Maintaining distribution access for Irish funds post-Brexit
Ireland enjoys many deep and strong business links with the UK asset management industry. In addition to the excellent service providers, there are many reasons for the close links which exist between Ireland and the UK such as: geographical proximity; shared language; shared legal framework; time zone; business environment and; long standing cultural and social links. This close partnership is demonstrated by the fact that over one third of all managers establishing funds in Ireland are from the UK, and more than 40% of the 520 overseas AIFMs operating in Ireland on a cross border basis are UK AIFMs. This relationship gives Ireland a unique perspective on the potential implications of and solutions to a post Brexit scenario for asset managers and investors alike.
One of the key consequences of the UK’s decision to leave the EU is that UK investment firms are likely to lose passporting rights into the EU based on the current rules. Of course this could also mean that EU funds may lose passport distribution rights into the UK. In light of these scenarios, it is worth examining three key Directives - the UCITS, AIFMD and MiFID Directives - and the detailed regulatory requirements they apply to firms based in EU member states which are, in return, given passporting rights elsewhere in the EU.
From a fund distribution perspective, the UK is the most significant market for the registration of Irish UCITS funds for sale. According to a PricewaterhouseCoopers (PwC) report benchmarking fund distribution across the EU 1 there were 2,128 Irish fund registrations in the UK at the end of 2015 (55% of all Irish funds at the end of 2015). This was the largest number of fund registrations for Irish funds in any country and amounted to 11% of the total fund registrations for Irish funds in Europe. The UK has consistently been the number 1 market for the sale of Irish domiciled UCITS funds and is usually the first market that an international asset manager establishing funds in Ireland will look to sell to once established.
It is therefore important for both UK based investors and asset managers providing funds for sale in the UK, that this inbound access for Irish funds into the UK is maintained. For continuation of business with least disruption and from an investor choice viewpoint, maintaining this access is something which has been identified as an important factor that the industry in Ireland will work with relevant authorities to maintain.
Alternative Investment Fund Managers Directive (AIFMD)
In addition to the large number of UK AIFMs using Ireland, there are many Irish AIFMs and self-managed AIFs which delegate (or sub-delegate) elements of portfolio management to a third country, e.g. US fund manager. Therefore, it would be possible and indeed highly likely, for Irish AIFMs and self-managed AIFs to delegate portfolio management elements to UK firms. In order for Irish AIFMs and self-managed AIFs to delegate portfolio management to UK managers post-Brexit, the UK will need to be subject to equivalent AIFMD remuneration rules, which are currently already in place.
As previously discussed, the position of Irish based AIFMs and self-managed AIFs in relation to distributing products in the UK will depend on what is negotiated and the UK’s position as a result. However, it is important to note that the UK has a long tradition of favourable private placement for funds from outside the EU to UK based investors. It should be the case that Irish AIFs would have at least the same access as non EU AIFs and this is again something which industry will work to ensure.
MiFID II: Passporting and delegating
Brexit is likely to remove any passporting rights to UK investment firms wishing to access the EU market. Therefore, some UK firms may need to create new EU hubs to market funds in the EU or provide other services to retail clients. This could present opportunities for Ireland to provide solutions for any problems that might be encountered as a result
A concern amongst UK investment managers is in relation to maintaining rights to manage Irish funds under delegation arrangements. Under the UCITS Directive, the approval of portfolio management delegates and arrangements concerning delegates coming from outside the EU is a Member State discretion.
The Central Bank of Ireland (CBI) already has a process in place with many jurisdictions. Given the existence of the already very close relationship with the UK, including Memorandum of Understanding in place between both regulators, it is again highly likely the CBI would quickly and effectively extend this to include the UK if required.
With respect to AIFMD, the picture is complicated by the need for an ESMA cooperation arrangement to be in place which must be signed by each Member State, which given the UK would have already signed with 3 rd country regulators (as an existing ESMA member) should mean this is something which could be put in place early.
As a fund domicile, Ireland is a leading location to establish fund ranges for global distribution as evidenced by the distribution of Irish funds in 70 countries globally. For many reasons, Ireland has a particularly close relationship with the UK, with many managers of Irish UCITS and AIFs delegating day to day portfolio management to affiliates or to third party entities based in the UK. Many of these investment managers will need to assess their future options post-Brexit,since their European fund operations are often established in the UK (under a MiFID authorisation) to access the EU market (via Irish domiciled funds). The industry in Ireland will strive to ensure that whatever option is chosen, including establishing a new EU MiFID entity, Ireland provides the most efficient and effective route for continuing business.
To ensure that there is no lack of service to existing investors and to minimise the risk of market disruption, it is imperative that the Central Bank of Ireland (CBI) sets out a clear roadmap for ensuring the maintenance of existing delegation relationships in Irish fund ranges at a domestic level, where there is national discretion, and at European level within ESMA if necessary. The focus should be on effective grandfathering arrangements for existing funds and the speedy adoption of cooperation agreements with the UK FCA to be effective as of the date of Brexit, to avoid any discontinuity of service. It is particularly encouraging to see recent publicly announced steps being taken by the CBI to ensure appropriate structures and resources are in place to address the needs of the asset management industry following the Brexit referendum.
We are confident the many reasons underpinning the close links Ireland has with the UK investment management industry will be deployed as often before, to ensure the partnerships and solutions provided by Ireland persist, and are expanded for UK managers and investors post Brexit. The industry in Ireland will work hard to make sure this is the case.
Ken Owens, Asset & Wealth Management Partner, PwC Ireland