A failure of the UK to join the European Economic Area, following last week’s Brexit decision, could have serious implications of the fund management industry, according to the London office of global law firm Morgan Lewis.
Investment specialists within the Morgan Lewis UK-based team have been analysing the potential impact of Brexit and how the fall-out could affect the industry further down the line.
And as the UK Government today, in a statement, outlined its plans to update Ucits IV to Ucits V, the fund management industry begins to digest how this and other fund classifications will impact on firms in a post-Brexit world.
“The impact of Brexit will largely depend on the nature of your business and where your investor base is located,” said William Yonge, private investment funds partner at Morgan Lewis.
“The impact on Mifid and Ucits firms is potentially greater than that on Alternative Investment Fund Managers (AIFMs) because passports are not available for third countries under Mifid and Units. The AIFM directive provides for the passport to be extended to managers based in qualifying third countries.
“Given the UK’s role to date in the EU, it is difficult to see how the UK would not qualify for the third country passport but the politics surrounding any decision by the EU to grant the passport to the UK make it difficult to predict the outcome,” he said.
European Economic Area
A potential implementation of the the so-called Norway model, would have the least impact, with the UK joining the European Economic Area (EEA) and retaining the passport to provide services EEA-wide and access the single market.
In this case the UK would still have to make significant financial contributions to the EU but would not have a seat at the table in negotiating legislation.
“However, the Norway model is complicated by the fact that [the] AIFMD hasn’t been made a part of the EEA’s cooperation agreement yet, meaning the passport isn’t technically legally implemented in the three EEA countries,” added Yonge.
“If we do not join the EEA, there could be a significant impact on UK fund managers,” said Simon Currie, private investment funds partner at Morgan Lewis. “But the extent of this impact will differ between different managers. A hedge fund manager with most of its investors in the UK, would be much less troubled by Brexit than a manager that is accessing capital across Continental Europe.”
But Brexit and the impending fall-out does have some positives for fund management houses, particularly those operating outside of the Eurozone.
“It could be potentially good news for non-European managers,” added Currie. “For US hedge funds marketing into the UK, for example, Brexit would offer a potential benefit if the UK were inclined to drop the AIFMD marketing regime and revert to the previous regulatory regime.”
Ucits IV moves to Ucits V and beyond
Legislation around the UK Government’s move from Ucits IV to Ucits V has been formalised in a post implementation report issued, earlier today.
A statement, issued today by HM Treasury department, highlighted that the Ucits IV directive remains in place, but it has since been amended by a new Ucits V directive. This has the objective of updating the legislative framework to ensure the safeguarding of Ucits fund operations across the EU, lower risk surrounding the management of Ucits funds, and to build consumer protection and trust in the market.
The statement added that Ucits V is expected to be followed with a Ucits VI directive. The UK Government said that it will continue to engage with industry and consumer groups to ensure that future Ucits legislation remain “proportional and fit for purpose”.