Brexit – An Irish Solution to a British Problem
As you will be aware, on 23 June 2016 the UK held a referendum on its membership of the European Union (“EU”) and a majority of those voting voted in favour of the UK leaving the EU. The immediate impact of that referendum (which we will refer to as “Brexit”) was considerable market volatility and a significant impact on Sterling and on UK and global equity prices. The longer term impacts of Brexit have yet to be determined, as the result of the referendum had no immediate effect on the UK’s legal status as a member of the EU.
The process by which a member state leaves the EU is governed by Article 50 of the Lisbon Treaty (“Article 50”), which provides for a two year period, running from the date upon which the UK formally serves notice on the European Council, during which the UK and the EU will negotiate the withdrawal agreement. The latest statement from the UK suggests that it will serve that notice by the end of March 2017, meaning the UK will remain a member of the EU until at least 2019. This two year period may be extended with the unanimous consent of the other 27 member states. It is difficult at this stage to predict what the terms of the withdrawal agreement may be, as this is the first time that the Article 50 procedure has been applied and there is no precedent for the withdrawal agreement. Indeed, there remains considerable doubt as to whether the UK will actually trigger Article 50, notwithstanding the very clear intentions expressed by the UK government.
Implications for Asset Managers and Investment Funds
The significance of Brexit for the asset management industry cannot be underestimated. European distribution of mutual funds, and increasingly of alternative funds, is done on a cross-border passporting basis. A fund authorised in one EU member state can be readily marketed in another EU member state without having to go through a separate approval process. Similarly the EU principle of free movement of services means that a manager authorised in one EU member state can manage funds established in any other EU member state. Many UK managers currently avail of this principle to manage funds domiciled in Ireland. If the UK leaves the EU then, depending on the terms of its Article 50 withdrawal agreement, a UK manager may not be able to manage funds domiciled in other EU member states and may not be able to distribute UK domiciled funds in the EU.
Potential Irish solutions
Ireland remains committed to its membership of the EU and retains its important position as an English speaking gateway to one of the world’s largest markets. A recent PwC survey ranked Dublin as the second most attractive European financial centre after London, based on criteria such as market access, ease of doing business, legal rights and education levels. This makes Ireland a natural home for UK investment management businesses looking to maintain a European footprint post-Brexit.
Irish investment funds will continue to benefit from marketing passports post Brexit and so UK managers with UK domiciled funds which are currently distributed cross-border may look to re-domicile their fund ranges in Ireland. In addition, Irish managers will continue to benefit from EU passports and so UK managers may look to establish Irish affiliate managers who can act as managers to their Irish domiciled funds and also to funds which may be domiciled in other EU member states. As Irish managers currently delegate investment management activities to a significant number of managers authorised in other OECD member states, it should be possible for them to delegate to UK managers post-Brexit.
Are UK managers looking for these solutions now?
It is important to remember that the UK continues to be a full EU member and so no immediate action is required from UK managers. However, UK managers are looking to put in place contingency plans, so that if the UK does leave the EU, they will be ready to take the necessary steps to maintain their presence in Europe. Given the strong historical trade links between Ireland and the UK, the degree of commonality between our legal systems and language and the familiarity of UK managers with the Irish funds industry, Ireland is well placed to solve any problems which Brexit poses for UK managers.
Tara Doyle, Partner and Head of the Asset Management Group, Matheson