The voters have spoken. Britain will (absent any new deals) leave the EU.
Under the EU Treaty, the exit process should take at least two years. During this two-year period, UK-based asset management entities, including UK subsidiaries of US and other overseas firms, will continue to take advantage of current EU rights but will need to adapt their businesses to the new reality.
This will, subject to the terms of separation, include:
- UK-domiciled Undertakings for Collective Investment in Transferable Securities (UCITS) funds and alternative investment funds (AIFs) would lose their EU marketing passports. UK UCITS funds would become AIFs. If EU marketing is required, UK funds could either be marketed under the Alternative Investment Fund Managers Directive (AIFMD) national private placement regimes (where these are permitted) or they could be re-domiciled to an EU member state. Extending the AIFMD third country passport to the UK would mean UK AIFs could continue to be marketed into the EU without substantial change, and UK UCITS funds could be marketed to professional investors in the EU as AIFs. Existing and new Irish, Luxembourg and other EU-based UCITS and AIFs will, subject to the following, continue largely as before and the two-year period will allow plenty of time to add new ones where required. Dechert is uniquely positioned to help here with our Luxembourg and Irish on-the-ground fund teams.
- UK-based UCITS management companies and AIFMs of EU funds established outside the UK would lose their EU management passports. To preserve these, funds will need to become self-managed or appoint a (non-UK) EU UCITS management company or AIFM. If the AIFMD third country passport is extended to the UK, UK AIFMs will be able to continue as before without substantial change.
- UK-based distributors would lose their EU passports to provide cross-border marketing services. To continue marketing into the EU, distributors would need to comply with local third country exemptions. Alternatively, a new distribution entity could be established in an EU member state. However, if the UK is designated as equivalent under the Markets in Financial Instruments Directive (MiFID II) (and the UK should implement MiFID II itself before the end of the two-year exit period), MiFID II’s new third country regime should permit UK distributors to continue to market to professional clients throughout the EU, which may avoid substantial change to their current business.
- UK-based portfolio managers of separately managed accounts would be in a similar position to UK-based distributors. To continue managing EU accounts, they would need to comply with local third country exemptions, but some investors are prohibited from contracting with third country managers. Alternatively, a new portfolio management entity could be established in an EU member state. However, if the UK is designated as equivalent under MiFID II as can be expected, UK portfolio managers would be able to continue to manage the assets of EU professional clients without substantial change.
- EU UCITS funds and EU AIFs would lose their rights under EU directives to be marketed in the UK. However, the UK is likely to continue to permit these funds to be marketed in the UK broadly as they are now, especially where they have a UK investment manager.