Brexit Not A Threat to Ucits Fund Passport
The UK vote to leave the European Union is not an immediate threat to UK asset managers with Irish and Luxembourg Ucits funds, the passport which allows funds authorized in one EU member state to be sold freely across the trade bloc.
Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman in Dublin, said in a blog that fund managers normally domicile their Ucits funds in either Ireland or Luxembourg.
“The big difference between the Ucits passport and other financial service passports, like MiFID, is that Ucits is regulated at the fund level, not the manager level,” he added.
National regulators are responsible for approving Ucits funds and there is no distinction between EU and non-EU fund managers.
Tuffy continued: “In the Ucits If Brexit results in the UK losing access to the EU market, UK managers will simply go from being EU managers of Ucits funds to a non-EU manager of Ucits funds, which will have no impact on their Irish and Luxembourg Ucits passports.”
The Ucits funds which are domiciled in Ireland and Luxembourg will have already met the local regulations, regardless of the domicile of the fund manager. Tuffy gave the example of fund managers in New York, Hong Kong, and Melbourne who are able to manage and distribute Ucits across the EU under this system.
He acknowledged that is it possible that after Brexit, the EU could change the Ucits procedures but this will not be easy, or quick.
“Even if there were factions who would like to see the UK’s Ucits access restricted somehow, they would surely face stiff resistance from Ireland, Luxembourg, and the Netherlands,” Tuffy said. “Any attempt to make these substantive changes to the Ucits framework would be the subject of intense debate.”
Tuffy explained that Ucits is different from, for example, the Alternative Investment Fund Managers Directive which allows alternative asset managers to market funds in the region under a single passport and where non-EU jurisdictions have to be authorized to use the AIFDM passport.
EU regulators have recommended that the AIFMD marketing passport should be extended to alternative investment fund managers in Switzerland, Jersey and Guernsey but not to the US, Hong Kong and Singapore, and even the three recommendations have not yet been approved by the EU legislature. Therefore UK fund managers could lose the ability to sell into the EU under the AIFMD passport.
The impact of Brexit on UK-based financial services is still unclear as it will depend on the outcome of the trade negotiations between the UK government and the EU. These discussions may not even start until the UK triggers Article 50 of the Lisbon Treaty, which gives the country two years to leave the EU.
Law firm Ashurst said in a note on the potential impact of Brexit on the asset management industry that a Ucits fund must be domiciled in the EU and managed by an EU management company, and non-EU country firms do not have any passporting rights.
“Should Brexit occur, and depending on the type of exit, UK Ucits and management may have to migrate or redomicile into an EU member state unless the Ucits is restructured so that it can self-manage,” added Ashurst. “Should the UK not join the European Economic Area, UK alternative investment fund managers would no longer be EU AIFMs, and UK fund managers would likely either have to use local national private placement rules (if available) or wait for the UK to be deemed equivalent and for the passport to be extended.”
Ashurst also noted that most UK alternative investment fund managers do not use AIFMD, but instead use the MiFID cross-border passport. “Therefore, considerations detailed in relation to MiFID and the Capital Requirements Directives will apply in order to consider whether this model will continue to exist in a materially unmodified way,” said the law firm.
Law firm Clifford Chance said in a note that funds established as Ucits in the UK would no longer be able to use the passport to market into the remaining EU member states.
“If the fund remains in the UK, it is likely that the UK regulator would regard the fund for UK regulatory purposes as a type of non-Ucits retail fund, which would be categorised as an alternative investment fund under AIFMD,” added Clifford Chance.
The note said that similarly, the EU would treat the UK fund as an alternative investment fund under AIFMD regime which means it could only be marketed into the EU to professional investors. In addition some EU member states, such as Italy, have not implemented an AIFMD private placement regime and in others, such as Germany, the conditions for the AIFMD regimes are very restrictive.
Clifford Chance warned that the loss of management and marketing passports may lead some funds to consider changing domicile as UK management companies would no longer be able to act as managers of EU Ucits and EU management companies would no longer be able to act as managers of UK Ucits. In addition under AIFMD, EU alternative investment funds would not be able to use UK banks as depositories and vice versa.
Chris Bates, partner at law firm Clifford Chance, warned at a conference at the end of last month that Brexit would have a number of unexpected regulatory consequences. For example, some EU members only accept financial collateral from another EU member state and UK firms could lose remote access to EU exchanges.
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.