On the 23rd of June, the UK voted to leave the European Union. Known as “Brexit”, the UK Government with now initiate Article 50 of the Lisbon Treaty, starting the two year procedure leading to the UK’s eventual withdrawal from the EU and, ultimately, to the establishment of a new relationship with its former EU partners.
Whatever your position, it is clear that Brexit will have a significant impact across a wide range of sectors – financial services, trade, employment, tax, competition and others. Asset managers, be they based in the UK, the EU or elsewhere, will be caught up in this, and will find themselves affected by Brexit, albeit to varying degrees. In this client alert, we set out a few issues that one should be aware of as the UK Government begins its withdrawal from the EU.
Loss of EU passporting
One of the key consequences of Brexit is that on current rules UK firms would lose managing and marketing passporting rights into the EU. Passports have been used extensively to further the single market and have shaped the way many asset managers conduct their business, for example, enabling funds to concentrate in centres such as Dublin and Luxembourg, or non-EU managers, from the US or Switzerland for example, to establish a hub in London, from which it can ‘passport’ into other EU Member States. Brexit would mean that UK firms would no longer qualify for a passport under existing EU legislation, which would have an impact on those asset managers who rely on a passport to conduct their business, for example if they rely on a passport to market and distribute their funds, or to provide managed account and investor advisory services on a cross-border basis.
Managing and Marketing of UCITS and AIFs
A UCITS fund must be EU domiciled and managed by an EU management company. After Brexit, funds established as UCITS in the UK would no longer fall within the scope of the UCITS Directive, and would therefore be unable to use the passport provisions which allow UCITS funds established in one Member. State to be managed and marketed in other Member States. As a consequence, asset managers for whom passports are integral to their business model will need to change the way in which they manage and market their funds.
If the fund remains in the UK, it is likely that the UK regulator would regard the fund for UK regulatory purposes as a type of non-UCITS retail fund, which would be categorised as an ‘alternative investment fund’ (AIF) under AIFMD.
Change of domicile and delegation
Loss of management and marketing passports may lead some funds to consider changing domicile. For example, UK management companies would no longer be able to act as managers of EU UCITS and EU management companies would no longer be able to act as managers of UK UCITS. They may choose to establish new management companies in the EU and the UK for this purpose (or, where there are existing affiliates in the EU, consider some form of group re-organisation to re-domicile in another EU jurisdiction).
Additionally, new management companies should be able to delegate portfolio management to the existing management company, subject to compliance with the requirements of the UCITS Directive on delegation to non-EU managers. Existing delegation arrangements may need to be updated to reflect these requirements.
Changes to investment mandates and parameters
UCITS may not invest more than 30% of their assets in non-UCITS collective investment schemes. This means that investment mandates may need to be re-assessed to take into account the UK not being in the EU. Indeed, more broadly than UCITS, asset managers (both UK and the EU) will need to consider any EU related investment parameters to accommodate investment in the EU (minus the UK) and the UK. This may require managers revisiting and updating investment management agreements and fund documentation. Investors in funds may also be subject to similar restrictions, and so will need to review their internal procedures and investment guidelines in the same way (for example, if investors have any restrictions on investment in non-EU funds).
Changes to investment mandates and parameters
UCITS may not invest more than 30% of their assets in non-UCITS collective investment schemes. This means that investment mandates may need to be re-assessed to take into account the UK not being in the EU.