Brexit: Where are we now and what next?
13th May 2021
The asset management industry has been discussing Brexit and its impact on the investment funds industry since 2016. That sense of confusion around Brexit and its many uncertainties and unknowns since 22 June 2016 has led to a multitude of different approaches and attitudes towards it.
The impact of Brexit and on-going fund governance
From a UK managers perspective and looking to continue to market in the EU 27, first and foremost, many managers decided to launch EU domiciled funds to take advantage of the UCITS and AIF passporting regime (via an AIFM). Ireland and Luxembourg were the leading domiciles, but some managers chose jurisdictions like Germany and France. In terms of the ability to continue distributing these funds in the EU 27, there have been a range of solutions. Specifically, the solutions that Zeidler Group saw were:
- Setting up a licensed entity in the EU 27 (management company or MiFID entity)
- Appointing a third-party management company / AIFM
- Becoming a tied agent of a EU 27 licensed firm
- Putting in place secondment or chaperoning arrangements with a EU 27 licensed firm (third-party management company or sister entity of the wider group)
- Obtaining a light national license in specific jurisdictions such as Germany
- Assessing what activities an entity could undertake in each targeted EU member state that would not trigger a license requirement
- Appointing third-party distributors in key markets to lead the distribution activity
- Nothing at all!
There are several pros and cons to each of the above solutions and different managers chose different solutions. Some of these solutions were more interim in nature to ensure that there was no disruption to distribution activity in the short term. Unlike the UK, there was no EU-wide temporary provisions regime (TPR). Although there were some limited national TPRs available.
On the flipside, from an EU market participant’s intention to access the UK, the picture was clearer due to the temporary permissions regime introduced by the FCA. This regime allowed funds that there were passported into the UK (as well licenses that were passported) to apply to continue being registered or continue providing services post-Brexit for a limited time period (between 3-5 years) until the FCA allocates a landing slot to switch to a local marketing authorisation directly with the FCA.
What about EU funds that have not been able to take advantage of the TPR?
For the time being, the available avenue for marketing UCITS in UK post Brexit towards retail investors and professional investors differs. In case, promoters are looking to sell their EU-domiciled UCITS or AIFs to professional investors, then they can register under the national private placement regime (NPPR). The UK NPPR is actually relatively straightforward, and the registration is quite quick to conclude. However, there is the additional burden of Annex IV reporting. In case promoters wish to sell their EU-domiciled UCITS to UK retail investors, they will need to use the framework under article 272 of the Financial Services and Markets Act (FSMA). This framework has been mainly used by funds established in the Channel Islands. This framework will have to be relied upon until the introduction of the UK Overseas Fund Regime. This regime would be an equivalence-based mechanism to permit overseas retail investment funds to be sold to UK investors. The HM Treasury would make an assessment of investor protection levels in various jurisdictions.
What about selling UK domiciled funds to EU investors post-Brexit?
Prior to 1 January 2021, authorised UK AIFMs were able to market UK (and EU AIFs) to professional investors via the AIFMD marketing passport, which entailed a single application to the FCA to enable marketing of a UK (or EU AIF) anywhere in the EEA. Likewise, UCITS managers were able to benefit from the UCITS passport.
Unfortunately, these passports are now no longer available to UK AIFMs, which means they can now only market AIFs in the EEA via the so called National Private Placement Regimes (NPPRs) in the various jurisdictions. However, this makes things much more complex for a number of reasons. Firstly, not all EEA jurisdictions have a NPPR. For example, Italy does not have a NPPR. While France, Spain and Austria do have a NPPR, however it is virtually impossible to register under these regimes. Even in less restrictive jurisdictions such as Germany and Denmark, the process takes a few months and may require the appointment of additional service providers (depositary-lite). There are jurisdictions where registration under the NPPR is relatively straightforward such as Luxembourg, Ireland, and the Netherlands. Another restriction is that the registration under the NPPR only permits marketing to professional investors. Lastly, registering under the NPPR triggers the requirement to perform annex IV reporting in each jurisdiction where the fund is registered under the NPPR.
There are significant differences in the NPPRs between member states, the application process takes time and is burdensome and costly (compared to passporting) and adds jurisdictional and investor restrictions. However, for some UK promoters the NPPRs may fulfil their purposes despite the drawbacks.
What is the current situation with Brexit?
That agreed deal between the EU and UK covered financial services in an extremely limited way and the focus shifted to a Memorandum of Understanding (MoU) to be agreed between the EU and the UK by 31st March 2021. While the MoU was agreed, it is important to note that not a lot of details on the future relationship between the EU and the UK for financial services were contained. In particular, there was no mention of regulatory equivalence. Equivalence has always been a complex topic as it is not permanent in nature and can be revoked by the EU at very short notice. Hence, while there is a desire for equivalence from market participants, there is also some scepticism of the benefits of pursuing it keeping in mind that most market participants already have a Brexit solution in place and that equivalence may never be granted (or could quickly be revoked) seeing that there is an expectation that the UK would diverge from the EU on various regulatory matters and the EU has stated that convergence was a key consideration for the granting of equivalence. One example is that the UK has opted out of adherence with the EU’s SFDR. The noise from the EU indicates that there is no rush to make a decision and even the MoU indicates the same. A slow and gradual development of a new relationship that will take years to conclude is likely.
What does the future of the UK look like as a fund hub?
The UK has taken the first steps in redeveloping its market structures. There is currently a public consultation on ideas to make UK domiciled funds more appealing. It will likely be an uphill task to compete with EU fund centres such as Ireland and Luxembourg. However, the UK does have an opportunity to create a practical, lean and ambitious fund centre that could be appealing to fund promoters struggling with the burden of increased regulatory changes in the EU.
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