Editor’s Letter – Issue 115

July | August 2016

Originally published in the July | August 2016 issue

UK Government ministers’ talk of potentially repatriating some new EU migrants is empty rhetoric for now as ‘Freedom of Movement’ applies, as does all EU law – until and unless the UK formally exits (likely at least two years ahead). But the Government’s policy on non-EU migrants may reveal some clues about aims for any new immigration policy. With some exceptions, non-EU migrants must earn over £35,000 to remain in the UK after five years. As fresh-faced finance industry graduate trainees in London earn above that threshold, financial firms perhaps need not fret that they will lose staff. But if freedom of movement remains an inalienable right, and obligation, of EU (or EEA) membership, they could lose automatic access to the Single Market.

Amid great uncertainty, we highlight a selection of predictions viewed as probable by contributors to this, and the past few, issues. Multiple reasons exist for many EU rules persisting post-Brexit, whether de facto or de jure. An EEA/EFTA relationship with the EU would require ongoing harmonisation in many areas; market access may depend upon demonstrating equivalence with EU rules; some EU law is already primary UK legislation; and some EU rules are part of global – typically G20 (e.g. EMIR clearing) or OECD (e.g. BEPS) – initiatives.

Most routes for accessing EU investors should remain after any Brexit. Many managers already have, or could set up, their own EU gateway hub (and at least two managers of that rare breed, the UK UCITS, will re-domicile vehicles); or make use of a third party AIFMs, e.g. in Luxembourg, Ireland, Malta or elsewhere, for UCITS/AIFMD passports. ‘Equivalence’ for third countries via AIFMD passports and/or MiFID II rules should permit continuing access. It is widely viewed as a virtual certainty that UK AIFMs could demonstrate equivalence and ESMA’s latest update on third country AIFMD passports, in July, was greeted positively by AIMA. But as both third country AIFMD passports, and MiFID II, have already been delayed – and may be further delayed – Brexit could occur before equivalence rules kick in, e.g. if MiFID II was postponed to 2020 and Brexit materialised in 2019.

Still, even those with neither passports nor equivalence could still act as advisers for platforms, or make use of some National Private Placement Regimes (NPPRs), which should remain in force until at least 2020. The UK’s own NPPR for inbound marketing (and the oversight regime for funds/firms marketed outside the EU) could revert to a pre-AIFMD lighter touch, without compromising equivalence for outbound marketing to EU countries. A dual regime, offering the best of both worlds, would be the ideal scenario, and reverse solicitation may not be impacted by Brexit.

But some managers may want to explore their options for diversifying their distribution avenues to hedge their bets under a variety of legal scenarios, making sure that backstops, such as toeholds in platforms, exist. Separately, the wide range of financial market event risks entailed in various Brexit journeys could be speculated on, or hedged, with options, which continue to see a surge in volumes as market volatility reverts towards more typical historical levels.