The European Commission (EC) published a blunt – albeit somewhat predictable – warning to the UK asset management industry reminding UK-based UCITS and AIFMs that they risk being excluded from the Single Market in 2019 if a Brexit deal is not concluded.
In its statement, the EC said that UCITS and AIFMD (Alternative Investment Fund Managers Directive) will dis-apply to UK firms at the point of Brexit, although adds that managers can continue to make use of national private placement regimes (NPPR). It also said EU authorised subsidiaries of UK UCITS and AIFMs will see no changes.
However, “branches of UK managers in the EU will be treated as branches of a non-EU AIF managers as of the withdrawal date. These branches will be subject to the requirements of NPPRs.”
It added that delegation of portfolio and risk activities back into the UK will only be permitted if there is a cooperation agreement in place with UK and EU regulators. Delegation has become one of the many sore points in Brexit negotiations as the European Securities and Markets Authority (ESMA) is likely to insist on having a greater role in authorising such set-ups.
This stance puts it directly at odds with the authorities in Luxembourg and Ireland, both of whom have issued strongly worded rebuttals against tampering with delegation.
The EC’s announcement, as many experts will testify, is unlikely to catch the industry by surprise, mainly because it is not saying anything new or unexpected. Most UK managers have been exploring their post-Brexit options for quite some time, although only a handful of companies have actually shifted parts of their operations to the EU. These are overwhelmingly firms heavily dependent on EU sourced assets.
The bulk of fund managers in the UK have yet to implement such changes, and some have been cautioned against making rash moves, especially as Brexit is a fluid process. Government officials are reportedly quietly confident though about securing a transitional deal with the EU, contrary to widely held reports. A transitional deal would bring much-needed clarity to Brexit and help businesses across the spectrum prepare for the changes.