Two main events were scheduled for 2017 with regards to the Alternative Investment Fund Manager Directive (AIFMD). One was the first review of the AIFMD and the other the long awaited AIFMD passport extension to third country Alternative Investment Fund Managers (AIFMs). None of these seem to have been occurred yet at this point in time and this is not entirely surprising. The two initiatives seem somehow to be deeply intertwined, because the review of AIFMD was cited as one of the reasons for delaying the AIFMD passport extension to third country managers.
The process of extension of AIFMD passport to non-EU AIFMs is very good example of the application of the so called equivalence, when dealing with international financial regulatory and supervisory regimes. We believe useful to refresh some of its key concepts, in light of a recent assessment paper from the European Commission on equivalence decisions in financial services. This should be even more interesting in the current political conjuncture of ever mounting speculation and chronical uncertainty with regards to the future of United Kingdom financial services post-Brexit.
The aim of this brief post then is to give more clarity on equivalence decisions adopted by the European Commission. This will offer an opportunity to discuss further on the subject should this path be pursued in relation to financial services offered by firms in the United Kingdom after a decision is reached at European level on Brexit. This would also make more understandable the process carried out so far on the AIFMD passport extension to non-EU AIFMs.
Regulatory approaches for cross-border regulatory interactions
We have been recently hearing more about equivalence than we ever did at all since its introduction in the aftermath of the global crisis of 2009. In the majority of recent cases, we heard about it in relation to the treatment of UK financial services after Brexit, mostly in comparison with the passporting and always highlighting its different nature and more limited scope. We have of course seen it cited when discussing about the AIFMD passport extension. It is little known that there are at least 15 acts containing provisions to empower the European Commission to decide on equivalence of foreign rules and supervision alike. It is worth mentioning that whilst there are equivalence provisions both in AIFMD and MiFID, for what we are specifically concerned, there are no such provisions for UCITS same as other financial products.
Both equivalence and passporting – along with i) national treatment; ii) exemptions and iii) international agreements – are part of the same family of regulatory approaches employed to deal with cross-border relations between European and foreign regulations. Created as a consequence of the global financial crisis of 2009, when interconnection of the worldwide financial markets exposed European Union financial systems to risks stemming also from foreign jurisdictions, these approaches are part of the international strategy of the European Union on financial services. Rather than having in mind liberalisation of international trade in financial services, these various approaches – equivalence in the first place – ultimately aim at establishing a system of convergence towards rigorous prudential standards for international regulations.
Aims, mechanism and dynamics of equivalence decisions
Equivalence seeks to fulfil two main objectives. In the first place, achieving a balance between protection of investors in the EU and the need to maintain an open approach for EU financial markets with the rest of the world. Secondly, ensuring that cooperation between EU and relevant third countries is enhanced and that convergence towards international regulatory standards is constantly fostered.
What empowers the European Commission to exercise its discretion in a decision of equivalence is always the main legislative act of reference, containing the specific conditions and criteria according to which it can be decided that it is safe to rely on the regulatory and supervisory framework of third countries when an international and cross-border element is involved. Equivalence is always the outcome of a unilateral and discretional decision of the European Commission and it is presented by way of a delegated Act of the European Commission. Whilst third countries have to request to receive an assessment, there is no obligation on the European Commission to both carry out the assessment or to reach a positive conclusion, especially in cases where the relevant criteria are not met.
Assessments are carried out by the European Commission also on the basis of technical advice provided by local industry supervisory agencies and typically involve an intensive and extensive dialogue with the relevant foreign authorities. The approach taken in the assessment is always outcome based, in that the foreign regulatory and supervisory regime needs to prove to pursue the same goals of investor protection of the European system, even if when these are obtained not necessarily through the exact same means. Realistically, through an assessment of equivalence and by relying on an equivalent foreign regulatory framework it is also possible to significantly reduce overlaps and burden of EU competent authorities, introducing also the possibility of reciprocity with the specific foreign countries.
Conclusions
There are of course some disadvantages in the equivalence regime when compared to the passporting or even mutual recognition regimes. Equivalence is more limited in scope and inherently more fragile due to the discretion exercised by the European Commission also in terms of revocation of positive assessments previously granted.
However, despite the appearances and some inevitable scepticism, it seems that more countries than we could ever expect are engaging bilaterally in order to solve potential gaps between regulatory systems and ensuing regulation and this is not only in relation to the AIFMD passport extension. The findings of the report of the European Commission are that so far there have been 212 equivalence decisions adopted by the European Commission on a total of 32 jurisdictions deemed equivalent accordingly. What is more important is that a more robust practice around these decisions is being developed over time, which gives more certainty to this framework. A potential scenario for United Kingdom post Brexit, most probably so in our view.