Asset managers are arguably the best placed to adapt to post-Brexit London. Both the existence of third country passports and the opportunity to “delegate” management functions back to London offers the ability for companies to continue to maintain their presence in the UK. However, to achieve this continued regulatory compliance must be seen as a priority.
The Brexit Challenge:
Asset managers face two major hurdles in a post-Brexit world:
- the loss of their marketing passports which enables them to sell their UK domiciled funds into the European Economic Area (EEA) without impediment
- the loss of the right to designate Undertakings for the Collective Investment Transferable Securities (UCITS) funds . Instead, outside of the EU, they will become merely Alternative Investment Funds (AIF). For those selling and marketing these funds within the UK, the impact will be minimal, however, those attempting to sell these funds into the EEA will encounter significant problems.
Possible responses: Equivalence for AIFM
Equivalence regimes could offer a potential solution. The AIF Directive (AIFD) has a third country passport and ESMA has recently approved five states for the passport on grounds of “equivalence.” In July 2016, the European regulator granted full equivalence approval to Canada, Guernsey, Japan, Jersey and Switzerland paving the way for the provision of the AIFD third country passport. If the Commission approves these recommendations, along with the UK in a post-Brexit world, then it could be possible for AIF Managers (AIFM) to continue to use the AIFD passport to distribute their funds within the Single Market.
However, UCITS funds will face greater impediment. The loss of the UCITS designation means that the fund could only be sold to institutional clients, not retail clients under the third country AFM passport. This is a significant issue as the vanilla nature of the UCITS fund is specifically designed as a retail product and boasts a strong brand image around the world.
The Solution: Re-Domicile and delegation
In order to maintain the UCITS designation, and thus maintain access to retail clients on a cross-border basis, the fund would need to be domiciled into the EU. This has precedent as the majority of UCITS funds managed from London, and produced for cross-border sale, are located within Ireland and Luxemburg. By domiciling the fund within the EU it would keep its UCITS designation and with it the UCITS marketing passport for cross border sale.
However, outside of the EU, UCITS managers would lose their UCITS management passport which enables them to manage the fund from anywhere in the EU. This has enabled asset managers to register UCITS funds in Luxembourg or Dublin and sell them across the continent, while keeping the vast majority of fund managers and marketing and sales teams in London.
In order to maintain this arrangement the UK would need to seek an agreement between the domiciled state regulator and the FCA and prove themselves an “equivalent” regulatory regime. Countries like Ireland and Luxembourg have historically been very accommodating to third country managers such as America and Australia, and so an agreement of this sort would be far from extraordinary. However, continued compliance with the likes of MIFID II is likely to be crucial to ensure a quick and smooth recognition.
Asset managers’ next steps:
The presence of key third country passports, along with the EU domicile of most of London’s UCITS managed funds, makes for a smoother Brexit transition for asset managers than other finance sectors. However, much hinges on maintaining our status as an equivalent third country. There can, therefore, be no let-up in ensuring regulatory compliance.