Editor’s Letter – Issue 126

September 2017

HAMLIN LOVELL

AIMA are fielding more member queries about MiFID II (unbundling, call taping, best execution etc.) than anything else, says Deputy CEO Jiri Krol, but there are other important items on the European regulatory agenda. To “strengthen the powers of ESMA to promote the effectiveness of consistent supervision across the EU and beyond” is now priority action #1 of the EU’s CMU mid-term review. ESMA opinions are now focusing on differences between countries’ authorisation and delegation arrangements. These must meet minimum standards, but many regulations, including MiFID II, allow for different application. Some regulators complain about perceived lighter standards applied by others. The UK has historically “gold plated” MiFID whereas other countries stuck to its minimums.

Any shift from a “lowest common denominator” to a “highest common denominator” philosophy for harmonising European regulation could threaten the delegation model that provides the foundation for Europe’s globally competitive asset management industry. “Delegation is vital for the EU asset management industry to survive as a single market that can benefit from specialisation. It encourages member states to group service providers within a single jurisdiction. This lets asset managers inside and outside the EU outsource activities such as the depositary function. The model has worked well and has not caused any issues in terms of financial stability or investor protection,” reflects Krol. “Though some additional conditions are imposed on third countries, delegation criteria are broadly similar for countries inside, and outside, the EU. So a Brazilian fund manager can act as adviser for a UCITS.” AIMA is reiterating the importance of delegation in discussions with ESMA and European Commission officials.

Another harmonisation drive is CMU mid-term review priority action #7: to “facilitate the cross-border distribution and supervision of UCITS and alternative investment funds (AIFs)”. This entails a review of the national private placement regimes (NPPRs), and reverse solicitation rules. Both vary markedly between member states in terms of fees and obligations. Krol expects “a common definition of what constitutes marketing and pre-marketing” should emerge. One mooted possibility “is to move to a US style regime with one single entry point for third country funds,” he says. The concept is being piloted with ESMA overseeing a particular group of funds. Some industry bodies seem to like the idea of ESMA becoming the pan-EU gatekeeper. The Irish Funds Industry Association has called for precisely “a single EU passport notification portal”.

A review of ESMA powers may also change criteria for assessing AIFMD “equivalence” of regimes in third countries such as Cayman, Jersey, Guernsey and probably the UK too, post-Brexit. Therefore, the review may further delay any decision on third country passports (even without Brexit). Meanwhile, the four-year mark review of AIFMD has also been delayed, and might not be completed until the end of 2018, Krol expects. The AIFMD review also draws on parts of the CMU review.