We consider that the UK leaving the EU may have a substantial impact on the management and marketing of investment funds in the UK. The regulatory environment within which funds and fund managers based in the UK operate is derived to a significant extent from EU rules and regulations. Central to fund management and marketing are Directives and Regulations such as the UCITS (Undertakings for the Collective Investment in Transferable Securities) Directives, MiFID (Markets in Financial Instruments Directive) and the AIFMD (Alternative Investment Fund Managers Directive).
A significant proportion of funds managed out of the UK take the form of UCITS, which benefit from a European cross-border passport. To the extent a UK UCITS is marketed widely across the EEA, there is potential for substantial disruption once the passport no longer applies to such UK UCITS. Where a UK UCITS is marketed primarily within the UK, the scope for disruption is less. In both cases however, UCITS would likely lose their designation, because UCITS are a creation of EU law (indeed they would likely be characterised as alternative investment funds, similar to their domestic counterpart, the non-UCITS retail scheme).
Alternative investment funds (AIFs) established in the UK with UK managers also benefit from a marketing passport under the AIFMD (facilitating access to professional investors across the EEA). To the extent any AIF relies on EEA wide marketing then, as for UCITS, there would be scope for material disruption. For AIFs that are marketed mainly in the UK or into countries relatively open to the marketing of AIFs established or managed outside the EEA, then the impact of Brexit would be less damaging.
In addition to the obvious marketing issues noted above, a loss of the management passport could also cause significant issues for UK based managers. A loss of the ability of UK managers to manage EU-domiciled funds, whether directly or through delegation arrangements will likely be of serious concern to managers who currently make use of that passport (to the extent that the local regimes in such countries do not anyway allow for management by non-EU managers). This issue may be most acute if and when the AIFMD begins to make overseas management of EU AIFs more highly regulated, pursuant to its controversial “third country” provisions.
In the medium to long term, therefore, asset managers could re-evaluate the benefits of operating from the UK and establishing funds in the UK, where there is a need to raise capital widely across the EEA. Others may already have split their business between UK and EU regulated entities and be well placed to deal with the change with relatively little disruption. On the other hand, however, increasingly prescriptive EU rules and regulations have been cited as putting London at a competitive disadvantage in comparison to jurisdictions like the US (for example with respect to remuneration restrictions). Once the uncertainties in the short term are addressed, over the long term Brexit may result in a more industry-friendly regulatory framework without some of the more burdensome EU provisions, thereby making the UK more attractive for management operations. There can, however, be no guarantee that more industry-friendly regulation will be promulgated.
On the other hand, however, increasingly prescriptive EU rules and regulations have been cited as putting London at a competitive disadvantage in comparison to jurisdictions like the US (for example with respect to remuneration restrictions). Once the uncertainties in the short term are addressed, over the long term Brexit may result in a more industry-friendly regulatory framework without some of the more burdensome EU provisions, thereby making the UK more attractive for management operations. There can, however, be no guarantee that more industry-friendly regulation will be promulgated.
Non-pooled clients (segregated accounts)
Many asset managers, in addition to managing and marketing pooled vehicles (be they UCITS or AIFs), will manage accounts for individual clients (typically on a discretionary basis). Some of these will be clients based outside the UK.
The issues that asset managers will face in relation to this line of business are similar to those that will be faced by banks in relation to their MiFID business. For further details, see the Financial Services section above and, in particular, the paragraph entitled “Access to European markets”. In short, there are access options that may be made available to asset managers for their MiFID business that would allow them to continue to provide services to clients based in the EU. These options, however, are not necessarily complete solutions and there is some material uncertainty in relation to when and how these will become available.