No quick fix: UK may have to join AIFMD queue

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It is unclear whether Esma will grant the UK a third-country passport any time soon

The European Securities and Markets Authority has indicated that the UK would not be able to jump the queue for third-country passporting – which would offer a crucial lifeline for UK-based fund managers wanting to attract European investors – if it exits the European Economic Area.

Without access to the EEA, the UK would lose its passporting rights under the Alternative Investment Fund Managers’ Directive, slamming the door on UK-based fund managers’ ability to market funds on the continent. Third-country passporting, in which managers can sell funds via an approved third-party nation – another potential route to European investors – will soon be phased out.

Catherine Sutcliffe, a spokeswoman for Esma, which is the main European regulator for alternative investments, said: “We cannot comment on where the UK would be in the queue.”

She said Esma would probably need to make an initial assessment on whether to grant the UK a third-country passport, suggesting it would have to go through the same process followed by other jurisdictions lining up for a passport. Another Esma spokesman said the ultimate decision would be up to the European Commission.

A Commission spokesperson said since there was not yet a negotiating framework for a Brexit, it was not possible to say who would take the lead in negotiations, but that “the treatment of third countries varies for each piece of legislation and is tailored to the specific sector and activity”.

Jeremy Bell, a partner in the investment funds group at law firm Ashurst, said that for setting up a new manager, “certainly a key agenda item will be future-proofing the structure for post-Brexit and that may involve establishing a management entity in, for example, Luxembourg”.

European leaders are apparently unwilling to give the UK concessions on immigration, which could make it hard for the next prime minister to secure a deal to remain in the EEA.

Rachel Kent, an associate at London law firm Hogan Lovells, said: “I seriously question how countries in the EU are feeling about the UK at the moment. Do they really need us to have a passport?”

The AIFMD, which was brought in after the financial crisis to provide a single market for European fund managers, was initially much maligned because it was seen as expensive and restrictive, but fund managers that want to attract European investors remain beholden to it.

Tim Flood, head of the funds and financial services team at law firm Mischon de Reya, warned: “We could set fire to everything, go back to how we were before AIFMD: life would be wonderful – except you would never again be able to access European investors to your fund.”

The private placement regime, which allows fund managers to place into Europe on a country-by-country basis, is due to be phased out from 2018/19, meaning the UK’s only option for remaining a competitive destination for global fund managers would be to secure a third-country passport.

Flood said: “If you’re not in an equivalent territory, when the [national private placement regimes] go, you will lose access to the various European countries.”

No country has yet jumped through the hoops necessary to secure a third-country passport. Esma recommended that Guernsey, Jersey and Switzerland should get AIFMD passports a year ago. It is due to publish the results of a second-stage assessment on July 12 at the request of the European Commission, the Esma spokeswoman said. She added that fund managers in jurisdictions such as Guernsey – which operates an opt-in AIFMD equivalent regime – cannot yet use the equivalency passport.

The authority’s board is due to review at the July 12 meeting its assessment of nine other jurisdictions: the US, Singapore, Hong Kong, Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia.

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