Brexit – What Next for Your Pan-European Asset Management Business?

Background

The UK referendum held on 23 June 2016 has resulted in a majority voting in favour of the UK leaving the EU. 

As of now the UK is still a part of the EU notwithstanding the vote on 23 June.  It is now up to the UK parliament to decide if, and if so when, to formally start the process to leave the EU.  The exit of a member state from the EU is dealt with in Article 50 of the Treaty on European Union (TEU) which has only existed since 1 December 2009.  This is the mechanism that the UK would follow to formally leave the EU.

As regards timing, Article 50(3) of the Treaty provides that:

"The Treaty shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in [Article 50(2)], unless the European Counsel, in agreement with the member state concerned, unanimously decides to extend this period".

Accordingly, it may take significantly longer than two years for the exit of the UK from the EU to actually occur.  In this regard, it is interesting to note that it took far longer than 2 years to negotiate the UK's accession into a much smaller and lighter European Communities. 

For the purposes of this note, we have assumed that some form of withdrawal agreement (a Withdrawal Agreement) will be entered into as it is difficult to envisage how it would be in the best interests of either the remaining member states of the EU or of the UK for the UK to exist without some form of agreement. 

The difficulty with speculating as to the content of any such withdrawal agreement is that no one has any idea as to what will be provided for in such a Withdrawal Agreement.  No member state has exited the EU to date and so there is no precedent to go by.  Any Withdrawal Agreement between the EU and the UK would likely cover a wider variety of areas, of which financial services would be only one.  To further complicate matters, asset management would be only one part of the financial services agenda. 

So what now?

It is worth scoping out the impact of a Brexit on a variety of Irish regulated fund structures that a UK asset manager may already have in Ireland or may look to put into place in light of a looming Brexit.

In brief this analysis would be as follows:

Irish self-managed UCITS Fund with a UK investment manager or Irish UCITS with EU (but not UK) UCITS management company and a UK portfolio manager

Little immediate change for either option here. 

A UCITS must be domiciled in the EU and managed by an EU “management company”.  An Irish authorised self-managed investment company or ICAV meets both of these requirements (it is an EU fund and acts as its own “management company” so that would continue to be in the EU as well) and an Irish UCITS with an EU (non-UK) UCITS management company would also continue to meet the requirements.  Neither will change on a Brexit.

UCITS funds are entitled to have non-EU investment managers (and many do) and so there should be no issue with the UK entity continuing as investment manager after a Brexit.  It may be necessary, at that point, to have the UK entity approved by the Central Bank as a non-EU investment manager but this is not a lengthy or burdensome process. 

Passporting of an Irish UCITS for sale in other EU countries (other than the UK)

This should not be affected by a Brexit.  The UCITS would continue to be an Irish authorised UCITS fund which would be entitled to passport the sale of its units to other EU jurisdictions. 

Sale of the UCITS into the UK

Following a Brexit and subject to anything agreed in any Withdrawal Agreement, this would be a matter for local UK law and may require action on the part of the UCITS to seek the necessary authorisation or otherwise register for public sale in the UK. 

Irish UCITS Fund with UK UCITS management company

These are possible but very uncommon.  Currently the UCITS regulations provide that a UCITS must have an EU management company and so there may be a need to change management company or have the Irish fund become self-managed (if it is a legal entity in its own right).

Irish Alternative Investment Fund (AIF) with an EU (but not UK) AIFM and a UK portfolio manager

Again, little immediate change here. 

The Irish AIF would continue to have an EU AIFM.  EU AIFMs can delegate portfolio management to non-EU investment managers (and many do) and so there should be no issue with the UK entity continuing as portfolio manager after a Brexit.  It may be necessary, at that point, to have the UK entity approved by the Central Bank as a non-EU investment manager but this is not a lengthy or burdensome process. 

Marketing shares of the an Irish AIF which had an EU (but not UK) AIFM into the EU (other than the UK)

Little change here again as the EU AIFM could continue to market the shares of an Irish AIF to professional clients on a passport basis throughout the EU.  The fact that the EU AIFM had delegated portfolio management to a non-EU entity would not impact on that. 

Marketing of Shares of an Irish AIF into the UK

Following a Brexit and subject to anything agreed in any Withdrawal Agreement, this would be a matter for local UK law and may require action on the part of the Irish AIF to seek the necessary authorisation or otherwise register for sale in the UK (assuming this is permitted at all). 

Irish AIF with UK AIFM

Unlike the UCITS Directive, the AIFMD governs the manager rather than the fund and accordingly, a Brexit could have a more significant impact for an AIF with a UK AIFM.  One would need to ensure that, following a Brexit, the UK AIFM could continue to act in that role.  This would be a matter for the Withdrawal Agreement. Alternatively, this could be remedied by appointing an EU AIFM or having the AIF seek authorisation as its own internally managed AIF (if it was a separate legal entity).

Marketing shares of an Irish AIF which had a UK AIFM into the EU (other than the UK)

Unlike under the UCITS Directive, the right to passport the sale of shares in an EU AIF is given to EU AIFMs under the AIFMD1.  Accordingly, unless the Withdrawal Agreement provided otherwise, the shares in the Irish AIF with a UK AIFM would no longer be able to be sold on a passported basis throughout the EU and one would have to look at a private placement regime on a jurisdiction by jurisdiction basis to see if such sale would be permitted in such jurisdictions.  Again, this could be remedied by appointing an EU AIFM or having the AIF seek authorisation as its own internally managed AIF (if it was a separate legal entity). 

Marketing of Shares of an Irish AIF with a UK AIFM into the UK

Following a Brexit and subject to anything agreed in any Withdrawal Agreement, this would be a matter for local UK law and may require action on the part of the Irish AIF to seek the necessary authorisation or otherwise register for sale in the UK (assuming this is permitted at all). 

Conclusion

About the only thing for certain is that a Brexit will lead to a period of uncertainty.  In all likelihood there will be a negotiated exit for the UK, which may take a number of years to agree and a further period of time to fully implement.  It is only when the final details of any such Withdrawal Agreement are known that you will be able to make fully informed choices. 

However we expect to see UK managers adding EU funds to their offering, if they do not have them already, so as to be able to offer investors certainty during what may be a turbulent transition phase.

We would be delighted to assist any UK manager looking at setting up Irish funds or making amendments to their existing structures to smooth the impact of a Brexit on their investors.

For more information please contact Michael Barr,  Nollaig Greene or a member of the Asset Management & Investment Funds Team.

Date published: 24 June 2016

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1 There is ongoing discussions as to extending this to non-EU AIFMs in certain circumstances but these have yet to be concluded.