Jumping off the Brexit Cliff – When to take the plunge?
Emerging trends between the UK and Ireland in relation to Brexit planning.
Trends in relation to UK asset managers impacted by Brexit
“We should all be clear that also when it comes to financial services, life will be different after Brexit.” This was the sentiment expressed by Donald Tusk in rejecting the hope expressed by the British Chancellor Phillip Hammond to include financial services in an EU/UK trade deal. One of the many changes is the loss of passporting rights which has made it relatively straightforward to do business throughout the EU for many UK asset mangers. This loss, coupled with it being harder to access European capital, is at the forefront of UK managers' minds. Notwithstanding the uncertainty that remains, the key determining factor as to when managers take the plunge is timing and the complexity of their proposed license.
Banks and insurance companies were first out of the blocks, applying early to the Central Bank for these licenses. As has been widely covered in the media, last year we saw the majority of the larger asset managers choose Ireland as the location for their "SuperManCo" and MiFID applications. Medium & smaller sized managers are closely monitoring developments but many have yet to implement their strategies. For many, there is still hope that a less hard Brexit could become a reality. However, the looming deadline and lack of clarity around transition periods means that managers should assume a worst case scenario of a hard Brexit, with the UK as a third country and no special deals. They then need to consider whether in these circumstances they can continue to carry on their businesses relying on a patchwork of access opportunities and delegation. If this is not viable, then a decision needs to be taken on whether to set up within the EU. Ireland is clearly an attractive location for many UK asset managers in terms of ease of access and communication, time zone and workforce considerations.
What are the options?
There are a number of licenses available in Ireland so there is no one size fits all approach.
The key factors in determining which license is appropriate for each manager's business is determined by cost, types of activities that they wish to engage in, the amount of substance they can provide in Ireland, what they wish to delegate back to the UK/elsewhere, the number of funds managed, and their domicile.
Typically, the larger managers seek the SuperManCo (with ancillary permissions) and MiFID licenses, which have higher substance requirements, with medium to smaller managers considering a self-managed/delegating SuperManCo license or appointing a third party manager.
Post-Brexit licensing options in Ireland
|Self-Managed Investment Company (SMIC)||SuperManco w/ Delegates ('v1')||SuperManco w/ Add-on Authorisations ('v2'||MiFID Firm|
|Authorisation Timeline||Allow 6-8 months (during high volume periods)||Allow 6-8 months (during high volume periods)||Allow 8-9 months (during high volume periods)||Allow 9-10 months (during high volume periods)|
|Activities (PM = portfolio management, RM = risk management)||Retain oversight of PM and RM but delegate day-to-day activities||Retain oversight of PM and RM but delegate day-to-day activities||Performs day-to-day PM & RM activities||Full range of services|
|Manage other fund umbrellas?||No||Yes||Yes||Yes|
|Manage / advise Segregated Mandates?||No||No||Yes, via add-on licenses without need for MiFID delegate||Yes|
2 Irish-resident directors
2-3 Designated Persons 1
2-3 Irish-resident directors
2-3 Designated Persons 1 2
2-3 Irish resident directors
2-3 Designated Persons 1
Chief Investment Officer / Managing Director
Head of Risk/Compliance and Finance, internal audit 2
|Substantive presence required in Ireland 3|
|Delegation / Outsourcing||CBI permits delegation of day-to-day PM and/or RM activities||CBI permits delegation of day-to-day PM and/or RM activities||CBI permits delegation of day-to-day PM and/or RM activities||Outsourcing allowed (according to other EEA states or 3rd countries) if in line with applicable law and best practice|
What Substance is required in Ireland and what activities can be delegated
The level of substance in Ireland depends on the type of license being sought. The Central Bank will require that full responsibility is retained and oversight is carried out in Ireland, but does not usually require the performance of the day-to-day activities in Ireland. Similarly, the day-to-day activities can be delegated back to the UK provided they are properly overseen in Ireland.
For fund management companies (absent MiFID add-on permissions) the substance can essentially be met by the board of directors and designated persons. In relation to MiFID entities, the 'head office' requirement needs to be met and this is a matter to be agreed with the Central Bank on a case-by-case basis. For entities seeking ancillary add-on permissions, usually a head of investments, risk/compliance function is also required, but it varies on a case-by-case basis, depending on complexity.
In order to retain EU passporting rights and access to European capital/distribution, notwithstanding the uncertainty in relation to Brexit, UK based managers need to urgently consider what options are available to them post-Brexit. With potentially just 12 months left, uncertainty in relation to the transition arrangements and a significant number of Irish funds/UK Managers directly impacted and seeking authorisation at the same time, putting pressure on the Central Bank, managers need to decide now on their Brexit strategy solution and look to implement it within the next 3 months to ensure that they are "day one ready" for Brexit at the end of March 2019.
Elizabeth Budd, Partner and Marilyn Cooney, Senior Associate, Pinsent Masons
1Designated persons not all required to be Irish resident and can be directors or employees of the Investment Manager. For 'low' PRISM rated firms, half of the directors and at least 2 Designated Persons performing half of the managerial functions are required to be EEA-resident. For 'medium' PRISM rating firms, 3 directors or 2 directors plus 1 designated person should be Irish resident.
2The need for specific roles may differ on a case-by-case basis and depends on the complexity and the number of branches required.
3'Substantive presence' for MiFID: the firm's board and management run the firm from Ireland and make decisions in Ireland with sufficient staff and resources to manage the risks.