The non-EU passport queue: marketing real asset funds in a post-Brexit EU

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Private real asset fund managers' businesses have been comprehensively re-shaped by a steady flow of regulation from the European Union (EU) since the global financial crisis. Chief amongst these EU-made frameworks for institutional fund managers is AIFMD. Here we look at how Brexit may alter the balance that AIFMD has struck between increased compliance burdens on one hand, and smoother market access on the other.

EU passports – the quid pro quo

Britain's membership of the EU has undoubtedly increased the compliance burden on UK real asset fund managers, imposing greater reporting, transparency and corporate governance requirements. But in return it has offered them an EU-wide AIFMD "passport", aimed at reducing the cost of licensing and cross-border marketing within the single market.

As things stand, a UK-authorised manager simply notifies the FCA (the UK regulator) of its intention to market a fund in the EU. Then, after a maximum of 20 working days, the manager may market its services to professional investors across the EU. This simplified market access process, although not without flaws, is the quid pro quo for compliance with EU rules. It is currently only available to EU managers (although that may change soon).

Getting a third country passport

The EU has always planned to extend the AIFMD passport to non-EU managers. Such "third country" managers should then also be able to market to all EU professional investors once the European Commission has assessed their home country's regulatory regime, and judged it to be substantively equivalent to that of the EU.

However, the process of evaluating non-EU countries' equivalence has so far been extremely slow, with ESMA (the Europe-wide regulator) adopting a laboured, jurisdiction-by-jurisdiction approach. Even those countries that have "sat" and "passed" the "equivalence test" (Jersey, Guernsey, Japan, Canada and Switzerland) have still not actually been granted passports for their managers. And other countries like Australia and the United States have only been given a conditional approval by ESMA. The next step is for the European Commission to agree with ESMA, which is not necessarily going to be the case, and pass legislation extending the passport to some or all of these countries. 

Failing the equivalence test

Procedural inertia aside, if the UK regulatory regime after Brexit continues to mirror the EU's, it seems inconceivable that the UK would not pass the equivalence test. However there are two complications.

  1. Not only is the passport-granting process pedestrian, ultimate success for the UK is not completely guaranteed. Even the US, birthplace of private equity, has only been given a qualified nod by ESMA and could still face obstacles in the European Commission. Some have cried "politics" in the United States' case, and the politics at play will be even more complex during the Brexit negotiations. This could further slow progress in the UK maintaining access or regaining any access lost during the negotiating/transitional period.
  2. The UK may exercise its new-found legislative freedom to cherry-pick aspects of EU financial services rules and discard more some of the more burdensome aspects (for example, the FCA was against the financial transaction tax and caps on remuneration). The resulting UK frameworks might then "fail" the equivalence test. This would leave UK managers' access to EU investors dependent on continued availability of the patchwork of NPPRs (see below).

When and if real assets fund managers in a post-Brexit UK might obtain an EU-wide marketing passport is therefore unclear. It may even be worth the UK considering whether the AIFMD passport is worth sacrificing, if doing so would allow more suitable home-grown regulation.

Crossing the EU border without a passport

In order to market to EU investors in the absence of an EU or third country passport, UK alternative investment fund managers would have to make individual notifications to the relevant regulator of each EU country in which they wish to market, and comply with various sets of local regulations under various national private placement regimes (NPPRs). The other option would be to rely on "reverse solicitation", but this is not really a marketing strategy. Regardless of the lack of an AIFMD passport, UK managers seeking European capital under the NPPRs would still have to comply with the transparency and reporting aspects of AIFMD.

There is also a question mark over how long the NPPRs will remain available. The original plan was to abolish them in 2018. This seems unlikely until a working alternative allows EU access for at least US managers, as it seems unlikely that public policy would be to prevent European investors from investing in US (and soon perhaps UK) funds.

MiFID services

Many real asset fund managers also provide MiFID services under Article 6(4) of AIFMD, and are treated as MiFID investment firms in respect of such services.

MiFID investment firms in the EU have for a decade been using the MiFID passport to provide their services to clients around the EU. An un-negotiated Brexit would invalidate UK firms' MiFID passports. If ESMA eventually assessed the UK as an "equivalent" jurisdiction to the EU, then "third country" rules would apply, meaning investment firms would need to register a branch in the EU with a member state regulator or ESMA (depending on the type of investors). This would take time, and there could well be a period during which firms would neither qualify as MiFID investment firms nor be able to obtain a passport. This would mean they were unable to access regulated markets, central counterparties and clearing systems in EU member states.

A further unknown is how MiFID II will impact this process, especially given the new regime is now due to come into effect in January 2018, probably before any Article 50 deadline. AIFMD managers providing MiFID services could find themselves in limbo, having to implement MiFID II without knowing how the UK′s relationship with Europe will be revised.


The "passporting" of non-EU fund managers' services around Europe depends on the "equivalence" of regulation in the manager′s home jurisdiction. The UK might have to decide between losing Europe-wide access and complying with the EU′s rules. Alternatively it might negotiate special treatment, whereby UK fund managers would not have to comply with all the EU′s rules, but could still access EU investors (and eligible counterparties etc.).

The likelihood of the UK securing such special terms is hard to judge. Therefore the future regulatory frameworks for UK fund managers could depend on whether the EU is viewed as an important enough market to warrant full compliance.