ESMA has published a letter dated 17 December 2015 that it received from the European Commission (the Commission) in respect of ESMA’s work on the extension of the AIFMD passport to non-EU AIFMs and AIFs.

The background to the letter is that ESMA had produced a piece of advice and companion opinion in July 2015 on the initial functioning of AIFMD following its implementation, and on whether the passporting regime should be made available to certain non-EU jurisdictions. Unfortunately, the broad conclusion of these papers was that it was too early to tell. As a result, they were not overly helpful to regulators or industry participants.

The Commission has now set a deadline of 30 June 2016 for ESMA to complete its work on advising on whether or not the AIFMD passport should be extended to various non-EU countries. The countries are Hong Kong, Singapore and the USA (on which ESMA was not definitive in its July 2015 advice) along with Australia, Canada, the Cayman Islands, Japan, the Isle of Man and Bermuda (which ESMA identified as a second wave in October 2015).

The Commission endorses the country-by-country approach ESMA is taking and says that it will be able to “take a decision” (i.e. to extend the passport by way of delegated regulation) when a “sufficient number” of countries have been “appropriately assessed.” To date ESMA has only issued positive advice for Jersey, Guernsey and Switzerland. Clearly the Commission requires more of a critical mass of qualifying third countries to proceed with implementing legislation.

In its letter the Commission also asks ESMA for two additional pieces of work. First, with regard to ensuring effective enforcement in the relevant non- EU countries, it asks ESMA to provide a more detailed assessment of the capacity of each of the non-EU supervisory authorities and their track records in ensuring effective enforcement. Second, so that potential market impact can be better assessed, ESMA is to provide a preliminary assessment of the expected inflow of funds (by type and size) into the EU from the relevant non-EU countries.

The Commission agrees with ESMA’s previous comments that that there would be merit in ESMA preparing a further opinion, having had more time to assess the market. In particular the Commission acknowledges that this will be helpful for the planned review of AIFMD from 2017. The upshot may be therefore that, following the delivery of any further positive advice from ESMA, we will still have to wait for any practical changes to the status quo in terms of marketing in Europe by non-EU AIFMs and by EU AIFMs marketing non-EU AIFs.

The Commission’s letter does not reveal whether or not it intends to leave the national private placement regimes operating until the third country passport is functioning correctly. There is a fear among some in EU jurisdictions that they should be careful what they wish for – in gaining access to the passporting process (and month-long delays that go with it), fund managers will lose the ability to access some EU markets on a private placement basis much more quickly. Allowing private placement regimes to continue would be preferred by many, as it allows more flexibility in future marketing strategies.

In effect, therefore, ESMA has been asked to take stock and resubmit its homework. Hopefully this will generate a more meaningful set of reports and enable the Commission, ESMA and national regulators to take steps to remedy failings in implementation across Europe and achieve a more level playing field.