Managing the Uncertainty of Brexit
Article 50; Passporting; Norwegian model; Swiss-plus; Michel Barnier; David Davis; Fear; Uncertainty. All of a sudden the language of Brexit is part of our everyday lexicon yet none of us know what the outcome is likely to be. In a business where we are asking investors to commit significant amounts of capital over at least three to five-year time horizons, political uncertainty can lead to inaction. Whilst the exact outcome of Brexit is unknown its impact in the investment funds sector can be managed. We are going to consider Brexit’s impact on EU access under 3 headings; Investment Management, Product Manufacture and Distribution.
Much of the European asset management community is based in London. This need not change post Brexit. It should be entirely possible for UK based asset managers to manage EU UCITS and AIF funds under a delegated arrangement. This arrangement is commonplace today for US, Swiss and other managers of well-regulated third country jurisdictions. Regardless of whether there is a hard or soft Brexit it seems inconceivable that UK managers would be prohibited from managing EU funds on a similar basis.
Most funds which are marketed on a cross border basis are established in either Ireland or Luxembourg. Over the past 25 years the Irish funds business has grown in parallel with the success of the City of London and has significant expertise in establishing and servicing all types of UCITS and AIFs. We share a common language with the UK, we both operate under a common law legal system, we are geographically and culturally close to the UK and the London/Dublin route is the best served international airline route in the world. The Irish government has been clear that Ireland’s future lies within the EU. Utilising an enhanced self-managed solution, an established third party management company and your own management company Ireland can continue to provide the platform for UK managers to access the EU. Ireland’s market leading position in the servicing of hedge funds makes it the natural home for UK firms seeking to establish an AIFM within the EU27 block.
One area where the impact may be more pronounced is on distribution. While UCITS and AIFMD offer a product passport, a separate licence is needed to sell the product. This is typically carried out under a MiFID passport. While MiFID 2 offers the potential of third country access, the denial of passport rights to UK firms using their MiFID passport to distribute their EU funds post Brexit would be a challenge that would have to be addressed. That said, solutions will be at hand - a MiFID licence could be sought in a remaining EU jurisdiction such as Ireland and third party distribution arrangements are possible. It is likely that solutions similar to the UK authorized representative regime and other secondee solutions may emerge. There is also time for these solutions to emerge. While an EU investor may well require an EU product in which to invest, until Brexit occurs UK MiFID firms will be able to continue to distribute product manufactured in Ireland or Luxembourg.
While the outcome of Brexit remains far from certain, solutions do exist which, with a few modifications, will allow UK fund managers to continue to manage, manufacture and distribute their products in the EU in much the same way as they do today. Investors are very familiar with this model and Ireland is well placed to continue its successful partnership with the UK in manufacturing and servicing investment funds which are sold to EU and other investors based farther afield regardless of the form the UK/EU relationship takes post Brexit. Fear of Brexit need not lead us to radical solutions where familiar ones are at hand.
Des Fullam, Director, Carne Group