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This article sets out some of the key points for fund managers to consider in the event of a “Hard Brexit” on October 31, 2019, whereby the UK will be treated by the remaining 27 European Union (EU) member states, and the other European Economic Area (EEA) member states (i.e. Iceland, Liechtenstein and Norway), as a third country on leaving the EU.1 It provides some high-level observations on the implications for alternative investment fund managers (AIFMs), Undertakings for Collective Investment in Transferable Securities (UCITS) management companies and firms authorized under the Markets in Financial Instruments Directive (MiFID).
AIF Management - UK AIFM
UK AIFMs will become non-EEA AIFMs after Brexit. The management of an EEA AIF by a non-EEA AIFM is outside the scope of the current AIFM Directive rules, because the third country passport has not been activated. Whether such an arrangement is permitted depends on the rules of individual EEA member states. Some EEA member states may not permit such an arrangement. Even where a UK AIFM, as a third country AIFM, is generally permitted to manage an EEA AIF, there may be certain circumstances for which this will not be acceptable. For example, a Luxembourg Reserved Alternative Investment Fund requires an EEA AIFM to act on its behalf.
A UK AIFM should be able to continue its management of a non-EEA AIF in the same manner as before Brexit.
AIF Marketing in the EEA by a UK AIFM
Marketing of a non-EEA AIF in the EEA post Brexit will need to be undertaken by a UK AIFM pursuant to Article 42 of the AIFM Directive, provided that private placement of this kind is permitted in the relevant EEA member state. The current basis for marketing a non-EEA AIF by a UK AIFM is under Article 36 of the AIFM Directive. If availing of a local private placement regime, a UK AIFM will need to consider any relevant private placement restrictions in relation to the AIF in the jurisdiction in which the AIF is being marketed.
An EEA AIF can passport itself to investors in the EEA if it has an EEA AIFM. UK AIFMs will lose this passport right after Brexit.
UCITS Management – UK UCITS
The UK implementation of the UCITS Directive post Brexit does not allow for a UK UCITS to be managed by a management company based outside of the UK. Thus, if a UK UCITS fund has a non-UK management company, a new UK management company will need to be appointed post Brexit.
UK UCITS Marketing in the EEA
A UK UCITS will become a non-EEA AIF post Brexit and will no longer benefit from the UCITS passport in the EEA. Thus, a UK UCITS will be marketed under Article 42 of the AIFM Directive within the EEA.
UK MiFID Investment Firms
UK investment firms authorized under MiFID, including exempt-CAD firms, will no longer benefit from the authorization to passport investment services and activities in the EEA. Thus, such UK firms will have to develop distribution strategies to replace the loss of their marketing passports, as such they will no longer be allowed to provide services in the EEA on the basis of their current authorizations.
A MIFID investment firm will continue to be able to act as a sub-delegated investment manager for EEA AIFM, UCITS management companies and MiFID firms facilitated by the fact that the European Securities and Markets Authority (ESMA) and EU/EEA securities regulators have agreed Memoranda of Understanding with the FCA as to how they will cooperate post Brexit.
UK MiFID Branches Passported into the EEA
Branches of UK MiFID investment firms in the EEA, including exempt-CAD firms, will become third country branches and will need to comply with national requirements applicable in the Member State where the branch is established and with the regime set out in MiFID II, as applicable. The provision of services will be limited to that EEA member state’s territory.
AIF Management – EEA AIFM
An EEA AIFM can continue to delegate to a UK investment manager operating under MiFID permissions after Brexit. This is facilitated partly by the fact that the ESMA and EU/EEA securities regulators have agreed Memoranda of Understanding with the FCA as to how they will cooperate post Brexit.
The EEA AIFM will need to meet the substance requirements of the AIFM Directive for an AIFM. The AIFM cannot be a letter box entity, whereby the AIFM “no longer retains the necessary expertise and resources to supervise the delegated tasks effectively.”
EEA AIFMs will be able to continue to provide services in the UK within the scope of their current passports for a limited period of up to three years after Brexit, within the FCA’s Temporary Permission Regime (TPR), while being placed in a queue for full scope FCA authorization.
EEA AIF Marketing in the UK
Existing EEA AIFs can avail of the FCA’s TPR to be marketed in the UK on the same terms and subject to the same conditions as they were able to before exit day for a limited time. However, new sub-funds to EEA AIF umbrella schemes which have entered the TPR cannot be added to the TPR. New sub-funds will need to be marketed via the FCA’s National Private Placement Regime procedure.
UCITS Management – EEA UCITS
The UCITS Directive does not envisage a UCITS fund having a management company from a third country. Thus, an EEA UCITS with a UK management company will need to change a UK management company to an EEA management company post Brexit. Duff & Phelps’ management company can assist if required.
EEA UCITS management companies can continue to delegate investment management to a UK investment firm authorized under MiFID post Brexit. The UCITS directive requires that cooperation agreements are in place between the UK and relevant EEA member states and ESMA announced that these agreements were finalized in February 2019.
EEA UCITS marketing in UK
The operator of an EEA UCITS will be able to avail of the FCA’s TPR. The benefits of the TPR for a UCITS will extend to being able to market ‘new sub-funds’ (i.e. those authorized by the relevant home state regulator after exit day) in the UK, subject to certain conditions.
EEA investment Firms – Branches in the UK
A UK branch of an EEA investment firm should avail of the FCA’s TPR. The FCA expects firms in the TPR to subsidiarize and be authorized by the FCA within three years. Firms should develop their plans for FCA authorization of standalone subsidiaries. Duff & Phelps can assist firms with FCA authorization.
A “Hard Brexit” may pose some challenges for UK and EEA investment management firms in restructuring their businesses that may require the appointment of new UCITS management companies/AIFMs and the development of new marketing strategies.
The Duff & Phelps AIFM/UCITS Super Manco may be able to assist firms in the development of these strategies.
Reorganization due to regulatory changes may also have UK and EU tax implications for managers that will need to be reviewed. For further details see a recent Duff & Phelps article on Brexit - Tax Implications for Asset Managers.
1 For ease of reference we refer to EEA member states throughout this article. Firms should check on a case by case basis whether specific requirements would only apply with regard to EEA member states and not to EU member states, and vice versa.
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