How Will Brexit Affect UK Fund Managers?
The Financial Conduct Authority (FCA) and Her Majesty’s Revenue and Customs (HMRC) continue to advise firms that there is likely to be a transitional period after the “Leave Date” during which the UK would be treated for most purposes as if it was still an EU member state with access to EU markets on current terms, as well as maintaining AIFMD passporting rights. Such a transitional period is conditional on the withdrawal agreement with the EU being finalised and ratified before 31 October 2019.
The UK Government has prepared draft statutory instruments under the European Union (Withdrawal) Act 2018 should the UK leave the EU on 31 October 2019 with “no-deal”.
The Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 (the AIFM EU Exit Regulations) will make amendments to retained EU law relating to AIFMs to ensure that such rules continue to operate effectively in the UK once the UK has left the EU.
Implications for UK Alternative Investment Fund Managers (“UK AIFM”)
For UK AIFMs, the AIFM regime to be adopted if there is “no deal” is an almost identical regulatory structure to the current AIFMD.
If an agreement cannot be reached, the UK will cease to be a member of the EU on 31 October 2019 without a deal. What this means for UK AIFMs is that there will be no transitional arrangements. However, we understand that the FCA has explained that, in the event that the UK leaves the EU without an implementation period, it will not take a strict liability approach and does not intend to take enforcement action against firms and other regulated entities for not meeting all requirements straight away, where there is evidence they have taken reasonable steps to prepare to meet the new obligations by exit day.
Changes introduced by the AIFM EU Exit Regulations generally apply to third country and EU AIFs to allow these to be marketed in the UK post-Brexit, so these will have limited effect in relation to UK AIFM.
Implications from the European perspective
From a European perspective, UK-based AIFs will become third party AIFs when the UK leaves the EU from 31 October 2019 if no deal is reached. An AIFM based in the UK would also become a third country AIFM, meaning that any management or marketing passports under AIFMD would cease to exist. UK AIFMs would need to rely entirely on national private placement regimes to market funds in the EU. This would require a co-operation agreement between the FCA and the supervisory authority of the relevant European Economic Area (EEA) state. It is our understanding that the FCA is working on putting these in place, but they have not been finalised yet.
UK’s role as a provider of investment management services provided on a delegated basis
Co-operation agreements are also important because of the UK’s role as a provider of investment management services which are often provided on a delegated basis. The AIFMD requires a co-operation agreement between the competent authority of the AIFM and the supervisory authority where the delegate is based if delegation is to be permitted. In a no-deal Brexit scenario, a delegation would not be permitted under the AIFMD, unless co-operation agreements are in place between the FCA and European regulators.
Conclusion
Despite Brexit, UK depositary services will continue to be a key service offering as most UK AIF with EU AIFM will still have to comply with AIFMD and appoint a depositary in the home country of the AIF, i.e. the UK. Moreover, the fact that UK fund managers use UK funds services somewhat neutralises Brexit implications. Also, real estate or private equity fund managers (both EU or non-EU) continue setting up UK special purpose vehicles (SPVs) for structuring UK or non-EU deals. We have seen a rise in set up of UK SPVs by fund managers to take advantage of the UK as a tax jurisdiction with favourable treaties with Africa and emerging countries.
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Author: Deeya Jugurnauth - Associate Director, Alternative Investments
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