As Britain contemplates the consequences of its vote to leave the European Union, one important question for the private equity industry is how much market access the EU will be willing to give to “third country” alternative investment funds. This week’s "advice" given to the Commission by the pan-EU regulator, ESMA, following a procedure laid out in the Alternative Investment Fund Managers Directive (AIFMD) – underlines the answer: “as little as possible”.

ESMA’s opinion on whether the passport granted to authorised EU fund managers under the AIFMD should be extended to non-EU managers and funds from twelve countries makes it clear that market access is a precious commodity to be given out sparingly, and that regulation may be used as a lever to obtain concessions from other countries. (Perhaps this approach stands in contrast to the welcome moves by the European Commission last week to assist those operating within its borders: it proposed amendments to the European Venture Capital Funds (EuVECA) and the European Social Entrepreneurship Funds (EuSEF) regulations, and confirmed that it will proceed with a private sector fund (or funds) of funds to encourage venture capital.)

In relation to the AIFMD passport, there is good news, there is bad news, and there is also ongoing uncertainty. The winners are Canada, Guernsey, Japan, Jersey and Switzerland, with ESMA confirming that there are no significant obstacles impeding the application of the AIFMD passport to those countries; although that takes Guernsey, Jersey and Switzerland no further forward – they were approved in principle last year but no passport has yet been granted to them. Japan and Canada are the only new jurisdictions which ESMA has approved.

The AIFMD marketing passport does not, of course, offer access to retail investors. However, that fact did not stop ESMA from arguing that, even though the regulatory regimes of Hong Kong, Singapore and the United States did not in general cause any significant concerns, difficulties of access to the retail market, or differential treatment of different EU Member States, must be noted. For example, ESMA found that Singapore had only approved UCITS from the UK, Ireland, France, Germany and Luxembourg as foreign funds which may be offered to retail investors in Singapore. Australia’s treatment of managers from member states other than the UK and Germany also ruled them out. And the US mutual funds and public offering regime was seen as unduly onerous for EU managers – completely ignoring the onerous nature of the AIFMD, and its lack of a route to public marketing. These seem harsh conclusions, and they require an interpretation of the AIFMD’s criteria which was not inevitable, as is acknowledged by ESMA’s advice which for each of these jurisdictions states that if assessed "only in relation to AIFs” there are no obstacles.

Bermuda and the Cayman Islands were not approved but were given hope because their local investor base is small, and they are planning to introduce “opt in” AIFMD copycat regimes, as Jersey and Guernsey have already done: ESMA reserves its position pending full implementation of the new regulatory regimes. On the other hand, ESMA refuses to make any definitive statement about the Isle of Man, which is not planning to introduce a copycat regime and currently treats EU member states differently, with some being considered ‘designated territories’ but others not (although in discussion with ESMA the Isle of Man has now offered to give all UCITS access).

The ongoing uncertainty, of course, arises from the fact that ESMA's advice is just that, and it is for the Commission to decide whether to introduce the third country passport, which was originally slated for 2015. The prospect of the UK becoming a “third country”, and one which will have an already operating fully equivalent regime and offering equal market access, may affect its willingness to do so, or the chances of any decision passing through the EU Council or Parliament without objection. Moreover, ESMA suggests that the Commission, Council and Parliament may wish also to consider tax and money laundering issues before granting a third country passport. Furthermore, there is still a long list of countries which have yet to be considered by ESMA. And, even if the passport is introduced for some countries, whether it will be of much use also remains in doubt, given the significant issues with the way in which the AIFMD contemplates that it will operate, and the uncertainties over the effect it will have on national private placement regimes. ESMA’s advice indicated that other non-EU managers should be allowed to continue to operate under those regimes after the introduction of the passport but says this needs clarification.

The third country passport provisions of the Directive were hard fought by many, particularly those in the US, who argued that the AIFMD’s draftsmen were protectionist. So far, the Commission has done little to rebut that allegation.