Post-Brexit Options for UK Managers
With the triggering of Article 50, the Prudential Regulation Authority (PRA) review of Brexit impact and the recently published ESMA opinion on supervisory convergence, decision time has arrived for many UK investment managers who operate European funds on the basis of a passport from the UK. They need to make alternative arrangements to future proof the management of their EU products. ESMA’s supervisory guidance has made it clear UCITS Managers, AIFMs and Supermancos require that “key executives and senior managers of EU authorised entities are employed in the Member State of establishment and work there to a degree proportionate to their envisaged role”.
The options for UK managers
UK investment managers have several options for establishing Irish fund products. They could establish a self-managed investment fund (referred to as a SMIC, self-managed investment company), establish an EU management company, or appoint an EU27 authorised third party management company with the day-to-day performance of the portfolio management function being delegated back to the UK domiciled investment manager. While ESMA has noted that management companies should not become “letter box” entities, this position is not new and UCITS and AIF management companies have regularly delegated the day-to-day performance of the portfolio management function to entities based outside the EU. Despite the recent ESMA advice it is unlikely that this practice will be discontinued.
Setting up or appointing an EU Management Company
Three primary options exist to meet the substance requirements for an EU Management Company.
Firstly, investment managers can choose to establish their own AIFM, UCITS Manager or Supermanco in the EU27 and put ‘boots on the ground’ to provide the required substance.
Secondly, managers can opt for a hybrid model whereby they establish their own management company but utilise secondees to provide some or all of the required substance in the EU.
Thirdly, managers can appoint an existing third party to act as a management company to their fund and delegate the investment management function back to the UK entity.
- Establishing a management company - For those establishing their own management company the level of substance required will depend on the nature, scale and complexity of the activities being undertaken. Factors to be considered would include the number and nature of the funds operated, the extent of the activities carried out directly by the management company and whether the management company intends to passport its services to other EU jurisdictions. The approval process for a new management company is usually between 4-6 months (this would be a similar timeframe for establishing a SMIC). If a manager is also seeking permission to manage separately managed accounts, the approval process is likely to take a further 2 months given the additional requirements which must be satisfied to undertake individual portfolio management.
- Establishing a management company but utilising secondees (hybrid model) - In the hybrid option, rather than directly employing staff to undertake all managerial functions, the management company may be staffed using secondees. The extent to which the use of secondees is permitted and the amount of time they dedicate to the operation of the management company depends on the nature, scale and complexity of the management company’s operations. The regulatory timeframes involved in establishing a management company on this basis would be similar to establishing a full management company albeit there may be some time saving in the recruitment process as there will be less staff directly recruited.
- Appoint an existing third party management company - The third option is for the UCITS or AIF to appoint an existing third party management company. This management company, which already has significant local expertise and access to the EU passport, would then delegate the investment management function back to the promoter of the fund. As the third party management company has an existing authorisation, no additional license or authorisation is required, making this option a swifter and potentially more cost-efficient one than establishing a new management company in the EU.
In all of these options, the management company permission gives the management company the right to distribute the products which it manages. In many cases the management company may delegate the distribution function to a MiFID authorised entity but there is no requirement for it to do this.
Why Ireland for asset managers
Ireland already has a leading position as a jurisdiction for investment funds and with a combination of a 12.5% corporation tax rate, measures such as the VAT exemption of management company fees, and the well-educated and skilled pool of labour it is a desirable location for fund management companies. As a location within the EU27, it has much in common with the UK, such as similar employment laws and under the special assignee relief programme, certain tax advantages may also be available to employees transferring to Ireland from the UK. The Central Bank of Ireland is an experienced regulator which has traditionally had close ties to the Financial Conduct Authority (FCA) and is very experienced in regulating investment funds and fund management companies. A number of leading managers already have significant substance in Ireland while other significant players have opted for both the hybrid and third party management company models.
Given ESMA’s guidance that the ‘entity’s programme of operations should provide a clear justification for relocating to the Member State of establishment’ - for all three management company options, Ireland is the clear choice of domicile.
Des Fullam, Director, Carne Group