The Alternative Investment Fund Managers Directive (AIFMD) is bedded down, and the costs have generally beenabsorbed by the asset management community without too much disruption. The European Commission (EC) is obliged to review AIFMD’s progress in 2017, but managers should not brace themselves for radical change. It is hoped that uncertainties about asset segregation rules will be settled, but remuneration provisions are unlikely to be amended. Reporting requirements under Annex IV could be reassessed although the specificities have not been laid out.
Anecdotally, there is talk that liquidity risk management and leverage rules are being tightened or at least synchronised with policy guidelines due to be outlined by the Financial Stability Board (FSB) and International Organisation of Securities Commissions (IOSCO). AIFMD is already pretty robust on liquidity risk management and requires firms to carefully document and manage it, through stress testing, for example. As such, any additional requirements should be fairly straightforward for firms to deal with.
In the meantime, it is becoming obvious that third country passporting rights are not going to happen, or at least not anytime soon. Third country equivalence – as the regimes of Guernsey, Jersey and Switzerland will not dispute – has been an exercise of endurance. Affirmation from the European Securities and Markets Authority (ESMA) that these countries met equivalence way back in 2015 has not led to any meaningful developments or substantive progress. A handful of large fund markets including the US, Hong Kong and Singapore, have subsequently been reviewed by ESMA and given a broadly positive opinion although there were some conditions.
The structure of the EU is such that approvals are required from multiple policymaking entities before anything can be actioned. Even before the market shake-up that was Brexit and the election of Donald Trump, the process was unwieldy. Brexit has prompted EU regulators to put the brakes ongranting equivalence. The AMF, the French regulator, has publicly said the EU should reopen negotiations with certain countries to guarantee reciprocity, an issue that has not been discussed in several years. In short, the passport extensions look to be on shaky ground.
The shock election of Donald Trump, who has promised a raft of deregulatory measures, could also provide an excuse for the EU to slow down on equivalence. Promises to scrap Dodd-Frank should be taken with a degree of scepticism but the mood in the US is certainly gearing towards less government intervention in capital markets as evidenced by some of the cabinet appointments in the new administration. Any revisions to the US fund regime could put AIFMD equivalence on the backburner.
APAC markets who are big buyers of UCITS will be particularly frustrated by the delays, and were notably incensed by their initial exclusion back in 2015 following ESMA’s first AIFMD equivalence opinion. This second set-back could embolden regional regimes to push more vigorously ahead with pan-APAC fund projects such as the ASEAN CIS and ARFP. Competition should always be supported, although if these fund schemes draw inflows over the next few years, some UCITS with Asian clients could struggle to win further mandates.
The EU’s renewed opposition to equivalence presents a huge issue for the UK. Admittedly, the terms of Brexit are unknown and predicting anything in today’s market is rife with challenges. However, if single market access for the UK was withdrawn, UK-based UCITS and AIFMs would effectively be excluded from passporting. It is highly probable that National Private Placement Regimes (NPPR) are going to end with markets moving towards the German model (i.e. a total ban). Non-EU firms may struggle to access EU markets when this occurs, although some could use reverse solicitation. It is true EU investors do call upon non-EU managers on occasion,but it is not something to be counted upon and it carries with it huge regulatory risk.
These political changes will probably force some UK firms to move parts of their infrastructure to onshore domiciles such as Luxembourg or Malta to maintain access to the EU investor base. The general trend in the EU appears to be moving towards protectionism and this will only grow once the UK leaves EU bodies such as ESMA post-Brexit. Again, it is foolish to rush to any conclusion. Firms should delay any structural alterations until there is greater clarity, although they ought to have a rough idea of how to act if Brexit does leave UK managers isolated from the EU.