This month saw the publication of draft regulations and rules containing the detailed proposals of the FCA and HM Treasury for the marketing and management of investment funds following EU withdrawal. Note the legislation and guidance are prepared assuming that the UK will leave the EU on 29 March 2019 (the Withdrawal Date) without any transitional deal, on a “hard Brexit” basis. If there is a deal, that will include a continuation of the status quo for a transition period (to at least the end of 2020). After that the rules may or may not differ from what is in the draft regulations, depending on what is agreed with the EU.
Inbound UK marketing of AIFs by EEA managers
The AIFMD marketing passport will cease to be available to EEA Funds marketed in the UK from the Withdrawal Date. However, as flagged in our August update there will be a temporary permissions regime permitting EEA AIFMs who are marketing existing funds before the Withdrawal Date to continue to market those funds in the UK for a limited period (the Temporary Permission Period) of three years, with some limited scope for extension. Marketing during the Temporary Permission Period will be on the same terms and subject to the same conditions as apply under the current AIFMD marketing regime. This is on the basis that (i) prior to the Withdrawal Date such AIFs were validly registered for marketing under the current AIFMD regime and (ii) the AIFM has notified the FCA that it wants to take advantage of the Temporary Permission Period marketing regime. The FCA expects to start accepting notifications early in 2019 and the period for notification (the Notification Window) will close prior to the Withdrawal Date on a date set by the FCA. Managers who fail to notify during the Notification Window will need to register for marketing under the UK PPR.
Managers who have elected to use this regime will, during the Temporary Permission Period, be allocated a "landing slot" during which they must submit an application to register the relevant AIF under the UK national private placement regime (UK PPR). The FCA relies on the landing slot approach to phase and smooth registrations and has flagged that it will take a firm line in managing the process. It does not expect to alter allocated slots other than in exceptional circumstances. If a manager fails to submit the required notification during its landing slot it will lose its temporary marketing permission and will need to cease marketing in the UK until it has re-registered under the UK PPR.
New funds (including additional parallel funds, feeders, sub funds and similar vehicles related to existing funds, where these are established and marketed after the Withdrawal Date) which have not been registered for marketing before the Withdrawal Date will not fall within this regime and will have to rely on the UK PPR from the Withdrawal Date. The UK PPR requirements will also be bolstered to allow the FCA to require submission of information which is now provided only to the home state regulator (as the FCA will lose the right to access this), making the UK PPR application process likely more burdensome.
The FCA has been encouraging EEA firms expecting to be marketing in the UK post the exit date to complete a survey to assist them in finessing the proposed interim marketing regime. The Financial Times has reported that 1,300 EU firms have indicated their willingness to sign up to the FCA’s proposed temporary permissions regime for EEA finance firms. The FT recently reported that out of the 8,000 EEA firms that have passported into the UK, only 1,300- or 20% - have completed the survey to express interest.
The EU has not, to date, offered a similar temporary regime for UK firms that currently passport into the EEA.
UK Management Activities
The transitional regime will also permit EEA AIFMs who were carrying out AIF management activities from the UK in reliance on the AIFMD management passport prior to exit day (for example, through a UK branch) to continue on the current basis during the Temporary Permissions Period. Such AIFMs will be deemed to have equivalent UK domestic Part 4A permissions covering all activities permitted under the passport, provided that they notify the FCA that they intend to rely on the temporary permissions regime during the Notification Window. The AIFM will then be allocated a landing slot during which it must submit an application to obtain formal Part 4A permission for the relevant activities, following which it will be treated as a third country branch. As we described in our August update, such AIFMs will be subject to all of the FCA rules that applied to them when exercising the management passport, including FCA rules that implement requirements reserved to a Home State regulator under AIFMD. However, the FCA will accept "substituted compliance" for Home State matters.
The EU has not, to date, offered a similar temporary regime for UK firms relying on management passports in the EEA for EEA branches.
Post Withdrawal Date reporting for AIFs
It has been clarified that the rules for reporting by AIFS will still be based on the combined AUM thresholds for the UK and EU and will not be determined solely on the basis of funds established in or marketed in the UK.
At present, any UK AIFM must report and make certain disclosures when it acquires control of an EU company and comply with restrictions on distributions and other forms of value extraction in the first two years of it acquiring control of the EU company. One welcome change for UK AIFMs which are not marketed in the EEA (if they are marketed the EU rules will continue to apply) will be that after the Withdrawal Date, a UK AIFM will only be required to report to the FCA and comply with the restrictions on asset stripping when it acquires control of a UK company, as opposed to an EU company.
The new UK UCITS regime
After the Withdrawal Date there will be a separate UK regime for UCITS-type funds established and authorised in the UK (UK UCITS). However, to ensure continuity for investors the regime for UK UCITS will:
- maintain the existing investment rules for UK UCITS which afford EEA assets preferential treatment over third country assets and will not treat EEA assets as third country assets; and
- continue to allow cash to be booked in accounts opened with any EEA credit institution, enabling UK UCITS to continue to use settlement accounts in other member states to give effect to their investment mandates.
In addition, after the Withdrawal Date it will no longer be possible for UK UCITS and other UK authorised funds (such as UK ICVCs, unit trusts and authorised contractual schemes) to have non-UK managers, trustees, sole directors, operators or depositories.
Temporary Permissions Regime for EEA UCITs and their Managers in the UK
A similar temporary permissions regime, as described above for AIF marketing and AIFMs, will also apply for EEA UCITS and EEA UCITS managers during the Temporary Permissions Period. There are some fairly technical differences between the regimes and we would be happy to provide clients with further guidance on any aspects of these.
EEA UCITS falling outside the temporary permissions regime (new ones, including feeders and new sub-funds, those not notified within the relevant notification period and any still being marketed after that period expires) will be capable of being marketed to professional investors under the UK PPR, as described above. However if they are to be marketed to UK retail investors, they will require recognition under section 272 FSMA.
Position of UK UCITS within the EEA
After the Withdrawal Date, UK UCITS will no longer qualify as UCITS under the UCITS Directive. This means:
- such funds (and their managers) will not have passporting rights into the EEA, thus far the EEA has not proposed any transitional arrangements such as those of the UK;
such funds will not be able to merge with EEA UCITS under the current EEA UCITS merger regime; and
investments in such funds will constitute third country investments for the purposes of the investment restrictions applicable to EU UCITS.