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Investment Funds Update: On the Brink of Brexit – Contingency Plans for the Asset Management Industry

06 February 2019

A hard Brexit, where the UK leaves the EU without an agreement and a transition period in place, will have a major impact on the asset management industry in the European Economic Area (EEA). The most salient risk to the industry is the cessation of the passporting regime for financial services into and out of the UK.

The FCA’s Temporary Permissions Regime

The UK’s Financial Conduct Authority (FCA) recently opened its Temporary Permissions Regime (TPR) for financial services firms and funds. The TPR alleviates some of the risks of a hard Brexit by permitting the passporting of various financial services and funds activity into the UK, pending full UK authorisation. To avail of the TPR, EEA firms and funds should notify the FCA using the Connect System by 28 March 2019. The TPR will come into effect at 11pm on 29 March 2019 if there is a hard Brexit.

EU assurances on a memorandum of understanding

In the event of a hard Brexit, the UK will be treated as a third country under EU law. This means that a memorandum of understanding (MOU) will be required between UK and EEA-based regulators to permit delegation of the asset management to the UK.

Recent keynote speeches from representatives of the European Securities Markets Authority (ESMA)[1] and the Central Bank of Ireland (CBI) show a stated intent to have MOUs with the UK in place by 29 March 2019. Ed Sibley, the CBI’s Governor of Prudential Regulation, recently provided the following assurance to Irish investment firms delegating portfolio management to the UK:

It is reasonable for firms to plan on the basis that MOUs will be in place by 29 March. Firms that delegate portfolio management to the UK can have sufficient confidence that this will be continued to be allowed post 29 March 2019”.[2]

Substance concerns

Although the formation of the MOUs will permit ongoing UK/EU business relations after 29 March 2019, ESMA and various EU National Competent Authorities such as the CBI have made clear that real substance is required within the EEA for those UCITS management companies and AIFMs which intend to delegate investment management to UK based entities.

In a recent speech[3] Michael Hodson, Director of Asset Management and Investment Banking at the CBI, stated that the CBI will not lower its assessment standards in relation to Brexit related authorisations. Firms should be aware that real business substance is required to gain an authorisation in Ireland.  In his regard, the CBI’s CP86 framework on supervision and delegation of activities is an important consideration for all applicants.

Conclusion

There is no doubt that Ireland shares a special relationship with the UK and it is in Ireland’s interests to maintain that relationship post-Brexit while protecting Ireland as much as possible from the risks posed by Brexit.

We regularly provide advice to firms considering Ireland as a domicile for their operations and wishing to delegate certain activities to UK based entities. Should you require our assistance, please contact a member of our Investment Funds Team.


Discuss your investment funds queries now with Sarah Cloonan.


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