Brexit for asset managers key issues update
Immediately after the Brexit Referendum we identified 10 key "first steps" for asset managers to consider. With roughly six months to go until the withdrawal date. We have revisited these below to show the progress made and what remains still on the "to do" list. We have also suggested five key priorities for the final months until the withdrawal date.
Progress On Our Initial 10 Key Issues
1. Lobby
We noted that as the UK Government developed its strategy there would be a window for businesses to make their voice heard and shape that strategy. We urged businesses to identify issues and communicate their views. Industry was quick to mobilise, with detailed engagement by trade bodies from an early stage. However, concerns have been expressed throughout the process that Government has been insufficiently engaged or responsive to business, and overly focussed on its own internal divisions. Response to the Government's White Paper by the financial services industry was that the proposals were "regrettable and frustrating" and a "real blow" for the sector (read more in our report). Government continues to flex its approach and our recommendation for the industry is to remain engaged in this final stage.
Lobby
"Nothing is agreed until everything is agreed".
There remains a window for industry participants to keep up pressure on the government to secure a workable solution.
- Key Priorities for the next six months
2. Reassess fund risks and return expectations
We noted that risk factors and return expectations and/or investment strategies might need to be altered and urged Managers to consider their obligations to notify investors and prospective investors of altered expectations and risks. In our experience, funds and managers have been quick to communicate market expectations and to incorporate significant Brexit risk factors. In addition, for sectors especially affected, such as real estate, a number of funds also moved to more frequent valuations to address market volatility. As the final withdrawal date approaches we may again see spikes in volatility, Managers will no doubt be monitoring this closely.
3. Consider liquidity impacts
We urged Managers to consider whether Brexit would bring a risk of pressure on liquidity for existing funds, such as increased redemption requests or the emergence of a material discount to NAV in market prices for listed funds. We advised managers to consider the measures they might need to take to identify and manage this risk, to review existing liquidity and, for listed funds, defence strategies and processes in place. In the initial post referendum phase UK focussed real estate funds took a particular hit, with several large funds suspending withdrawals.
Plan for potential liquidity and pricing impacts.
The milestones over the next few months, from announcements as regards an agreed settlement and/or any bumps in that process to the arrival of the Brexit Date itself, will be significant market events. There may be significant turbulence and a risk of pressure on liquidity, such as increased redemption requests or the emergence of a material discount to NAV in market prices for listed funds. Be prepared.
- Key Priorities for the next six months
4. Review existing investment policies and mandates
We noted that, if drafted by reference to the EU, these might need amendment in the future to allow continued investment in the UK post-Brexit. This approach still holds good. Some mandates may limit investment to UCITs funds or securities listed on EU/EEA regulated markets.
5. Review cost expectations
We flagged that costs might increase as a result of currency movements and, in the future, the need for structural or management changes or altered distribution processes. We recommended that managers review cost assumptions and costs clauses in fund and client documents to assess scope for increases and to factor in scope for increased costs when settling new fund terms. This also still holds good, managers should reassess overheads in light of their contingency plans.
6. Consult over investor requirements
We urged managers to establish whether key investors or target investors could be restricted to making (or would simply prefer to make) EU investments; or Investment with UCITS status.
The recent EU Notice to Stakeholders on the implications of Brexit reiterated this, recommending that EU investors "review their investment criteria to assess compliance with the change in the legal status of the funds they invested into (e.g. non-EU AIF instead of UCITS)".
7. Consider distribution channels
After Brexit we noted that UK Managers and EU Managers with fund vehicles which are, or contained feeders which are, UK structures might need to market within the EEA under the private placement regimes in the future (and vice versa for EEA funds marketing in the UK). We recommended that Managers review key target country regimes to assess feasibility. Whilst the UK authorities have proposed a three year transitional window to apply to the marketing of EEA funds into the UK no corresponding proposals have emerged from the EU. UK Managers therefore face the risk of having to use the national private placement regimes (NPPR) available within the EEA after the withdrawal date. There is much variation in the NPPRs across the EEA, Managers who are unfamiliar with these should not underestimate the logistical issues.
Communicate with investors and plan for changes to distribution channels
Managers should be:
establishing Investor requirements for EEA products; identifying any consent requirements for necessary tweaking to
terms or product costs and any planned mandate transfers to EEA affiliates; and planning ahead for marketing processes in key jurisdictions.
- Key Priorities for the next six months
8. Consider HR and staffing impacts
We recommended that Managers focus on any key affected UK based staff, consider the implications of relocation requests for compliance and oversight and assess resourcing options should they need more EU substance. The Government has published its proposals for an EU Settlement Scheme. Under the proposed Scheme EU nationals in the UK at 29 March 2019, or who come to the UK during the transition period ending on 31 December 2020 (assuming that period is agreed), will be able to apply for either settled status (if they have 5 years lawful and continuous residence in the UK) or pre-settled status (allowing them to remain in the UK until they reach 5 years residence, at which point they can apply for settled status). Information packs are being issued to employers, and eligible employees (and family members) should be encouraged to apply as soon as the scheme is open. It is expected to be fully operational by March 2019. Eligible EU nationals will have to apply on-line for this status by no later than July 2021. Failure to do so would mean that they were in the UK unlawfully, rendering them liable to removal. While progress towards a broader approach to immigration for future migrants seems to have stalled, it seems clear that the new regime will be more restrictive, particularly for wider family members.
Support affected staff
Managers should inform themselves about the processes to help affected staff attain rights of residence.
Despite reassurance from the Government, EEA staff across many industries appear to have been significantly unsettled. Managers should be prepared to help and reassure affected staff, including making sure they know that, even if they have a right to settled status, they will still have to apply for it.
Managers should include potential staff impacts in their contingency and risk planning.
- Key Priorities for the next six months
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9. Map required regulatory permissions
We noted that funds managing EU funds or portfolios relying on the EU management passport, or conducting other deal activity across borders under a MiFid passport, would in a worst case scenario lose passporting rights and so should identify restructuring arrangements that could be needed to mitigate the impact of this (e.g. establishing EU affiliates, delegation models etc).
It was hoped that this scenario would not arise and that some form of mutual recognition might be agreed, allowing a continuation of passporting rights. However, in its White Paper on the future relationship with the EU (the "White Paper") the Government proposed instead an enhanced version of the EU's current equivalence arrangements with third countries. The EU has since then expressed its concerns on the workability of the UK's proposals. Because "nothing is agreed until everything is agreed", both sides have to prepare for all eventualities, including "no-deal".
The UK has recently published outline details of a 3-year "temporary permissions regime", enabling EEA companies operating in the UK via a passport to elect to continue their activities in the UK for a limited period after the UK's withdrawal from the EU. See our note on the proposed regime. However, no corresponding proposals have emerged from the EU or the other Member States.
Managers have increasingly lost patience and been taking steps to establish delegation models (with an EEA manager taking the primary role and delegating back to the UK). However, the delegation model is not simply a case of establishing a notional EU presence. In July 2017, ESMA issued an opinion noting that relocations may not be made on a "letter box" basis and flagging that substantive justifications must be established, with genuine substance and oversight to be retained within the EEA. Managers should engage early with EEA regulators to assess requirements. A potential further challenge to implementing new structures could be the need for investor consent to enable the new EU Manager entity to take over contracts. Many firms have utilised the cross border merger regime to seek to minimise the need for specific consents. Contracts should be checked in light of the specifics of any contingency plans and Managers should plan ahead for any required consent processes.
10. Review longer term strategic plans
We noted that Managers would need to reassess broader projects through the prism of the post-Brexit world. Most Managers have been making plans to address the possible deal and no-deal scenarios.
Finalise contingency plans, identify key actions, look well ahead
Managers need to identify and resolve any roadblocks for their contingency plans, in particular:
developing objective justifications for delegation models; engaging with the relevant EEA regulators on their EEA oversight
models and local substance; and identifying investor consent requirements and planning consent
processes.
Keep a watching brief on developments. The great regret is that any deal, or confirmation that there will be no deal, is likely to be very last minute.
Managers should keep their risk and contingency plans under review and prepare, at least in the short term, for a bumpy ride.
For the longer term, managers will need to plan carefully for restructurings, with some useful tools available within the EEA (such as cross border mergers) potentially becoming unavailable.
- Key Priorities for the next six months
