Asset Management and Investment Funds

The 7 biggest Brexit related issues for the Asset Management and Investment Funds sector arising are:

1. Disruption to Marketing Arrangements: the capacity of UK firms to market their fund products within the EU 27 may be severely impacted by a hard Brexit. The capacity to sell EU domiciled funds into the UK may also be compromised. UK firms, even those with UCITS or EU AIFs, may find that although they have the correct product range, the lack of a MiFID authorisation or of a UCITS ManCo or AIFM authorisation means that they cannot market their products themselves and have to rely on third parties, or in the case of AIFs, on private placement regimes. Sales into the UK of EU products may likewise suffer a loss of straight forward marketing opportunities, with product producers possibly having to duplicate structures for the different market places.

2. Loss of Passports: UK firms will not be able to be UCITS ManCos as UCITS ManCos must be established in the EU and there is no Third Country regime (that also closes off the Super ManCo opportunity). Given the increasing indirect regulatory pressure on self-managed fund structures, UK firms wishing to offer their own UCITS products will have to set up an EU UCITS ManCo or either engage a third party ManCo or use a third party fund platform. Even then, real marketing challenges will remain.

The loss of passporting rights – at least until some probably very far off date – for UK AIFMs will also impact sales into the EU 27, although NPPRs may offer some options in a number of jurisdictions. The absence of a AIFM management passport, and the inability to be a Super ManCo, are potentially significant drawbacks.

Possibly of greater concern and impact is the loss of a MiFID investment portfolio management authorisation given the less than optimal Third Country regime. Although Third Country investment firms can provide services to retail and opt-up professionals based in the EU they can only do so if they set up a branch in the EU. In the case of per se professional clients and eligible counterparties, Third Country firms who do not set up an EU branch may be able to rely on individual national regimes allowing them market access, until ESMA determines whether their jurisdiction is “equivalent”. Ireland plans to allow such access but others of the EU 27 may not. It is a country by country determination, exposed to changing views and sentiments.

3. Portfolio Impact: Brexit may also have an impact at portfolio level. Being outside the EU will impact master/feeders, cross border mergers, recognised markets, etc. Other impacts may arise relating to, for example, asset stripping or “skin in the game” rules.

4. Longer Term Competitive Impact: UK firms who decide not to create a substantive EU presence run the risk, over time, of falling behind EU competitors who will have the capacity to generate revenue from an EU 27 client base, to be Super ManCos and to continue to leverage off the UCITS brand further afield. In time, that could lead UK firms becoming more vulnerable to takeovers by EU competitors.

5. Some Loss of Control: firms which decide to address the Brexit challenges may do so in a variety of ways, including the use of third party fund platforms and ManCos. These solutions have much to recommend them but come at a price, loss of control. The lack of say in choice of directors, administrators, depositary and other service providers may be an issue for some but may be welcomed by others. However, it is a factor to take into account when planning for longer term growth.

6. Cost: whichever way of addressing Brexit is chosen – to disregard the EU (or the UK) market entirely and focus elsewhere; to establish a substantive EU presence; or to engage a third party ManCo – firms face significant additional costs such as the cost of an EU authorisation (capital, boards, employees, set up costs, etc.); the cost of engaging a third party and/or reworking existing contractual arrangements; the “cost” of losing the economies of scale (or at least their potential) in being able to sell a single product in the UK and across the EU 27. The cost of revising offering documentation and, where the choice is to go onto a third party platform, the costs of coming off the platform, must also be taken into account. Firms, funds or investors (or all three) may end up bearing those costs.

7. European Investors Lose Out: EU 27 investors may lose out if UK managers lose interest in selling into the EU or in managing EU money or if it proves too burdensome for them to do so. The old fortress Europe arguments during the AIFMD negotiations are a reminder that the EU also loses from Brexit.

Relevant Publications:

Doing business in the EU after the transition period

Deadlines for Registrations and Updates for FCA Temporary Permissions Regime

Contingency Planning for a Hard Brexit

Re-preparing for a Hard Brexit

Extension of the registration deadline for FCA Temporary Permissions Regime and process for notifying updates to previous TPR filings

Brexit Update: Additional clarity received from the Central Bank of Ireland - Mar 2019

Brexit Update: Further clarity received from the Central Bank of Ireland - Feb. 2019

BREXIT: ESMA and European Regulators reach agreement on MoUs with the FCA

Briefing for Funds Marketed in the UK

ESMA issues reminder to investment firms on disclosure obligations under MiFID relating to Brexit arrangements

Third Country Delegation and Brexit MoUs – A Reprieve!