Hedge funds in AIFMD passport limbo

Britain’s vote to leave the EU may have an impact on UK fund managers
By Jonathan Watkins & Paul Walsh
Hedge funds are facing a period of uncertainty around access to the AIFMD passport in the aftermath of Britain’s vote to leave the EU.

Originally designated under AIFMD the pan EU marketing passport allows managers of EU funds to market them across the EU. As this is only available to EU AIFM’s, UK managers would not have access to the AIFMD passport if the UK was to leave, or at least initially until the European Securities and Markets Authority (ESMA) grants equivalence.

At present, Guernsey, Jersey and Switzerland have been told by ESMA that they meet equivalence needed to utilise the AIFMD marketing passport although the European Commission (EC) has yet to pass a Delegated Act confirming this. Other jurisdictions including the US, Australia, Canada and the Cayman Islands are being reviewed by ESMA although this could take several years.

The UK would fall into this third country bracket – those outside the EU – but the period in which it is applying to regulators would create a great deal of uncertainty in the market.

The UK has implemented AIFMD into national law and in theory should not face any questions about not having equivalent status, however the passporting process has been slow for other countries.

Given any UK exit negotiations could take up to two years, it might leave the fund management industry in limbo for quite some time.

The Alternative Investment Management Association identified the AIFMD passport and whether the UK would be granted this as a key area following a Brexit. “It is in the clear interests of our members in the UK to have access to EU markets and EU investors,” said AIMA CEO Jack Inglis.

Sean Tuffy, senior VP investor services at Brown Brothers Harriman suggested that companies may decide to move their fund to an onshore EU country which would likely be Luxembourg or Ireland.

“Right now the trouble is that there are more questions than answers,” said Tuffy.

“So much will depend on what the final relationship between the UK and EU looks like when the divorce is finalised.”

This sentiment was echoed by former head of securities services at HSBC, John Gubert, who suggested the period of uncertainty, would lead to client demand for funds to be re-domiciled to Luxembourg or Ireland.

Dick Frase, partner, Dechert, said that the UK should qualify for equivalence assuming that the UK retains the substance of the AIFMD legislation it implemented in 2014. When it comes to on-shore funds distributing into the UK, Frase added there will be another challenge in accessing the UK through the EU passports.

“Those on-shore AIFs which do have passports such as Irish QIAIFs may no longer be able to use the AIFMD passport as such to access the UK,” said Frase.

“However, the UK may elect to retain a regime similar to AIFMD marketing post Brexit and even if it doesn’t the UK’s domestic financial promotion rules potentially cover promotion to a wider class of UK investors than the AIFMD ’professional investor’.”

«