Now that we have a date in the diary - and Boris is no longer on the fence - we thought the moment opportune to highlight our analysis of the potential implications for the funds sector.
We also attach some other materials we have prepared on the Brexit effect, including a Note on Rumours and Realities of Brexit; a Joint Business Survey with ICC on Brexit and finally, our interactive Infographic, which will help you assess the potential "Brexit effect" across sectors.
The nature of "in" is now settled but the terms for "out" remain unclear and will depend on the operation of the WTO rules and any replacement terms which the UK is able to negotiate with the EU and/or the rest of the world.
Please get in touch with us if you would like to discuss the impact on any potential fund structures.
Brexit – Potential Impact on Funds
Depending on the exact terms negotiated for a Brexit (and assuming that the UK would not remain in the EEA) the impact on UK fund managers has the potential to be significant. As much of the relevant regulation is based on international initiatives, Brexit would not necessarily mean that the regulatory requirements on managers would differ significantly from current requirements but certain associated benefits may be lost.
Much would depend to what extent (and when) UK implementing legislation would be repealed, for example in relation to the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, and whether the UK could negotiate to retain the benefits of the EU based regulation in the form of marketing and management passports (which allow UK fund managers to market to investors based in the EU and provide services to entities in the EU).
Also, several fund vehicles such as UCITS and European Long Term Investment Funds (ELTIFs) must be EU domiciled and managed by an EU-based manager, which would prevent UK domiciles and managers for such funds unless these requirements are re-negotiated with the EU.
Impact on Alternative Investment Fund Managers
Depending on exit terms, post Brexit, UK alternative investment fund managers (AIFMs) would be treated as non EEA AIFMs and would only be able to market alternative investment funds (AIFs, i.e. broadly non-UCITS funds) to EEA investors under private placement arrangements if the member states where the investors are based permit such marketing. Under the AIFMD, a non EU passport may be introduced. This would allow non EEA domiciled and managed funds to be marketed within the EEA if the manager is authorised and certain other conditions are met. However, at present, the introduction (and timing) of such a non EU passport is not certain.
Impact on UCITS funds and managers based in the UK
A Brexit would fundamentally impact UK domiciled UCITS as, based on current requirements, these would need to be EU domiciled and self-managed or managed by an EU management company (ManCo). As the precise terms of a Brexit are uncertain we cannot yet fully know whether the UK will be permitted to remain a domicile for UCITS or ManCos. If this would not be the case, current UK UCITS or ManCos will have to be migrated/relocated to an EU member state (and re-authorised) or cease being a UCITS.
Impact on investment mandates/investment products that specify the UK as a single investable area
Mandates in Investment Management Agreements and investment policies in fund documentation, plus retail investment products, will likely need to be amended to allow for investment in a Brexited EU and UK (instead of the current EU). This will require consideration of the relevant variation terms and is likely to require agreement of the investors as well as regulatory notifications.
Investors will have to review their internal procedures and investment guidelines to accommodate investment in a Brexited EU and UK. For example, pension fund trustees may have to amend their Statements of Investment Principles.
Impact on current investors resident in a Brexited EU
Existing funds and investment products would need to distinguish between investors resident in a Brexited EU and UK to allow for separate a Brexited EU and the UK product offerings. As set out above, UCITS funds may need to be radically restructured.
Impact on Listed Funds
A post-Brexit world would see the LSE's Main Market and the Specialist Funds Market lose their status as EU regulated markets. It is likely that the UK would try to negotiate equivalent market status for these markets on the basis that the disclosure obligations applicable to funds and other issuers traded on those markets are equivalent to other EU regulated markets.
Equivalence status is likely to help maintain the competitiveness of London's markets and would minimise the impact on listed funds whose investors require them to be traded on a market that has a certain regulatory status. However, equivalent market status is likely to restrict the ability of the UKLA and HM Treasury to remove defunct provisions or unnecessary 'red-tape' laws, rules and regulations that have originated in Europe, so many of the Prospectus Rules and DTRs are likely to continue to apply to listed funds (even the bits that don't make any sense!).