What options are in front of alternative fund managers if the UK departs the European Union without a trade deal?

With the UK’s exit from the European Union less than three weeks away and a chance that Brexit could happen without a trade deal, wealth managers are understandably nervous. An issue that has been debated before in London’s financial community is so-called “passporting” of financial services and of market access. 

If the UK is no longer a member of the Customs Union after 29 March and does not have a treaty deal to give it access to the European Single Market, what should wealth and asset managers do? Already, some fund management organisations such as Legal & General have shifted some activities to EU states to ensure business continuity. 

Some data can convey what is potentially at stake. The EU’s investment funds sector had total assets under management of €15.2 trillion ($17.1 trillion) at the end of last year, according to data issued last week from the European Fund and Asset Management Association. And pan-European UCITS funds, which can be bought and sold across national borders, accounted for €9.284 trillion in terms of net assets. Alternative investment funds, such as hedge funds, private equity and property, held €5.873 trillion. Nine countries recorded positive asset growth in 2018. These are large markets, with the UK having been a major driver of fund-raising and managing money.

What could happen if the UK departs the EU with no deal? According to UK-based financial services group SGG, there are a number of options to consider if this happens. (Its guidance was issued at a recent event in the City, attended by this publication.)

In the case of a UK manager overseeing existing funds for which fund-raising is closed, UK asset managers will be able to keep managing funds for which money-raising is closed. With alternative investment funds that operate under the AIFMD passport, UK private equity managers have several options: They can set up an alternative investment fund manager in an EU member state such as Ireland or Luxembourg; they can appoint a third-party AIFM. In the latter case, the UK manager can provide investment advice to the AIFM and undertake portfolio management once conditions for delegation of power back to the UK are met.

In the event of a no-deal Brexit, another route that UK managers can take to get access to EU investors is to use national private placement regimes. If the UK leaves without a deal on 29 March, UK fund managers would have the status of a “third country” alternative investment fund manager. EU member states will allow a third country AIFM to sell alternative investment funds in their country in a number of ways. However, private placement rules vary “considerably” between EU member states, SGG says, with some imposing long waiting periods, and others such as France, Italy and Spain where private placement is off-limits. SGG said there was no indication when the UK could expect its Financial Conduct Authority to have co-operation agreements in place with other EU member states. At the time of writing, the position appears unclear.

Finally, SGG set out another situation for fund managers, such as EU funds accessing UK investors under a no-deal Brexit which use the Financial Conduct Authority’s “temporary permission regime”. The temporary regime allows most European Economic Area-domiciled investment funds to continue to be sold to the UK to new and existing investors for up to three years in the event that there is a no-deal Brexit. The FCA said that managers who want to continue marketing passported funds in the UK after Brexit can now register for temporary permissions. The FCA opened this window on 7 January this year.

As reported here, the UK's Financial Conduct Authority has signed a number of memorandum of understanding pacts to deal with the impact of a "no deal" Brexit.