The EU reminds asset managers of the consequences of Brexit

On 9 July 2020, the European Commission published an Advice to stakeholders reminding UCITS ManCos and AIFMs of the need to take appropriate action in good time ahead of the UK’s transition period coming to an end on 31 December 2020.

Although the UK formally left the EU in January, EU rules (including the UCITS Directive and AIFMD) continue to apply until 31 December 2020, when the transition period ends.

The impact for UK firms

The end of the transition period brings with it a number of consequences for UCITS ManCos and AIFMs which have been authorised by the FCA as they will cease to be EU authorised UCITS ManCos or AIFMs and will, instead, all become third country (ie non-EU) managers of AIFs.

(Since - very broadly speaking - an AIF is a collective investment fund that isn’t a UCITS and since it won’t be possible for a UK UCITS to remain a UCITS after the transition period, as UCITS need to have an EU authorised manager, from 1 January 2021, UK UCITS will become AIFs.)

This means that (currently) FCA authorised ManCos and AIFMs will no longer be able to manage and market funds in the EU on the basis of an EU passport.

As the AIFMD third country passport regime has never been activated, third country AIFMs that want to market AIFs in the EU will have to rely on a given Member State’s National Private Placement regime (NPPR) – not all Member States have a NPPR and some of these only permit marketing to professional investors.

UCITS ManCos or EU AIFMs which are subsidiaries of UK entities are, themselves, EU companies and so can continue to operate on the basis of their existing authorisation.

The impact for EU firms

As mentioned above, once the transition period ends, UK UCITS and AIFs will be third country AIFs. This means that:

1. Managing and marketing a fund

• An EU UCITS ManCo which manages a UK (former) UCITS will need to be authorised under AIFMD to manage a third country AIF.

• Where a third country AIF is managed by an EU AIFM but not marketed in the EU, the AIFM must comply with AIFMD other than the rules on depositaries and annual reports and a co-operation agreement must be in place under Article 34 of AIFMD.

• Where a third country AIF is managed by an EU AIFM and is marketed in an EU Member State under Article 36 of AIFMD, this will be subject to the relevant NPPR (if the Member State has one).

2. Disclosure to investors

• UCITS ManCos and AIFMs will need to inform investors of the consequences of the UK’s withdrawal and the end of the transition period, in particular:

  • AIFMs must disclose to investors any material change to the information required under Article 23 of AIFMD including the legal implications of the contract to invest

  • UCITS ManCos must keep the essential elements of the UCITS’s prospectus and KIID updated, including information on Member States in which the ManCo is authorised, where the UCITS is managed or marketed cross-border.

3. Investment restrictions

• While neither the UCITS Directive nor AIFMD prohibit investment in eligible assets located outside the EU, some restrictions exist around fund-of-funds structures - in particular, EU authorised UCITS will have to assess the eligibility of (former) UK UCITS.

4. Delegation of portfolio, risk or investment management

• Delegation of certain functions, in particular, portfolio management or risk management (or investment management for a UCITS) can be made to a UK entity (as a third country firm) only where there is a cooperation agreement between the competent authority of the ManCo’s or AIFM’s home Member State and the FCA.

  On 17 July, the FCA confirmed that the Memoranda of Understanding covering cooperation and exchange of information, which it had reached with ESMA in February 2019 remain relevant and will come into effect when the transition period ends

  ESMA’s Opinion of July 2017 provides specific clarification on a number of matters, in particular on the risks of letter-box entities, which could arise from delegation or the use of third country branches for the performance of functions/services with respect to EU clients.

5. Delegation of depositary functions

• Finally, under the UCITS Directive and AIFMD, an EU UCITS's or AIF’s depositary must be located in the home Member State of the fund

  Safekeeping functions can be delegated to a third party but, where this is to a third country entity, the UCITS or AIF depositary must be able to show that it has objective reasons for delegating.

  The depositary must also obtain a legal opinion from an independent party as to the adequacy of the UK’s insolvency laws.