UK Brexit investment manager plans don't cover post-transition status

The UK government has published two draft statutory instruments aimed at converting retained EU law governing investment funds and their managers into domestic law.

In order to continue selling existing alternative investment products into the UK after Brexit, alternative investment fund managers (AIFMs) will have to notify the Financial Conduct Authority (FCA). Once an AIFM has done so it will benefit from a temporary permissions regime to last for three years from ‘exit day’ on 28 March 2019, which will enable the passporting of funds governed by the EU’s alternative investment fund management directive (AIFMD).

After this three-year transitional period European AIFMs will have to use the UK’s national private placement regime (NPPR) to market their products to institutional investors in the UK, as is currently required for managers based outside Europe.

Both UK and European Economic Area (EEA)-headquartered AIFMs will have to use the NPPR to market any new EEA fund products after exit day, with the temporary passports only applying to products currently marketed in the UK.

Investment funds expert Ian Warner of Pinsent Masons, the law firm behind Out-Law.com, said the draft instrument provided clarity for EU-based managers who wanted continued access to the UK market.

“What of course it doesn’t cover is how the UK’s substantial AIFM industry will gain access to the EU’s investor base when the UK effectively becomes a third country under AIFMD,” Warner said.  “It is on that point where we are seeing many clients considering their options for both existing and new funds.”

The government said it would not be appropriate for UK supervisors of fund managers and products to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. The statutory instrument (40 page / 696KB PDF) has removed provisions requiring cooperation and information sharing.

UK authorities will be able to share information with their EU counterparts on a discretionary basis, using the existing domestic framework for cooperation and information sharing with countries outside the UK.

However Pinsent Masons’ funds expert Oliver Crowley said more clarity on reporting was still needed.

“The draft legislation also clarifies that UK AIFMs won’t be required by the FCA to report on EU companies which they acquire control of. However, it remains to be seen whether other legislation will deal with that issue to enable marketing to take place cross border on the condition that reporting has been satisfied,” Crowley said.

The government has also published a draft statutory instrument relating to collective investment schemes (30 page / 624KB PDF). This legislation will maintain the existing investment rules for funds that are currently sold to retail investors under the Undertakings for Collective Investment in Transferable Securities (UCITS) directive.

As UK authorised schemes will no longer be established and authorised in the EEA, they will lose their legal status as UCITS funds according to EU law. The statutory instrument therefore introduces a ‘UK UCITS’ regime for funds established and authorised in the UK.

UK UCITS will be able to use settlement accounts in EU member states.

As with AIFs, a three-year temporary passporting regime will apply for managers who want to continue selling existing EEA UCITS in the UK. After the end of this period, the fund will have to be recognised under the Financial Services & Markets Act, as will any new EEA UCITS which are not part of the temporary permissions regime.