on a “sufficient number of non-EU countries, before introducing the passport in order to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have”.

“ESMA aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries until it has provided advice on all the non-EU countries that it considers should be included in the extension of the passport,” it said.

Andrew Shrimpton, managing director and global head of compliance consulting at Duff & Phelps’ Kinetic Partners division, welcomed the general thrust of ESMA's comments but was surprised at no mention of the Cayman Islands. “We welcome ESMA’s opinions and advice to the EU Commission on AIFMD arrangements, many of which reflect previous views published by the organisation. In particular, ESMA has taken an individual country approach, rather than prescribing a ‘one size fits all’ basis. This will be good for the development of fund management in Jersey, Guernsey and Switzerland in particular. We are surprised that the Cayman Islands, as the largest non-EEA domicile of hedge funds, was not assessed at this time."
 
Jersey Finance, the body representing the island’s financial services sector, was understandably pleased at ESMA’s comments.

Jersey’s current marketing route into Europe via national private placement regimes looks likely to remain in place until at least 2018. This route, which only requires adherence to AIFMD reporting and disclosure requirements, continues to prove popular, with the number of Jersey funds marketing into Europe in this way recently breaking through the 200 barrier,” Jersey Finance said. It said that new official data shows 84 fund managers have received private placement authorisation, up 40 per cent compared to
December 2014, and 205 Jersey funds are now being marketed into Europe through private placement regimes, an increase of 10 per cent over the past six months. Jersey managers and funds not actively marketing into Europe are not subject to any AIFMD regulation.

“Guernsey has had its own opt-in equivalent AIFMD regime fully operational since 1 January 2014 – well in advance of today’s news. We did this in order to demonstrate the high standards that our funds industry works to and are now ideally placed to continue to provide access to Europe," Dominic Wheatley, chief executive of Guernsey Finance, said.

This publication has contacted the Swiss Association of Asset Managers in Zurich and may update with comments in due course.