But the EU intends to improve the current status and address the lack of efficacy.
The European Commission is aware that it must review the Directive’s application and scope. In that respect, the European Commission issued an AIFMD assessment report to the European Parliament and the Council on 10 June 2020. In this report, the European Commission identified various inefficiencies, notably regarding the cross-border distribution of AIFs. It recognized that this lack of efficacy is caused by local gold-plating requirements (for instance, in the case of NPR), divergences in the national marketing rules (definition of marketing activities) and non-harmonized interpretations of the AIFMD.
Regarding the latter, the lack of agreement on the definition of a professional investor impairs the efficacy of the marketing passport. In some countries (Austria, Germany, Italy and Sweden), it is possible to use the marketing passport to target sophisticated retail investors who have a high net-worth and experience in financial markets (e.g., the so-called “semi-professional” investors in Germany). The definition and the level of wealth required to qualify as sophisticated retail investors differs significantly from one MS to another.
The need for greater convergence regarding the definition of a professional investor was also identified by ESMA in its letter to the European Commission on 18 August 2020 highlighting areas of the AIFMD where improvements could be made. ESMA called for more precision regarding what the European Commission has said. For example, if any new investor category is introduced under the AIFMD (such as “semi-professional” investors), ESMA recommends that the appropriate investor protection rules are also put in place. Moreover, the AIFMD passport should be restricted to marketing to professional investors only, and not extended to semi-professional investors which could currently be the case in some MS.
In addition, ESMA also stressed the importance of clarifying the reverse solicitation definition. It cannot be considered as a marketing route, but this notion is currently subject to different market practices amongst the MS. A harmonized interpretation by each MS should be considered to protect investors.
In the end, are perfectly homogenized rules across the EU a utopia?
The AIFMD’s objective was to create a solid legislative framework. Nine years later, there are still many local practices, interpretations and even gold-plating requirements regarding the marketing of AIFs within the EU. That being said, some improvements are already on their way.
A “new” Directive (2019/1160/EU) was put in place in July last year, going one step further in the harmonization of practices at EU level. While it has addressed some issues, such as the question of pre-marketing, many others have remained unanswered, for example, passport extension to third-countries, the possibility of marketing to retail, investor classification, reverse solicitation, etc. However, the European institutions are aware of these weaknesses and consultations are being held to reach a more level playing field across all MS.
In the end, (i) AIFs are not products that are designed for retail customers; and (ii) based on Deloitte’s discussions with EU regulators, they are not ready to provide access to third-party players who do not respect the EU’s rules.
Regarding the initial enthusiasm of 2011, we believe that there was a gap in expectations between the investment management industry and the goals of the AIFMD. European bodies wanted to impose more governance and their intention was not to revolutionize the industry by providing marketing passport options to retail or non-EU markets at first.
But let us not conclude on a negative note. Even if we still face a long journey ahead, we believe that the standardization of distribution matters accomplished so far is already a great achievement. The figures speak for themselves: the total net assets of AIFs increased by more than 250 percent from 2011 to 2019. Indeed, the marketing passport has successfully streamlined the distribution of EU AIFs managed by EU AIFMs, following the example of UCITS. Moreover, the Directive has also addressed inconsistencies related to private placement of non-UCITS amongst MS in abrogating these regimes and forcing MS to at least clarify the conditions of retail marketing.