The Impact of Brexit on the Investment Funds Sector
The investment funds industry is an area that is heavily regulated at EU level by the Alternative Investment Fund Managers Directive (“AIFMD”), the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS”) and the Markets in Financial Instruments Directive (“MiFID”). While Brexit is not likely to occur before 2018, we summarise below some of the potential impacts on the investment funds industry.
Marketing of Investment Funds
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UK Domiciled Fund |
Irish Domiciled Fund |
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UCITS
(a) national private placement regimes will likely apply; or (b) the fund could consider re-establishing in an EU member state. |
UCITS
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AIFMD
(a) continue to be marketed by the UK AIFM with no great change if the AIFMD passport is extended to the UK post-Brexit; or (b) appoint an AIFM in an EU member state; or (c) consider re-establishment as a self-managed AIF within an EU member state. |
AIFMD
(a) continue to be marketed by the UK AIFM with no great change if the AIFMD passport is extended to the UK post-Brexit; or (b) appoint an AIFM in an EU member state; or (c) consider converting to a self-managed AIF. |
Distribution
For UK Distributors of funds, the MiFID right to market cross-border will no longer be available. A UK Distributor may be able to continue marketing in the EU subject to local third country rules, or alternatively, establish a MiFID regulated entity in the EU. For the moment however, it is business as usual for UK Managers and Distributors.
For investment funds themselves, they will need to consider the markets in which they operate and whether, post-Brexit, it will still be possible for them to operate in those markets. For Irish funds marketing in the UK and for UK funds marketing in the EU, the landscape will change.
Other Issues
Other issues for investment funds and fund managers to consider may include the following:
- The London Stock Exchange (“LSE”) would no longer be recognised as an EU-regulated market and amendments to fund documentation will be required to ensure that securities listed on the LSE can still be purchased;
- Director residency requirements: EU fund management companies are required to have at least two-thirds of their directors in the European Economic Area (“EEA”) – this could prove problematic for UK sponsored funds post-Brexit should the UK not seek EEA status;
- Legal and fund documentation would have to be amended to update definitions and certain clauses;
- A possible ‘Brexit risk warning’ may need to be inserted into fund documentation;
- Changes to the Taxation section in fund documentation may be required to reflect any changes in UK law;
- There could also be implications in relation to investment objectives and policies of particular funds;
- Member State of Reference – reconsideration of the member state of reference under AIFMD for those AIFs who intended to designate the UK as the member state of reference;
- Recognised Market – there may be a requirement to specify individually each of the UK exchanges in UCITS fund documentation;
- UCITS fund of fund rules – UK domiciled UCITS may lose their UCITS status with the result that Irish UCITS investing in UK UCITS may be required to rebalance their portfolios;
- Remuneration requirements – the UK may continue to impose remuneration requirements on portfolio managers;
- Approval of UK investment managers – the possibility of having to undergo the Central Bank of Ireland’s approval process for non-EU managers should the UK manager lose its MiFID status.
Future for the UK and Trade
There is an uncertain future ahead with different trade options available to the UK:
- EEA Arrangement: the UK would retain their passporting rights with respect to the single market for goods and services, however, they would lose any right of say in respect of future law-making, an option the UK will not likely follow.
- European Free Trade Agreement: a separate rulebook would be required, however the UK would retain passporting rights. The UK would become a third country and as such firms would be assessed for equivalence by the European Securities and Markets Authority or required to set up a subsidiary.
- Customs Union: this would allow free access to EU markets, with the UK having to comply with EU rules and regulations with little or no say over the creation of these rules.
- World Trade Organisation Agreement: the UK would become a third country with the possibility of the imposition of tariffs on imports.
- UK Bespoke Deal: the UK agrees a specific deal with the EU in order to retain free trade.
Conclusion
Investment funds are already seeing the impact of the referendum result in stock market volatility, the fall in sterling and, in some cases, significant redemptions.
The potential impact Brexit may have on funds and fund managers needs to be considered and contingency plans put in place. This is particularly relevant for fund managers wishing to keep EU distribution channels open. Ireland is a potential market for re-domiciliation and future product initiatives.
If you have any queries or require further information for your business or your clients, please contact one of our team listed below.
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Conor Durkin |
Rowena Fitzgerald |