A view on Brexit for asset managers
December 2016 | SPECIAL REPORT: INVESTMENT FUNDS
Financier Worldwide Magazine
A great deal has happened – and has been written about – since the United Kingdom chose to leave the European Union on the 23 June 2016. Not only does the country have a new prime minister (and we now know that she believes that “Brexit means Brexit”) we also have seen and read the volume of pages that have been written regarding ideas on what structure and shape any future relationship may look like between the UK and the EU. From a legal perspective, in the coming months we are awaiting the Great Reform Bill which will set out the legal pathway for the transition of current EU legislation into the UK’s statute books. However, at present, we have no further clarity on the exact manner in which Britain’s exit from the EU will happen.
London remains ‘city of choice’
Despite the lack of clarity around the UK’s divorce from the EU, what is becoming clearer is that, in reality, many key asset managers want to remain operating in the UK, and in particular in London, largely due to its unmatched ‘ecosystem’ of best in class global financiers, thought leaders and service providers (including the legal industry), culture, diversity and rule of law. With this in mind, it becomes necessary to look at the finer detail as to how asset managers may continue to operate and lead operations in London if they wish to do so.
The provision of investment services
At an entity level, many asset managers rely on the UK to act as a ‘gateway’ to the EU through the use of the Markets in Financial Instruments Directive (MiFID) passport for the provision of investment services (including portfolio management) or the use of the manager passport under the Alternative Investment Fund Managers Directive (AIFMD). While at this stage it is unclear whether the UK will remain part of the single market, it is surely necessary to view the world as if the UK may very well no longer be part of the single market; consequently, this EU/EEA passport functionality is likely to be switched off. In which case, on a practical level, firms will need to assess whether it is possible for them to either provide services on a cross-border basis on a bilateral basis or look at alternatives such as bolstering any existing permissions in other EU States or future-gaze into the possibility of using a ‘third-country passport’ under the MiFID II or the AIFMD regimes. The final option is reliant upon the concept of equivalence. Given that the UK intends to convert existing EU law into the UK’s statute books under the Great Reform Bill, there is a strong case to suggest that the UK should receive an ‘equivalence’ status, though it should be noted that this decision must be determined by the European Parliament, European Commission and the European Supervisory Authorities and therefore is reliant on possible subjective opinions by these bodies.
It should also be noted that the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) does not provide for a third country passport for UCITS managers but observes that in essence the vast majority of UCITS vehicles are not established in the UK, and often managers seek to establish their platforms in other EU jurisdictions such as Luxembourg or Ireland. Consequently, the status quo is unlikely to change for a number of asset managers in this respect, other than the need to look at how distribution channels into and out of the UK may remain open.
Maintaining distribution channels
From a product distribution perspective, it very much depends on the type of instrument as to whether a relevant non-EU/EEA passport is available. For instance, in relation to alternative funds, (including private equity or hedge funds) there is the possibility of either using the national private placement rules or, in time, using the third country passport under the AIFMD. Subsequently, there is not likely to be much change in the current analysis of this space. From a mutual fund perspective, while the UCITS product passport will no longer be available, given that a vast volume of UCITS products are ‘in-bound’ to the UK, in effect, firms, when marketing their UK established vehicles, would either end up in a similar situation as distributing under the current AIFMD regime or would need to seek opportunities for mutual recognition of distributing mutual funds on a bilateral basis. For example, in some EU jurisdictions, such as Ireland, there is already a willingness to distribute foreign registered mutual funds within Ireland, provided that they are registered with the US Securities Exchange Commission.
Thoughts for the future
While the dialogue on the shape and form of Brexit will likely continue for many months and years to come, a post Brexit world is likely to generate new ideas and opportunities for growth and change in the asset management industry. It will be for asset managers and the wider financial services industry to work out new ways of collaborating across jurisdictions but given the historic ability of this industry to adapt to change, it is clear that Brexit can only mean further innovation in this field.
Monica Gogna is a partner at Ropes & Gray. She can be contacted on +44 (0)20 3201 1630 or by email: firstname.lastname@example.org.
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