There is now less than eight weeks to go on the long and winding road that is Brexit, which has been a journey of more than four years to date.
With the end of the transition period looming, funds, fund management companies and asset managers should take one final look at the implications of the UK’s exit from the EU on their activities.
Whether there will be an agreement or not remains uncertain, however across the wealth and asset management industry at least, we have a clearer view of what life beyond Brexit entails. We have gained greater clarity on the details around the future UK-EU financial services relationship. Importantly, we have also gained a better understanding of the EU’s stance and strategy for the future of European financial services. A hard negotiation stance by the UK and EU, numerous and complex political agendas and another cliff-edge timeline could still deliver a ‘hard or no deal’ scenario at the end of the year.
Changes to date
Brexit has been a costly challenge for the wealth and asset management industry. However, like other significant changes, it can be viewed as an opportunity. Fund promoters should be ready to continue to identify, mitigate and avoid the risks of Brexit. A lot of the preparation work has already been done. Per EY’s Financial Services Brexit Tracker, there were more than 400 UK financial services job relocations to Europe in September, taking the total number of jobs leaving the UK since the EU referendum to over 7,500. Firms have added to or are in the process of hiring for almost 3,000 new roles in Europe since the Referendum, with Dublin remaining the relocation destination of choice for financial services firms. We have seen, over the last two years in particular, a number of fund management companies establish themselves in Dublin. As the relocation of a business is complex, time-consuming and resource intensive, it’s not surprising that we can see Brexit-fatigue on some of the new arrivals’ faces.
Financial services is unlikely to be included in any free-trade agreement, if indeed an agreement is even met over the next few weeks. This presents the prospect of wealth and asset management firms having to navigate an already confusing regulatory landscape while also providing opportunities for regulatory arbitrage.
Regulators, in the interim, will look to balance the responsibility of protecting investors and financial stability against maintaining their own political agendas. The temporary permissions regime (TPR) introduced in 2018 is an early example of this.
In addition, in September, the European Commission (EC) adopted a time-limited temporary equivalence decision to give financial market participants 18 months to reduce their exposure to UK central counterparties (CCPs), noting that the heavy reliance of the EU financial system on services provided by UK-based CCPs raises important issues related to financial stability and requires the scaling down of EU exposures to these infrastructures. Back in August, too, ESMA recommended to the EC that there was merit in providing additional legislative clarifications in the AIFMD and UCITS frameworks with respect to delegation and substance requirements, particularly in relation to the maximum extent of delegation that would help to ensure supervisory convergence and ensure authorised AIFMs and UCITS management companies maintain sufficient substance in the EU. These recommendations were made very much with Brexit front-of-mind.
What is coming next
Although a lot of the preparation work has already been done, wealth and asset management industry participants should take a final look at the implications of the UK’s exit from the EU on their activities and take appropriate actions. These include but are not limited to ensuring fund documentation is updated as relevant, considering the impact of data transfers to/through the UK and examining their fund distribution access.
Given the passage of time since asset managers initially prepared their Brexit contingency plans, it will be of benefit for firms to continue to establish or re-assess who you are selling to and ensure that you are registered for sale under the correct regime in the UK so that you are best placed to continue to market post-Brexit.
UCITS and AIFs should note the TPR deadline for any new fund launches, allowing enough time for CBI authorisation, passporting under the UCITS Directive/AIFMD to the UK and submission/update of their TPR application.
Existing TPR applications should be reviewed to ensure that they include all funds which are to continue to market in the UK after the Brexit deadline. It is likely that the FCA will impose two separate deadlines for updated TPR applications: a notification of intent to update, followed by a later update/reapplication deadline. If there are no changes to your existing TPR application and to the funds included in such earlier application, no further action should be required. New TPR applications should be made in advance of the TPR Deadline.
On January 1, we will enter a ‘New European Financial Services Market’, which will have more complexities than what exists today. This will necessitate a greater level of preparedness and multi-tasking than ever before; it is therefore important to take action on the key knowns that exist today, so we have time to deal with the ‘unknowns’ of tomorrow.
As ever, reach out if you have a question.