Brexit: EC notices issued stating potential consequences relating to UCITS, MiFID and AIFMD

Of relevance to: All firms involved in Asset Management and Markets in Financial Instruments
Key date: 30 March 2019

The UK will become a ‘third country’ (being a country that is not a member of the remaining EU (“EU27”)) on 30 March 2019 (“the withdrawal date”), unless a ratified withdrawal agreement establishes another date.

On 8 February 2018, the European Commission issued a ‘Notice to Stakeholders’ to managers of investment funds and investors, reminding them of the legal repercussions which need to be considered when the UK becomes a third country. It issued a similar ‘Notice to Stakeholders’ to UK investment firms involved in markets in financial instruments.

The following is a summary of the worst-case scenario – The EC notices are ‘without prejudice’ to any equivalence decisions that may be adopted by the EU and the ‘third country passport regime’ laid down in the Alternative Investment Fund Managers Directive (“AIFMD”).

Many commentators are assuming the final withdrawal agreement will allow some sort of access to the EU for UK financial services operations, at least during transition (the ‘implementation period’).  The FCA stated, on 20 December 2017, ‘Firms based in the UK servicing clients in the EEA should continue to prepare for a range of scenarios and should discuss these arrangements and the implications of an implementation period with the relevant EU regulator. The FCA will keep these expectations under review as negotiations on an implementation period progress and communicate to firms accordingly‘.

Potential consequences of UK withdrawal from the EU

  • UK investment firms will no longer benefit from the Markets in Financial Instruments Directive (“MiFID”) authorisation to provide MiFID investment services and activities in the EU (i.e. they will lose the so-called “EU passport”) and will be third country firms. This means that those investment firms will no longer be allowed to provide investment services or carry out activities in the EU on the basis of their current authorisations.
  • UK UCITS Management Companies (“ManCos”) and UK Alternative Investment Fund (“AIF”) Managers (“AIFMs”) will no longer benefit from the EU passport and all will be treated as third country AIFMs. This means that they will no longer be able to manage funds and/or market funds in the EU on the basis of their current authorisations:
    • For Undertakings for Collective Investment in Transferable Securities (“UCITS”), European Venture Capital Funds (“EuVECAs”), European Social Entrepreneurship Funds (“EuSEFs”) and European Long Term Investment Funds (“ELTIFs”), both the investment funds and their managers must be established and registered or authorised in the EU to manage and market funds to retail and/or professional investors across the EU.
    • AIFMs need to be established and authorised in the EU to be allowed to manage and market AIFs to professional investors across the EU.
  • As a consequence, all collective investment undertakings registered or authorised in the UK will become non-EU alternative investment funds (“non-EU AIFs”). This applies to:
    • UCITS;
    • AIFs;
    • EuVECAs;
    • EuSEFs;
    • ELTIF; and
    • Money Market Funds.
  • EU Member States may allow AIFMs which are not established and authorised in the EU to market AIFs (EU AIFs and non-EU AIFs) only in their territory under the so-called National Private Placement Regimes (“NPPR”). Some EU Member States do not allow for the NPPR, while other Member States only allow marketing to professional investors.
  • UCITS ManCos or AIFMs authorised by the EU27 competent authorities under the UCITS Directive or the AIFMD, which are subsidiaries of entities established in the UK (i.e. legally independent companies established in the EU27 controlled by or affiliated to entities established in the UK) can continue to operate in the EU27 on the basis of their authorisation as UCITS ManCos or AIFMs.
  • Branches of UK managers (permanent presences which are not legally independent from the AIFM) in the EU will be treated as branches of a non-EU AIFM as of the withdrawal date. These branches will be subject to the requirements of NPPRs, where available.
  • There will be an impact on fund-of-funds structures; in particular, UCITS authorised in the EU27 must assess the eligibility of (former) UCITS authorised in the UK.
  • All portfolio managers should review their investment criteria to ensure any EU limitation is still complied with after the UK withdrawal from the EU.
  • EU established firms dealing in financial instruments subject to the MiFID trading obligations would no longer be able to use certain UK established firms/venues. Also, clients will no longer have direct electronic access to EU established trading venues via UK established firms.
  • UK market operators/investment firms operating a trading venue or execution venue will no longer benefit from the MiFID authorisation/licence. UK based Regulated Markets (“RMs”), Multilateral Trading Facilities (“MTFs”) or Systematic Internalisers (“SIs”) will thus cease to be eligible venues for trading shares subject to the MiFIR share trading obligation; EU counterparts will no longer be able to undertake trades in shares subject to the trading obligation on such platforms.
  • In light of MiFID obligations on disclosure of information to clients, firms providing investment services are required to provide clients or potential clients with accurate disclosure, in good time and in any case before clients are bound by any contract, on the impact on the provision of services and investors’ rights that may emerge from the withdrawal of the UK from the EU including the upcoming loss by the firm of its MiFID authorisation. Firms providing investment services are also required to notify clients in good time about any material change to the information already provided, including if any material changes occur to the situation of the firm and any resulting consequences for contracts.