Earlier this year, the European Commission published a notice about EU rules for asset management reminding stakeholders within the industry about the legal repercussions of Brexit.
Subject to any transitional arrangements, the EU’s rules concerning funds will no longer apply to the UK.
Bye-bye Ucits
Unless a ratified withdrawal agreement establishes another date, the UK will become a so-called ‘third country’ from 30 March 2019, and UK funds will no longer carry the Ucits badge.
From that date, all collective investment undertakings registered or authorised in Britain could potentially be deemed as non-EU alternative investment funds (non-EU AIFs).
The EU passport will also be lost, which is problematic considering that 500 million people and about 200 firms are currently part of the EU market. Losing passporting rights will mean the UK’s £8trn ($10.6trn, €9.1trn) asset management industry will no longer be able to manage and market funds across the EU based on their current authorisations.
While there are some EU Member States that do allow non-EU AIFs to be marketed under the National Private Placement regimes, marketing may be limited to professional investors only.
Act prudently
As it stands, and as highlighted by the Commission, there remains considerable uncertainties concerning the content of a possible withdrawal agreement. Following the change in the legal status of the funds, EU investors, including Ucits fund-of-funds structures, will need to assess compliance with the funds in which they are invested.
In March, Claude Marx, the director general of Luxembourg’s financial regulator, the CSSF, warned fund managers that those working by way of free provision of services would be prudent to set up an office in the respective area, either the EU27 or the UK.
There have already been many announcements in the press about major UK-based asset managers moving substantial human resources to Ireland and Luxembourg after Brexit.
Columbia Threadneedle, M&G and JP Morgan have all made statements and research conducted by consulting firm EY found that 83,000 roles could potentially move out of the UK.
Unfortunately, this isn’t a pragmatic solution for many asset managers.
The Commission has also reminded asset managers of the opinion published by the EU securities regulator, ESMA, last year, which was aimed at preventing EU letterbox entities that delegate material functions back to the UK.
Instead, many asset managers will now need to consider managing funds based in the UK as well as Luxembourg that follow the same investment strategies, in order to have freedom of access to investors in the UK, and still provide a Ucits compliant fund outside the UK.
It’s here where we see management companies being in a position to help asset managers, providing them with cost-effective solutions that help market their funds as Ucits compliant, whether locally in Luxembourg on established platforms or through a more tailored level of service.
Whichever route managers choose, as the uncertainty of Brexit remains and its impact on the asset management industry starts to be felt, managers will need solutions, lest they face being shut out of the market as we reach the Brexit deadline.
