Brexit Asset Managers U.K. E.U. Distribution Strategy AIFM MiFID UCITS Equivalence

Published: Feb 15, 2019
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With Brexit looming, U.S. asset managers should be preparing themselves for an overhaul in the way U.K. and E.U. regulation and legislation affects their future. Brexit may change the course for all funds and managers looking to do business in the U.K. and E.U. Managers should ensure they are considering steps to mitigate the uncertainties surrounding the U.K.’s departure from the E.U. in March 2019. Below are some key areas to consider:

1. Distribution Strategy

A key focus for U.S. asset managers in the run up to Brexit is to put in place a clear distribution strategy focusing on the investors they are targeting. By getting a clearer understanding of the overall distribution strategy (by both product and investor type and location), managers can focus on jurisdictions and regimes under which they might fall. For example, a distribution strategy targeting the U.K. should be focused on the appropriateness of product for that market. While it is likely a given that an E.U. 27 product will still be saleable in the U.K., the question is for how long? Also, is a U.K. product now more viable? The converse will also be true for a U.K. product sold to E.U. 27.

Currently, U.S. asset managers with no operations in the U.K. who classify themselves as Non-European Economic Area (EEA) Alternative Investment Fund Managers (AIFMs) will continue to function with little or no change going forward, as they have never had access to the passporting rights that are afforded to EEA AIFMs. They will, however, continue to be able to use NPPRs (National Private Placement Regimes) and reverse solicitation to do business with the E.U. 27 to the extent national regulators continue to allow them. Reverse solicitation, while not a strategy, may also continue to be used. However, the European Securities Marketing Authority (ESMA) has requested changes to the Markets in Financial Directive (MiFID) II regulations to increase restrictions on the use of reverse solicitation.

Additionally, from March 29, any U.S. asset manager who uses a U.K. Undertakings for Collective Investment of Transferable Securities (UCITS) to sell within the E.U. 27 will have to rethink their European product set. Establishing an EU-based UCITS, whilst seeming like the most straightforward option to bypass this issue, is potentially costly.

2. Processes

Despite the increased costs, managers are in the active phases of contingency planning for a U.K. exit from the E.U., including additional compliance measures that will need to be considered. In particular, large banks and asset managers have grown weary of waiting to see how Brexit will impact them and several firms have already made significant changes to processes.

As the U.K. could soon be classified as a ‘third country’ under MiFID, any U.S. asset managers who use U.K. operations to do business within the E.U. should consider applying for passport licences within E.U. jurisdictions. By establishing subsidiaries with substance within the E.U., they should effectively be able to access similar passporting rights as they have currently from the U.K.

Luxembourg and Ireland have become the frontrunners for managers looking to ensure their continued ability to do business in the E.U. Both jurisdictions have seen a huge increase in the number of license applications over the last few months.

The E.U. could also grant the U.K. ‘equivalence,’ which would be in line with the current arrangement between the U.K. and the U.S. Equivalence is based on the notion that a third country has similar regulatory and compliance structures to the E.U. and can continue to trade and distribute without having to directly adopt the E.U.’s regulations.

3. Personnel

Another significant change that U.S. asset managers should consider is the location of their U.K. and European based personnel. Some of the U.K.’s largest financial institutions such as UBS and Goldman Sachs have already taken the costly decision to move some operations and personnel to cities like Frankfurt or Paris. While this move hasn’t been seen to the same extent in the asset management space, managers should be considering where they need to base personnel. This is as a result of the new paradigm of a U.K. outside the E.U. and the visa requirements that might follow, or because of the need for additional substance to maintain effective connectivity with the U.K. and E.U. 27 post-Brexit.

Predicting and understanding what changes will come into play post March 29 is something that our clients are considering carefully in the run up to the U.K. leaving the European Union. Fundamentally, the continued uncertainty surrounding whether there will be a hard Brexit, soft Brexit, no-deal or a delay in the entire withdrawal agreement means that most fund managers are adopting a process which minimises risks no matter how the U.K. leaves. The U.K. government’s deliberations are mired in political infighting and complexity with only a handful of weeks remaining. While the E.U. is stating that the chance of no-deal is becoming much more likely with every passing day. As with U.K.-based fund managers, U.S. fund managers are left second guessing which way events may unfold, but immediate contingency planning should help weather the Brexit storm.…

Asset Management Intelligence – Q1 2019