The financial services sector is highly regulated in the UK. Brexit would allow the UK potentially to rationalise and simplify the regulatory requirements. However, firms dependent on having cross-border access to the EU may find that they still have to comply with EU legislation e.g. if they need to benefit from a third country MiFID or AIFMD passport.
Areas where the EU passport will be a matter for concern include:
Undertakings for Collective Investment in Transferable Securities (UCITS)
Brexit would mean that existing UK UCITS (authorised unit trusts and OEICs) potentially would not qualify as UCITS and therefore cease to benefit from the EEA-wide passport for the distribution and marketing of these funds. They would potentially then fall to be treated as funds subject to the AIFMD regime and so marketing in EEA Member States would be dependent on compliance with the restrictions imposed by the national private placement rules of those Member States. Further, following Brexit, UK-based fund management companies potentially would no longer be entitled to provide services to EEA-based UCITS with the result that some restructuring of such managers would be required in order for such services to be provided from within the EEA.
Markets in Financial Instruments Directive (MiFID)
Following Brexit, UK authorised firms potentially would no longer be able automatically to undertake MiFID business in the EU and equally EU firms would no longer be entitled automatically to conduct MiFID business in the UK. The new MIFID II regime could, however, dilute the impact of Brexit on the UK as it envisages that non-EEA firms may be afforded a third country MiFID passport upon registration with ESMA. Delays to the date for the transposition of MiFID II (currently set for January 2018), means that the position governing access to customers and clients in the EU will remain uncertain for some time to come.
Alternative Investment Fund Managers Directive (AIFMD)
Following Brexit, a UK manager (AIFM) of an alternative investment fund (AIF) potentially would be treated as a non-EEA AIFM for the purposes of AIFMD. This would mean that marketing a UK AIF in the EU by a UK AIFM would need to be undertaken on the basis of the national private placement rules of individual Member States.
At the same time, an EEA AIFM wishing to manage an AIF established in the UK would need to be authorised in the UK to do so and may also have to comply with UK private placement rules with respect to the marketing of such AIF to investors. AIFMD does include provision for a non-EEA AIFM to market funds within the EEA on the basis of a third country passport. However, the parameters of this are not yet certain and will depend upon the provision of equivalence determinations by ESMA and decision of the EU Commission, both of which are uncertain.
- If authorisation in an EEA Member State will be required in order to provide investment services to clients or customers in that state or in order to benefit from the passport, applications for authorisation should be planned well in advance of the UK leaving the EU as certain national authorities may not have the resources to process an increased number of applications within the required timescale.
- EU fund managers relying on the passport to manage UK UCITS and UK AIFs will also need to apply for authorisation from the FCA to undertake such activity following Brexit, if it is no longer possible to rely on the passport.
- In the case of UK UCITS, consideration should be given to such funds being re-domiciled to another EEA Member State and re-authorised under the UCITS Directive.
- Consider the inclusion of clauses in contracts to facilitate the assignment or novation of such contracts as part of any required restructuring.