While European investors seeking to invest in UK funds will encounter bigger barriers if there is a no-deal Brexit, some options could remain, an expert has said.
Olivier Fines, head of advocacy for Emea at the CFA Institute, the global association of investment management professionals, explained: “In the case of a no-deal Brexit and no regime of equivalence or memorandum of understanding in place between regulators – the worst case scenario, by definition, the passports under Mifid, Ucits or AIFMD would cease to operate.
“This would immediately have two sorts of consequences: For one, UK-based investment funds (Oeics, trusts) would no longer be able to be recognised and marketed into the EU. Second, EU-domiciled funds could no longer delegate investment management to UK-based asset managers. This is what is at stake.”
But while this would hamper investments at large, alternative ways of investing in UK funds exist.
Julie Patterson, head of asset management, regulatory change, at KPMG, told Expert Investor: “The current passports for UK Ucits and UK Alternative Investment Funds (AIFs) will fall away, but professional investors can, of their own initiative, choose to invest in non-EEA vehicles. It’s called ‘reverse solicitation’.
“Also, individual member states can decide whether to allow UK funds to be marketed or sold to professional investors in their own jurisdiction. A number have ‘private placement regimes’ already in place. Again, it has always been unlikely that the future EU-UK trade agreement would cover this, so whether or not there is an agreement is unlikely to impact this position.”
But it is unclear whether the rules on ‘reverse solicitation’ could change going forward.
On August 18, the European Securities and Markets Authority (Esma) sent a letter to the European Commission, highlighting areas to improve in the forthcoming review of the AIFMD.
The letter stated: “There is merit in considering achieving greater clarity on the definition of reverse solicitation.”
Esma said that it wants to underline “the importance of clarifying the notion of reverse solicitation mentioned in Recital 70 of the AIFMD, which is currently subject to divergent practices and interpretation at national level, to protect investors”.
But Fines explained to Expert Investor that, even if a EU-UK deal is reached, he expects Esma to strengthen rules around delegation.
“Part of this is linked to concerns around investor protection, especially in a context where it is unclear what sort of oversight Esma would retain over activities delegated to a jurisdiction which may not have to abide by EU rules.
“Brexit meaning Brexit, it becomes a question of fitting the square of UK sovereignty into the circle of EU’s natural aspirations for harmonisation of its rules within its borders,” he said.
Fines also pointed to the large amount of assets that UK firms currently manage for the continent, with “about €2trn on behalf of European Economic Area (EEA) clients, which represents over 50% of its foreign activity”.
Paul Angell, investment research analyst at Square Mile Investment Consulting and Research, believes that UK asset managers are well prepared for the eventuality of a no-deal Brexit.
“Before the UK’s decision to leave the European Union, many asset management groups already ran continental monies in the requisite Sicav structures and were therefore protected in a hard Brexit scenario.
“Others have had to make contingency plans: M&G for example went through a process of splitting all continental assets out of their UK Oeics into Luxembourg Sicav structures in March 2019. At the time, the move led to a large fall in the size of their UK Oeic business; however the assets they manage on behalf of European investors should now be unaffected in a hard Brexit scenario.”
UK asset management firms can also set up a shop on the continent, Fines added.
But he believes that “some level of compromise will be reached” in the negotiations.
“The UK may have to accept some dent into its sovereignty over financial services supervision while the EU could continue to see benefits in operating a reasonable partnership with a powerful and expert financial centre,” he said.