What does the future lie for asset managers since the decision to leave the European Union? When reviewing the risk of Brexit for investment managers, we should assess the continuing ability of UK based investment managers to access the EU market. Many speculations arose as to what the future held for asset and fund managers, including the dependance of the UCITS passport to continue business throughout the European Union and more.
This article looks to consider how to best track and reference the ever increasing array of EU requirements going forward.
The EU asset management regime The main EU asset management regime is contained in the Markets in Financial Instruments Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS). In addition, OTC derivative transactions by asset managers are regulated under the European Market Infrastructure Regulation (EMIR).
These apply a series of very detailed regulatory requirements to firms based in EU member states which, in return, are given passporting rights elsewhere in the EU.
In general, UK based investment managers access fees from clients or investors through the sale of UCITS, the sale of AIFs and the provision of segregated account services. It follows that, in assessing the risk of Brexit for investment managers, we should assess the continuing ability of UK based investment managers to access the EU market in each of these three areas.
In the case of the first two, access to the rest of the EU is often already structured through European centres like Dublin, Luxembourg and Malta (EU Gateway Hubs). These arrangements can be expected to remain largely unchanged after any Brexit. Those who do not have this infrastructure are likely to have ample time, during the two-year negotiating period, to put such arrangements in place. The continued provision of segregated account services should not be too difficult as explained below.
As indicated above, the following discussion assumes that no special access deals are struck as part of the exit arrangements, but that existing legislation broadly remains in place in both the EU and the UK (although the UK would now be outside the EU and have no special EU position).
As such and post Brexit, UK managers would, in EU parlance, become “third country firms” and would cease to benefit directly from the MiFID, AIFMD and UCITS passporting regimes. However, the UK’s existing EU-based laws should be fully equivalent to those of the EU. Therefore the UK would be well placed to take advantage of EU Gateway Hubs and concessions available to third countries, as many non-EU countries already do. There would be some transitional issues – for example, would the UK (and indeed the EU) continue to implement MiFID II post Brexit? Also some currently passported services, such as the MiFID/AIFMD branch passports and cross-border UCITS manco services, are not designed to extend to third countries and might need to be terminated or replaced with an EU-authorised service provider.
As for UK groups with continental affiliates, the fact that the continental affiliates are in the same group as a UK manager should not affect their position as EU firms, apart from certain requirements that apply on a UK group consolidated basis. For example, for a group headed by a UK bank, the continental affiliate could fall outside the scope of the onerous remuneration restrictions that might otherwise apply under the new Capital Requirements Directive. Funds and managers in EU Gateway Hubs would continue to operate within the EU regime and should be able to continue to delegate portfolio management to UK based investment managers (see further under “portfolio management” below).
UCITS management and marketing
Post Brexit, an existing UK UCITS and its UK manager would continue to be UK-authorised and their activities would be unaffected in the UK domestic market.
However, the fund would cease to qualify for the UCITS marketing passport. As already noted, UK managers often use funds set up in EU Gateway Hubs for their EU marketing so there would be little or no change here. If this was important there should be ample time and limited expense for a UK fund to be re-domiciled, or a UCITS clone fund established in an appropriate EU member state.
A UK manager would still be able to set up a UCITS in an EU Gateway Hub whether using a local affiliate as a ‘self-managed’ fund or by hiring a local contractor to act as the UCITS management company. The new fund could then appoint the UK manager as its delegated investment manager. According to ESMA’s UCITS V draft guidelines, the UCITS management company would need to ensure that the delegated UK investment manager was subject to remuneration policies equivalent to those in UCITS V or agree to meet them on a contractual basis.
A third country manager is usually able to set up a UCITS and act as its delegated manager in the way described above.
UK rules similarly permit EU and non EU managers to act as delegates for a UK retail fund provided certain standards are achieved.
As for marketing, assuming the UK’s existing UCITS inward passporting regime dropped away, an EU UCITS would no longer have automatic access to the UK retail markets. It is likely to be relatively easy for such a fund to obtain approval as a UK recognised scheme which would give it equivalent marketing rights, at least where the fund has a UK investment manager. EU Gateway Hubs, in particular, would be well-placed to obtain general recognised status for their UCITS funds.
EU UCITS management companies may also be permitted to continue to manage a UK UCITS after a Brexit.
Non-EU retail funds, such as US registered funds, would continue to be treated as AIFs subject to AIFMD marketing restrictions in the UK, including the UK’s implementation of AIFMD article 42 discussed below. Post Brexit, the UK Government could permit these funds to be marketed in the UK under its less onerous pre-AIFMD private placement regime.
Source: Dechert LLP