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What happened?

On 8 February 2018, the European Commission released a number of Brexit Notices to Stakeholders in relation to Brexit, which is scheduled for 30 March 2019. These notices cover a wide range of sectors, including investment managers and MiFID firms, both of which will be of interest to asset managers in the EU. They are available here and here.

The key points are summarised below.

Co-operation Agreements and the Issue of Delegation
One important point to note relates to co-operation agreements between the FCA and other national regulators in the remaining EU27. Without co-operation agreements in place, EU27 management companies (AIFMD or UCITS) will be unable to delegate portfolio management to UK investment managers, and EU27 MiFID firms (as well as management companies performing permitted MiFID activities) will not be able to outsource portfolio management. In addition, UK AIFMs will be unable to make use of National Private Placement Regimes (NPPRs) to market into the EU27, and nor will they be able to manage EU AIFs.

Whilst it seems reasonable to expect that co-operation agreements will be put in place, it is not a certainty. We recommend that firms take this into account when considering their plans and operating models post-Brexit.

Passporting
Cross-border services passports will no longer be available, post-Brexit, to UK UCITS and AIF firms across the EU27 or for EU27 firms into the UK. For EU27 firms with branches in the UK, the UK Government has confirmed that if no transitional period is agreed, it will create a temporary permissions regime for these firms. The FCA has confirmed that it will be publishing more details about its approach, but these branches will need to become directly authorised by the FCA.

UK firms with a branch in an EU27 member state will need to obtain direct authorisation for the branch, although it is important to note that this will not confer any cross-border passporting rights on the branch. We recommend this is taken into account during Brexit planning.

UK Managers – Managing & Funds
UK firms undertaking portfolio management for EU27 management companies will only be able to continue to do so if, as noted above, co-operation agreements are in place. If they are not, firms will need to look at alternative arrangements and take into account ESMA’s July 2017 Opinion regarding the use of delegation and investment advisory mandates. This is available here.

EU27 UCITS funds with a UK management company will, post-Brexit, become AIFs unless a new management company is appointed. The EU Commission has highlighted the need to contact investors, specifically by way of the fund’s annual report and its Key Investor Information Document, and to disclose to them the impact and risk as a result of this change. In addition, the continuing eligibility for investment of funds located outside the EU will need to be considered.

If co-operation agreements are not in place, UK AIFMs will be unable to manage EU AIFs.

UK Managers – Marketing
If there are co-operation agreements in place, UK AIFMs can continue to use NPPRs to market any non-EU AIFs and will, post-Brexit, need to use this route for EU AIFs. Firms will need to give greater consideration to their distribution channels and how they can reach their target investor base as NPPRs differ from Member State to Member State and some do not recognise the concept. Further details are available here.

Even marketing within the UK could face fresh complexities until rules are updated to reflect Brexit. For example, UCITS funds that have not been recognised by the FCA cannot be marketed to retail clients unless there is compliance with COBS 4.12.

It is also important for UK firms to note that even if a fund (a UCITS or AIFMD) has a passport it can use that enables the management company to market it across Europe, it will not necessarily enable the UK investment manager to undertake this marketing. Further consideration of distribution will be required.

EU27 Managers – Managing & Funds
Any UK-domiciled UCITS funds will become non-EU AIFs post-Brexit, and managers will need to consider whether they need to change their authorisation or make notifications to their national regulator in order to be able to continue to manage them. However, as noted above, without co-operation agreements an EU AIFM cannot manage a non-EU AIF (even if it is not being marketed within the EU).

EU27 Managers – Marketing
The change from UCITS to non-EU AIF makes a significant difference to the marketing of funds; in particular, the ability to market to retail investors in EU27 locations will be restricted. For both UCITS and current UK based AIFs, becoming non-EU AIFs means only NPPRs are available for marketing, resulting in different approaches from Member State to Member State. Once again, the existence of co-operation agreements is key.

The changes in categorisation will also affect how firms market into the UK. The FCA’s plans in relation to UCITS funds have yet to be confirmed; at present, there are alternative routes to gain recognition for an overseas fund in the UK. However, without recognition, there are additional requirements to comply with, particularly to market to retail investors, and this may affect both UK and EU27 funds.

MiFID Firms
UK investment firms will no longer benefit from the MiFID authorisation to provide MiFID investment services and activities in the Union and will therefore be third-country firms. This means that those investment firms will no longer be allowed to provide services in the EU on the basis of their current authorisations.

Firms providing investment services are required to provide clients or potential clients with accurate disclosure, in good time and in any case before clients are bound by any contract, on the impact on the provision of services and investors’ rights that may emerge from the withdrawal of the UK from the EU, including the future loss by the firm of its MiFID authorisation. Firms providing investment services are also required to notify clients in good time about any material change to the information already provided, including if any material changes occur to the situation of the firm and any resulting consequences for contracts.

Implications for Firms
There are a number of significant uncertainties that arise pending the agreement of new trading arrangements, and a possible transitional period, between the UK and EU. For asset managers the interplay of MiFID II, UCITS and AIFMD, along with the different impacts on fund management and marketing arrangements, creates additional complexity. We recommend firms take into account which regulatory regime they need funds to be in and consider in particular:

• the type and location of investors
• how they will be able to market funds and services
• as a contingency, the impact should co-operation agreements not be agreed

It is also important to ensure that ESMA’s Opinions1, and in particular the points on substance and letter-box entities, are taken into account. Firms will need to ensure that any EU entity has sufficient substance and resources to meet the relevant directive’s authorisation criteria and that when delegating investment management, it is considered on a fund by fund basis. In addition, ESMA is clear that firms must have sufficient resources and competence to properly monitor delegated activities.

How can Thistle help you?

Thistle will continue to keep this area under review and will issue further updates where necessary. Visit our investments page or contact us for more information on our services.