Editor’s Letter – Issue 112

March 2016

Originally published in the March 2016 issue

Dechert LLP has no corporate stance for or against Brexit (the UK exiting the EU). But the law firm has released an On Point note, and organised a seminar, entitled ‘Brexit: Implications and Potential Consequences for the Asset Management Industry.’ Though any vote for Brexit could create huge uncertainty, it need not precipitate any immediate exit nor any eventual one. Firstly, a referendum vote on June 23rd for Brexit does not bind the UK Government. There could be a second or subsequent referenda and/or further agreements modifying the UK’s relationship with the EU. The prerogative to pull the trigger rests with the UK Government and, if it did notify the Council of Europe of an intention to leave the EU, negotiations over the terms and conditions of any Brexit would likely last at least two years (a period longer than two years requires unanimous EU approval). Dechert’s presumption is that the status quo regarding EU regulation would continue during such a negotiation period.

The probable implications of various Brexit models vary for factors including combinations of asset manager domicile, client domicile and investment vehicle domicile, for different types of investment products and services under AIFMD, MIFID, UCITS and EMIR rules.

Most or all of the income for UK investment managers comes from the sale of services direct (e.g. managed accounts) and income from UCITS and AIFS. Access to AIFMD, UCITS and MIFID passports would no longer be guaranteed. However under MiFID 2 (presumed to be in force before any eventual exit), the UK could register to continue to provide services into the EEA (e.g. through managed accounts).

UK entities could also continue to access AIFMD and UCITS passports through EU Gateway Hubs with appropriate management company or ‘self managed’ structures. Indeed, the majority of UK managers already choose Ireland, Luxembourg, or Malta, rather than the UK, for AIF and UCITS fund domiciles. Those managers that needed to re-domicile funds and/or restructure manco arrangements could do so relatively easily within anticipated Brexit timeframes. As EU rules now stand, there would be no difficulty in these funds delegating actual investment management to the UK in its new capacity as a non-member state provided that appropriate compensation restrictions were entered into reflecting current and future EU requirements in the area.

Under Brexit, the UK could operate a ‘dual regime’ along the lines anticipated in Jersey, with potential for managers to be AIFMD compliant or not, or to have some funds (as well as managed accounts) outside AIFMD scope alongside others covered by AIFMD. If the UK allowed a somewhat lighter touch regime, the UK might have a competitive advantage in creating funds for sale outside the EU.