The European Commission issued a series of public notices on 8 February 2018, plainly spelling out the legal and practical consequences of Brexit for a range of market sectors including asset management, banking, investment services and insurance. From an asset management perspective, the Commission made it clear that unless a ratified transition arrangement is put in place by 30 March 2019, then from that date:
- UK UCITS management companies and AIFMs will lose their passporting rights and become treated as 'third country' AIFMs;
- UK UCITS, AIFs, EuVECAs, ELTIFs, EuSEFs and money market funds will become non-EU AIFs, capable of being marketed to EU investors only where permitted by national private placement regimes; and
- Any EU27 branch of a UK AIFM/ UCITS management company will become treated as a branch of a non-EU AIFM.
On the thorny topic of delegation, the notice (the full text of which can be found here) stresses that unless the requisite regulatory co-operation agreements are put in place between the UK and the EU27, fund managers will lose the authority to outsource portfolio or risk management activities of EU funds/ clients back to UK entities. The Commission also reiterates the focus in ESMA's previous opinion on the risks of UK managers relying on 'letter-box entities' in the EU27, and that objective reasons will be required for any delegation of tasks back to the UK.
Finally of note, the Commission encourages investors and managers to consider the more granular impacts of Brexit, such as the continued eligibility of investments (for example if a UK UCITS becomes re-categorised as a non-EU AIF), or the possible need to provide additional investor disclosure (through annual reports, UCITS KIIDs or otherwise) of the legal implications of any such restructuring.
In one sense, the Commission has not said anything new or material which we didn't already know. What is striking, though, is the frank and robust tone of the message. It is unusual that the Commission has chosen to spell out the stark consequences of a "hard Brexit" to industry stakeholders in such a fashion. It suggests a concern about the slow progress in the UK/ EU political negotiations and perhaps a concern about complacency/ presumption that a transitional arrangement will be agreed and a "hard Brexit" avoided.
In that respect, the Commission's notices echo a similar set of recent letters from the Central Bank of Ireland to Irish authorised fund management companies and investment fund boards, seeking to ensure that appropriate impact assessment and planning is underway. The Central Bank is already seeing the anticipated significant inflow of applications for new Irish AIFMs, UCITS management companies and MiFID investment firms, and although it has scaled up its resources to meet those demands, authorisation timelines are inevitably beginning to extend. The message is clear from the Irish regulator, and now also apparently from the Commission, that while a sensible "soft Brexit" transitional period will hopefully ultimately be agreed, firms with exposure to Brexit should now be actively putting solutions in place.