Brexit: Where are we now?
The investment funds industry is busy assessing the business and compliance challenges of the United Kingdom (UK) withdrawing from the EU (Brexit). These issues include concerns around marketing permissions, delegation, portfolio impact, trading and counterparties, investor disclosures, contractual changes and GDPR.
There is still no certainty over the timing and consequences of Brexit. There have been some helpful clarifications from regulators which will assist no-deal Brexit contingency planning.
Investment by UCITS and RIAIFs in UK investment funds
The Central Bank of Ireland (Central Bank) issued a Markets Update on Thursday 7 March 2019. In the event of a no-deal Brexit, the UK will become a third country. The Central Bank acknowledged that this may have implications for UCITS which have exposure to UK securities or counterparties. It could impact investment by UCITS and Retail investor AIFs (RIAIFs) in UK investment funds. It could impact the eligibility of counterparties to OTC derivative instruments entered into by UCITS and RIAIFs. The Central Bank concluded:
- UK UCITS will become non-EU AIFs in a no-deal Brexit (UK AIFs). As regards any investment by Irish UCITS and Irish RIAIFs in UK UCITS, the Central Bank will consider whether such UK AIFs should be identified in Central Bank guidance as a category of investment fund in which UCITS and RIAIFs may invest. For the period while this is under consideration, the Central Bank does not propose adopting a default position which would treat the UK AIFs as ineligible. Such a determination by the Central Bank may change
- For Irish UCITS, any investment in UK AIFs must fall within the aggregate limit of 30% for investments in all AIFs
Eligibility of counterparties to OTC derivative instruments entered into by Irish UCITS and Irish RIAIFs with UK investment firms, currently authorised under MiFID
As regards the eligibility of counterparties to OTC derivative instruments entered into by Irish UCITS and Irish RIAIFs with UK investment firms, currently authorised under MiFID (which at that point will cease to be authorised under MiFID), the Central Bank will also consider whether such UK investment firms should be a category of eligible financial derivative counterparty for UCITS and RIAIFs. For the period while this is under consideration, the Central Bank does not propose adopting a default position which would treat UK investment firms as ineligible. Such a determination by the Central Bank may change
List of Eligible Markets may need updating
Brexit could also trigger a need for the UK to be listed as an eligible market for investment in the markets list in prospectuses (where the UK would have previously been included as an EU member state).The Central Bank is currently considering the provision of a form of fast-track review procedure for amendments to UCITS/RIAIF prospectuses which are solely related to Brexit, such as updates to the list of recognised exchanges.
QIAIFs will be permitted to designate a UK AIFM as their AIFM
The Central Bank published the Thirty-First Edition of its Central Bank AIFMD Q&A which includes a new Q&A concerning Irish Qualifying Investor AIFs (QIAIFs) with UK AIFMs. The Q&A clarifies that a QIAIF will be permitted to designate a UK AIFM as its AIFM. QIAIFs migrating to such an arrangement need to assess the impacts arising from the loss of the marketing passport under AIFMD including notification to investors, amendments to documentation, filings with the Central Bank or other supervisory authorities and any other operational issues. QIAIFs with UK AIFMs (which become non-EU AIFMs) will be subject to the full AIFMD depositary regime including the AIFMD depositary liability provisions.
Delegation / outsourcing arrangements to UK
On 1 February 2019 ESMA confirmed the agreement of no-deal Brexit MoUs with the FCA. One memorandum of understanding (MoU) is a multilateral MoU between national EU/EEA regulators and the Financial Conduct Authority (FCA) of the UK (MMoU). The multilateral MoU will facilitate delegation or outsourcing arrangements between Irish UCITS Management Companies/ AIFMs/ MiFID Firms and UK entities.
On 6 March 2019, the Central Bank updated a FAQ to clarify that the MMoU facilitates delegation or outsourcing arrangements between Irish UCITS Management Companies/AIFMs/MiFID Firms and UK entities.
Location requirement for directors and designated persons
The Central Bank issued a Notice of Intention in relation to the location requirement for directors and designated persons of Irish fund management companies in the event of a no deal Brexit. The notice reminds readers that the Central Bank introduced an Effective Supervision Requirement (ESR) for Fund Management Companies as part of a review of the organisation and effectiveness of Irish Fund Management Companies. The requirements are set out in the Annex to the Notice.
Should the UK become a third country, the Central Bank will consider whether it is a jurisdiction to be determined as meeting the ESR. While this is under consideration, the Central Bank does not propose adopting a default position which would treat the UK as not satisfying the ESR. After consideration, the Central Bank will make a determination and will publish a notice on its website. Such determination may change.
ESMA opinions to support supervisory convergence in EU27 in the context of Brexit
On 13 July 2017, ESMA published the following opinions to support supervisory convergence in the context of the UK leaving the EU:
- Opinion on investment firms which addresses regulatory and supervisory arbitrage risks related to the relocation of investment firms' activities
- Opinion on investment management which addresses regulatory and supervisory arbitrage risks related to the relocation activities of UCITS management companies, self-managed investment companies and authorised AIFMs
- Opinion on secondary markets which addresses regulatory and supervisory arbitrage risks stemming from third country trading venues (regulated markets, multilateral trading facilities and organised trading facilities) relocating to the EU27 and seeking to outsource activities to their jurisdiction of origin
The opinions are aimed at relocating entities in the context of Brexit, however these principles and additional expectations may apply more generally over time, in order to ensure consistency.
In a related press release, ESMA explained that the opinions set out sector specific principles and build on the nine principles set out in the general cross-sectoral opinion that ESMA published in May 2017 which were:
- Principle one: No automatic recognition of existing authorisations
- Principle two: Authorisations granted by EU27 NCAs should be rigorous and efficient
- Principle three: NCAs should be able to verify the objective reasons for relocation
- Principle four: Special attention should be granted to avoid letter box entities in the EU27
- Principle five: Outsourcing and delegation to third countries is only possible under strict conditions
- Principle six: NCAs should ensure that substance requirements are met
- Principle seven: NCAs should ensure sound governance of EU entities
- Principle eight: NCAs must be in a position to effectively supervise and enforce Union law
- Principle nine: Coordination to ensure effective monitoring by ESMA
Personal Data Transfers in Event of 'No Deal' Brexit
The Data Protection Commissioner published guidance on transfers of personal data from Ireland to the UK in the event of a 'No-Deal' Brexit'. The guidance includes information on the extra measures that can be put in place to legally transfer personal data to the UK in the event the UK becomes a 'third country.'
The Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019 has been signed into law. Whether and when it will be triggered remains to be seen. This legislation is important in the event of a no-deal Brexit but it does not have any provisions specifically targeted at investment funds.
Marketing in the UK - UK Temporary Permissions Regime
The UK Government issued statutory instruments which create regimes allowing EEA investment funds and EEA fund managers that market EEA investment funds in the UK under a passport to continue temporarily marketing in the UK after exit day in the event of a no-deal Brexit. This is called the Temporary Permissions Regime (TPR).
The TPR will only come into force if the UK leaves the EU in a no-deal Brexit scenario. EEA UCITS and EEA AIFMs who act as manager to EEA AIFs who wish to avail of the TPR must opt in to the TPR by notifying the FCA. Notifications must be made by submitting the TPR Form using the FCA's Connect system before the notification window closes.
The FCA has decided to extend the notification window for the TPR from the end of 28 March 2019 until the end of 11 April 2019. This is as a consequence of the agreement between the EU Council and the UK Government on a delay to the process of the UK's withdrawal from the EU. This means that any fund managers who have not submitted a TPR notification now have until 11 April 2019 to do so. If a fund manager has already submitted a TPR notification and wants to update that notification, the fund manager should notify the FCA about their intention to do so by the end of 2 April 2019.
The TPR also allows EEA firms which currently passport into the UK to continue business for a temporary period while they seek full FCA authorisation, again in the event of a no-deal Brexit.
Anti- Money Laundering considerations
A no-deal Brexit will likely trigger a change in designation of the UK from EU member state to third country for AML purposes.
The Central Bank Brexit FAQ notes (among other things) that differences can arise between national AML legislative frameworks, and that minor differences may already exist between the UK and Ireland’s national AML legislative frameworks. Post-Brexit, such differences may be accentuated in certain circumstances and firms authorised in one jurisdiction need to be aware of any differences that may exist in another jurisdiction’s AML legislative framework if they plan on providing services in that other jurisdiction.
As part of Brexit contingency planning, clients may be considering impacts on contractual arrangements with UK parties, including Brexit clauses, jurisdiction clauses, governing law clauses and change of law clauses.
Some useful Brexit resources
- ESMA has a Brexit section on its website
- The EU Commission webpage which includes a notice setting out the consequences that the UK withdrawal from the EU will have on asset management rules
- The FCA Brexit webpage
- ALG February Brexit Update
- ALG Brexit Hub
For more information in relation to this topic please contact a member of the Asset Management & Investment Funds team.