The post EU Commission proposes changes to UCITS V and AIFMD safekeeping regimes. first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>It is advised that firms contact those who are responsible for safekeeping the assets of the AIF(s) or the UCITS, as well as conducting internal reviews and checks of the documentation held and due diligence undertaken to ensure that the above points have been considered and addressed to their satisfaction.
If you want to discuss how these changes may affect your firm, please contact Complyport now, info@complyport.co.uk.
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]]>The post Money Market Funds Regulations 2018 first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>European MMFs (mostly established in France, Ireland and Luxembourg) manage about €1 trillion of assets and constitute around 15% of the EU’s funds industry. MMFs are an important source of short-term financing for financial institutions, corporates and governments; they are one of five workstreams identified by the Financial Stability Board in 2012 in relation to the Shadow Banking System.
The MMF Regulation introduces:
The UK MMF Regulations widen FCA authorisation and intervention powers in respect of unit trust funds and contractual schemes and allow funds which are Open-Ended Investment Companies (“OEICs”) or Alternative Investment Funds (“AIFs”) to be MMFs.
The Financial Services and Markets Act 2000 is amended to provide powers of authorisation and intervention for the FCA in respect of unit trust funds and contractual schemes, both of which may be types of MMF.
The Open-Ended Investment Companies Regulations 2001 are amended in order to allow funds which are OEICs to apply to become MMFs, or for funds which apply to be authorised as an OEIC to be authorised as an MMF at the same time.
The Alternative Investment Fund Managers Regulations 2013 are amended to make provision for the FCA to direct the manner in which an application may be made for an AIF to be authorised as an MMF, and the process for intervention by the FCA in respect of such a fund.
The Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 is amended to enable the FCA to investigate and bring enforcement action against funds directly for contravention of a requirement imposed by the MMF Regulation or any directly applicable regulation or decision made under the MMF Regulation.
The FCA has updated their application forms to account for the introduction of the MMF Regulation. Most existing MMFs operate under the UCITS Directive, but some operate under the AIFMD. The MMF Regulation will not amend either Directive, and their managers will need to remain authorised under either one of them.
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]]>The post Proposed changes to the AIFM and UCITS Directives first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>| Of relevance to: | All UCITS Management Companies, AIFMs and those managing AIFs |
| Key date: | Adoption planned by May 2019 |
The European Commission (“EC”) has published a proposed directive and a proposed regulation amending Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMs”) and Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (“UCITS”) to facilitate cross-border marketing of funds, including pre-marketing under the AIFM Directive.
The EC has adopted a package of measures to deepen the Capital Markets Union (“CMU”), along with publishing the Communication “Completing Capital Markets Union by 2019 – time to accelerate delivery“. The EC is committed to put in place all building blocks of the CMU by mid-2019. The measures presented here and the remaining CMU proposals that will be presented by May 2018 make it possible that legislation can be adopted before European Parliament elections in mid-2019.
The package includes:
This article will concentrate on the first bullet point; please contact Complyport should you require further information on the other four bullet points. We note there is no mention of the Markets in Financial Instruments Directive (“MiFID”) in the package.
The EU have recognised that regulatory barriers, namely EU Member States’ marketing requirements, regulatory fees and administrative and notification requirements, currently represent a significant disincentive to the cross-border distribution of investment funds in the EU.
The proposed Directive amends certain provisions in the AIFM Directive and the UCITS Directive with the purpose of reducing those barriers. The new measures are expected to reduce the cost for fund managers of operating cross-border and should support more cross-border marketing of investment funds.
The EC also recognise that such provisions have been identified as burdensome or insufficiently clear and allowed the creation of additional requirements (‘gold plating’) when transposed by Member States. These amendments are consistent with the objectives of the AIFM Directive and the UCITS Directive, which aim to establish a single market for investment funds and facilitate the cross-border distribution of investment funds. The proposal also aligns the rules between the different legislative frameworks for investment funds. The EC believes consistency with existing policy provisions is therefore safeguarded and that increased competition will help to give investors more choice and better value, while safeguarding a high level of investor protection.
The EC states that investment funds are an important tool to channel private savings into the economy and increase funding possibilities for companies; the EU investment funds market amounts totals EUR 14.3 trillion. However, the EC believes this market has not yet achieved its full potential.
Only just over a third (37%) of UCITS funds and around 3% of AIFs are registered for sale in more than three Member States. This appears to be due to regulatory barriers that currently hinder the cross-border distribution of investment funds.
The proposed changes aim to remove these barriers for all kinds of investment funds; making cross-border distribution simpler, quicker and cheaper.
A pre-marketing definition is added to Article 4(1): ‘a direct or indirect provision of information on investment strategies or investment ideas by an AIFM or on its behalf to professional investors domiciled or registered in the Union in order to test their interest in an AIF which is not yet established’.
A new Article 30a lays down the conditions under which an EU AIFM can engage in pre-marketing activities as the EC considers it important to provide sufficient safeguards against potential circumvention of the requirements of the AIFM Directive that apply when marketing AIFs in the home Member State or across a border in another Member State. An AIFM is therefore allowed to test an investment idea or an investment strategy with professional investors but may not, as prescribed by the new Article 30a, promote an established AIF without notification. Moreover, when professional investors revert to the AIFM following their pre-marketing activities, a subscription to the units or shares of an AIF that is ultimately established or of a similar AIF managed by that AIFM will be considered the result of marketing.
Article 32a is inserted to complement the notification procedures with the procedure and conditions for AIFMs who wish to discontinue their marketing activities in a particular Member State. An AIFM can be authorised to de-notify the marketing of an EU AIF it manages only if there are a maximum of 10 investors who hold up to 1% of assets under management of this AIF in an identified Member State. The AIFM must notify competent authorities of its home Member State how it fulfils the conditions for de-notification and for a public notice of the de-notification. The AIFM must also notify the authorities of the offers presented to the investors to repurchase units and shares of the AIF that is no longer going to be marketed in their Member State. All transparency requirements that investors must fulfil pursuant to the AIFM Directive will continue to apply to investors who retain their investment after de-notification of the marketing activities in the selected Member State.
Article 43a is inserted to ensure a consistent treatment of retail investors regardless of the type of fund in which they decide to invest. Where Member States allow AIFMs to market units or shares of AIFs in their territories to retail investors, those AIFMs should also make facilities available to retail investors to serve situations such as making subscriptions, making payments or repurchasing or redeeming units. For this purpose, AIFMs will be able to use electronic or other means of distance communication.
Article 77 to be deleted as the enhanced requirements for the marketing communication are laid down in the proposed Regulation on facilitation of cross-border distribution of funds. The principles established for marketing communications will apply to all asset managers who market their funds, irrespective of their type; thus ensuring a level playing field and the same level of investor protection across all Member States.
Article 91(3) to be deleted as the proposed Regulation provides for specific rules on the transparency of national laws and requirements applicable to marketing communications with respect to all collective investment funds, thereby ensuring comprehensive, clear and up-to date information is collected and published by ESMA.
Article 92 to be amended. The current Article 92 does not impose the obligation on UCITS to have local facilities in each Member State where UCITS are marketed but many Member States require facilities on their territory for ‘making payments to unit-holders, repurchasing or redeeming units and making available the information which UCITS are required to provide’. A few Member States also require these local facilities to perform additional tasks, like handling complaints or serving as a local distributor or being the legal representative (including dealing with the national competent authority).
Requirements to have local facilities are costly and have limited added value given the use of digital technology. Therefore, this proposal bans the imposition of physical presence. While requiring that facilities are established in each Member State where marketing activities are carried out and which serve situations such as making subscriptions, making payments or repurchasing or redeeming units, this proposal allows fund managers to use electronic or other means of distance communication with investors and the information and means of communication should be available to investors in the official language(s) of the Member State where the investor is located.
The insertion of new paragraph 8a in Article 17 and replacement of paragraph 8 in Article 93 aim to align notification procedures for UCITS across funds types and across Member States by introducing a precise time frame for communicating the competent authorities’ decisions. A precise time frame is also deemed necessary to ensure that procedures governing changes to the information provided by AIFMs in the notification process are aligned with the AIFM Directive.
A new Article 93a is added to complement the notification procedures with the conditions for UCITS who decide to stop their marketing activities in a Member State. Asset managers are allowed to de-notify the marketing of their UCITS only if a maximum of 10 investors who hold up to 1% of assets under management of the UCITS have invested in the UCITS in an identified Member State. The competent authorities of the home Member State of the UCITS will verify the compliance with this requirement, including the transparency and publication requirement for investors and the repurchase offer. All obligations to inform will continue to apply to remaining investors after de-notification of the marketing activities in a Member State.
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]]>The post Brexit: EC notices issued stating potential consequences relating to UCITS, MiFID and AIFMD first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>| 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‘.
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]]>The post Illiquid Assets and Open-ended Funds first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The FCA has published Discussion Paper DP17/1 on “Illiquid assets and open-ended funds”.
DP17/1 concerns itself with the liquidity within a scheme – which in turn would impact upon the ability of investors to redeem their holdings on request – in open-ended funds and, specifically, the liquidity problems associated with investing in illiquid assets e.g. property or unlisted securities.
As far as AIFs are concerned the AIFMD, of course, already requires the AIFM to manage liquidity.
The paper suggests the possibility of developing the regulation of liquidity to support fund managers to meet their liquidity obligations. Possibilities include:
The FCA invites comments by 8 May 2017.
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]]>The post UCITS and AIFs: Transparency Requirements first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>A reminder to UCITS management companies and AIFMs that certain transparency obligations arising under the Securities Financing Transactions Regulation (“SFTR” – 2015/2365) apply from 13 January 2017 – see Regulatory Roundup 76.
A SFT is defined as:
a margin lending transaction.
The effect is that affected firms will need to include in their periodic reports (half-yearly and annual for UCITS and annual for AIFs) the information as set out in section A of the Annex to the SFTR, although this is copied out in the Handbook as to:
The above obligations arise from Article 13 of the SFTR which extends transparency to the use of SFTs and to total return swaps.
For the record, Article 14 requires transparency in pre-contractual documentation (content based upon section B of the Annex to the SFTR) although this does not come into force until 13 July 2017 for those funds constituted before 12 January 2016. Interested firms can find these requirements in the Handbook now as to:
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]]>The post AIFMD Passport: Non-EU Jurisdictions first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>AIFMs and, non-EU fund managers
As we know (see Regulatory Roundup 78) the AIFMD allows for the extension of the marketing passport to EU AIFMs of non-EU AIFs (currently such marketing is subject to the national private placement regime – “NPPR”) and to non-EU AIFMs (currently also NPPR only) as well as the extension of the management passport to non-EU AIFMs. ESMA has already given a thumbs-up to a few countries such as Switzerland, Jersey, Hong Kong etc. – please see Regulatory Roundup 78 for further information.
ESMA has published an updated ‘Advice’ paper which sets out in the one place its assessments of these third-countries.
The document advises (page 105) that ESMA has started gathering intelligence on the following non-EU countries:
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]]>The post AIFMD Passport: ESMA Advice re non-EU Jurisdictions first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Although the AIFMD marketing passport simplifies the marketing of EU AIFs by EU AIFMs, under the current AIFMD regime, the marketing by non-EU AIFMs and EU AIFMs of non-EU AIFs is subject to the national private placement regime (“NPPR”) of each Member State (provided that the conditions in Articles 36 and 42, as relevant, are adhered to). As many fund managers will be aware, the existence of AIFMD Articles 36 and 42 combined with NPPR does not mean that marketing is assured in Member States.
Although the AIFMD provides for a marketing passport for a non-EU AIF by an EU AIFM (Article 35) and for a marketing and/or management passport for non-EU AIFMs (Article 37 – 41), this is subject to advice provided by ESMA on the extension of the passports.
Rather than a blanket approach, ESMA has adopted a country-by-country assessment: the first review took in Guernsey, Jersey, Switzerland, Hong Kong, Singapore and the US and was published in July 2015 – see Regulatory Roundup 66. Basically it was a thumbs-up to the first three jurisdictions and a delay in the decision for the latter three. Barely three months later (see Regulatory Roundup 69), the ESMA Chairman announced that the second round of non-EEA country assessments would include:
ESMA was formally requested by the European Commission in December 2015 to:
ESMA has now published its advice (ESMA 2016/1140). ESMA maintains its favourable view of Guernsey, Jersey and Switzerland and adds both Canada and Japan to that list. An opinion on Bermuda and the Cayman Islands is on hold as both countries are in course of implementing new regulatory regimes.
The report is also largely favourable to Hong Kong and Singapore (although it does draw attention to the fact that both jurisdictions only facilitate the access of UCITS from certain, but not all, Member States to retail investors) and to Australia provided that ASIC extends the ‘class order relief’ to all Member States.
The situation is not so rosy for the Isle of Man (it has no AIFMD-like regime in place so making it difficult to assess whether the investor protection criterion is met) or for the US. Although no significant obstacles were found, the report does comment that extension of the passport regime to the US could result in an uneven playing field in that the market access conditions for US funds would potentially be less onerous than the conditions that would be placed upon EU funds in the US.
The advice within the ESMA report will now have to be considered by the European Parliament, the Council and the Commission.
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]]>The post Brexit and its Implications first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The votes have been counted and ‘Brexit’ has won the day. The UK electorate has voted 52% to 48% to leave the European Union (EU).
The Prime Minister David Cameron has announced he will resign in the Autumn as soon as a new Leader of the Conservative Party has been elected. Meanwhile the UK currency, the Pound Sterling has suffered massive falls in value overnight against the US Dollar and the Euro and the London Stock Exchange has also seen massive falls in value in early trading.
BREXIT & FINANCIAL SERVICES KEY POINTS
The UK regulator, the Financial Conduct Authority (FCA) issued a news release this morning saying:
“On 23 June, the UK voted to leave the European Union (EU). This has significant implications for the UK.
The FCA is in very close contact with the firms we supervise as well as the Treasury, the Bank of England and other UK authorities, and we are monitoring developments in the financial markets.
Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.
Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation.
The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. We will work closely with the Government as it confirms the arrangements for the UK’s future relationship with the EU.”
The now “lame duck” Prime Minister, David Cameron has announced that he will not initiate the immediate EU withdrawal process. This task will fall to the new Prime Minister in the Autumn or later. Our thoughts turn now to what the implications might be for the financial services sector.
The Withdrawal Process
In terms of breaking away from the EU the high-level process can be found in the Treaty on European Union (TEU), which together with the Treaty on the Functioning of the European Union (TFEU), is the legislation upon which the EU is founded.
The right of any Member State (including the UK), to cease to be a Member State of the EU is enshrined in Article 50 of the TEU – see link (the link provided is a consolidated version, the relevant article can be found on page 59).
The UK is required to notify the European Council of its intention to withdraw from the EU under Article 50. Unless agreed otherwise by the EU, the UK then has 2 years within which negotiations must be conducted with the EU to conclude an agreement setting out arrangements for the withdrawal. These arrangements will include a framework for the UK’s future relationship with the Union following withdrawal.
When a withdrawal agreement is concluded and has entered into force then the ‘Treaties’ (being the TEU and the TFEU) cease to apply. If a withdrawal agreement cannot be agreed, the Treaties will cease to apply two years after the notification, unless the European Council, in agreement with the UK, unanimously decides to extend this period.
It is not therefore a foregone conclusion that the details of future trading relationships will have been concluded and finalised as part of the withdrawal arrangements. What is clear is that at that time the UK will cease to be a Member State and will lose all automatic rights of access to the EU markets and institutions.
Unlike firms grappling with the detail of MiFID, EMIR etc. the UK will not have the comfort of ESMA Q&As or Technical Standards to fall back upon to help it ‘conclude an agreement’ – it will be down to hard negotiation on both sides.
Although perhaps not of immediate relevance to the UK case, should a departed Member State change its mind it is entitled to ask to re-join (Article 50(5)). It does raise the intriguing possibility of a change of course by a future Government if the UK finds life outside of the EU too tough! As former Prime Minister Harold Wilson famously said: “A week is a long time in politics!”
The Transition
As far as we can ascertain today (24 June 2016), the UK is likely to remain part of the EU until at least the Autumn of 2018. This is based on the observations that the EU has never agreed new trading relationships in a period of less than 2 years (with between 3 and 7 years being much more the norm). There is also no evidence to suggest that such a complex and unprecedented withdrawal agreement can be concluded in less than 2 years.
Much of the UK’s financial services law is now derived directly or indirectly from EU Directives and Regulations designed to harmonise trade. Unless repealed and replaced by the UK Parliament, even after the official withdrawal date has been agreed, it is highly likely that the majority of such law will remain in force within the UK. The volume of law to be repealed and replaced is simply overwhelming. It is likely to take years for the UK Parliament to complete such a task. In other similar situations internationally, where a Territory has seceded from a State or similar structure, what tends to happen is that much existing law remains in force going forward and is only gradually changed.
During this next 2 year period, it is clear that at day to day level, EU Regulations and Directives will still apply on a ‘business as usual’ basis.
The ‘withdrawal agreement’ is, of course, the most important part of the process, during which the possibility of the UK either going it alone or, perhaps, applying to become a member of the European Economic Area – or even some hybrid arrangement – will no doubt be thrashed out. Having said that, like the Government and the EU, no one actually knows what is going to happen so the following is food for thought.
Impact on Financial Services
The EU Single Market in Financial Services has to a greater or lesser degree, been one of the most integrated and successful aspects of the EU Single Market. It covers banking, investment services, investment funds, pension funds, mortgage broking and lending, consumer credit broking and lending, life assurance, general insurance and motor insurance. It touches the daily lives of citizens and is a major component of the UK economy.
As observed above, for the next 2 years there is likely to be no change as the UK will still be an EU Member State and the UK will still have access to the Single Market. However beyond that timeframe the picture is decidedly uncertain.
Going forward beyond the next 2 years, the impact on UK financial services will depend significantly on the nature of the future trading agreements that are negotiated between the UK and the EU. What is fairly clear from the referendum campaign is that membership of the Single Market via membership the European Economic Area (EEA) is unlikely to be acceptable to a UK Government, as it involves free movement of people. Therefore, unless there is a dramatic change of stance, the UK will need to negotiate access to markets on a market by market and case by case basis. The recent precedent for this was the 7 years it took to negotiate a very much more limited set of agreements with Switzerland.
The scenario is thus beginning to look like no change for the next 2 years followed by a period of likely restrictions on access to the Single Market in Financial Services.
In practical terms, this means that firms that currently conduct cross-border business or have Branches in other EU States under Service or Branch Passports, may no longer be able to conduct such business without authorisation from the Host State regulator(s).
Similarly, unless the UK Government passes legislation in Parliament to permit it, the automatic right of firms based in other EU States, that operate in the UK under Passports, will lapse and they will need to seek authorisation from the FCA and/or PRA in the UK.
The foundation stones of the Single Market are the Insurance Mediation Directive, Solvency 2, the Capital Requirements Directive, MiFID, the Banking Consolidation Directive, UCITS directives, AIFMD, the Payment Services Directive and similar directives applying to mortgage lending and consumer credit.
The Directives are transposed into national (i.e. UK) law by way of statute or UK regulations. However, with each of its Directives, the EU issues implementing regulations and technical standards that are automatically binding and become law in Member States. There are 2 significant Directives that are in the process of implementation and where Brexit is likely to pose problematic questions.
The AIFMD came into force in 2013. Significant aspects of the Directive have not as yet been implemented fully, namely the ability to passport into the EU from outside of the EU and decisions regarding replacing the national private placement regimes.
Passporting is a valuable benefit under the AIFMD, both in terms of the right to manage AIFs established in other Member States, whether directly or via a branch, and the right to market AIFs. As a UK AIFM would be transformed into a ‘non-EU AIFM’ the passporting rights would no longer be available. Whilst the AIFMD allows for the extension of the passport regime to non-EU AIFMs in due course, and assuming that the UK would be assessed in a favourable light for such an extension, the great unknown would be in the period between the UK no longer being able to benefit under the AIFMD as a ‘EU AIFM’ and the, eventual, extension of the passport to the UK as a ‘non-EU AIFM’. This uncertainty would apply to both UK firms that were hoping to obtain a passport for the first time and to UK firms that are already operating under a passport. Although we are looking at the AIFMD for the purposes of this article, it is not unknown for AIFMs to delegate portfolio management to MiFID firms who of course would also face similar problems on the availability of passports under the MiFID regime.
On a positive note, some of these issues, if not all of them, could well be addressed during the ‘withdrawal agreement’ process, although this would presumably depend upon the tenacity of the UK representatives involved.
On the matter of MiFID, the application of MiFID II (and MiFIR), as we know, has been delayed until 3 January 2018. Now this time frame throws up an interesting, but hopefully hypothetical, scenario especially if the UK provides the European Council with its notification to leave the EU sooner rather than later. As mentioned above, based upon Article 50 of the TEU the UK could cease to be a Member of the EU two years from now, if not earlier. UK firms subject to MiFID II may therefore be in the unfortunate position of having to comply with MiFID II on 3 January 2018, only to find that it ceases to be relevant to them later in 2018 when the ‘two year’ period has expired. Of course, what that would mean in terms of UK legislation that transposed and adopted MiFID II is another question.
The UK financial services sector was almost universally opposed to Brexit. The City will be a major loser if access to the single market is lost. Given this scenario, The City and the wider financial services sector will lobby politicians very hard to try to preserve access.
The reality is likely to be that the UK would continue to operate under the requirements of AIFMD, MiFID etc. by way of bringing in UK legislation that mirrors those requirements. Whilst the UK would not be a Member State, the effect of mirror legislation would arguably minimise the disruption that would be encountered if, instead, the UK decided to start its financial regime from scratch. Also, the UK might be looked upon in a more favourable light by the EU when negotiating the terms of a withdrawal agreement if the UK were to continue to be seen to ‘comply’ with EU Directives and Regulations by way of UK legislation.
Although this article is naturally concerned with the ‘financial world’, to gain perspective it must not be forgotten that EU Directives and Regulations extend beyond this to cover many different areas, some of which may also be of relevance to a wider range of firms e.g. ranging from data protection obligations (currently Directive 95/46) to anti-Money Laundering and Counter-Terrorist Financing.
Inward Investment & UK Headquarters
Significant numbers of non-UK financial services companies have located their European HQ in the UK in order to have a wider presence in Europe via the UK membership of the Single Market in Financial Services. Whilst the UK will remain an important financial centre, it remains to be seen what impact Brexit will have on the future attractiveness of the UK compared to other European financial centres for the location of a European HQ.
It is probable that many companies will evaluate whether Dublin/Ireland (same time zone, same language, similar legal and taxation system, preferential Corporation Tax rate) becomes as attractive or even more attractive as a location compared to London/UK.
It is also highly likely that companies from the USA and other non-EU companies looking to locate/invest in Europe will now have to consider what impact Brexit and loss of automatic access to the Single Financial Services Market will have on their appetite to invest in and locate in the UK.
One of the key benefits of the Single Market and its passporting system has been the ability to be authorised in one Home State, but to trade in several other Host States without the need for authorisation by the regulator in each state. Those of us old enough to remember European cross-border financial services before the Single Market, will recall the horrendous regulatory burden of multiple regulatory applications, multiple trading entities and multiple capital adequacy requirements required for each State in which business was to be conducted. It was expensive and inefficient compared to the Single Market passporting system.
What Is To Be Done?
In the shorter-term, there is little positive action that can be taken by firms. More importantly, that is precisely the time to consider and reflect upon business objectives, identify risks (or opportunities) potentially posed by Brexit and to seek advice (where needed). Firms should then be in a position to identify actions required or desired in the shorter to medium term to achieve those business objectives.
This is also likely to be an iterative process. It is possible (indeed highly likely) that the regulatory environment and regulatory requirements may evolve in response to trade negotiations and market conditions. It is highly unlikely that governments, regulators or firms will get this right at the first attempt. It is much more likely that firms will need to keep Brexit and its implications under rolling review, for as long as it takes.
How Can Complyport Assist?
The Complyport Governance, Risk Management and Compliance (GRC) team are not only skilled and experienced in management of regulatory issues, but have significant cross-border experience. Complyport is very well placed to assist firms and their other professional advisers to assess the impact of Brexit upon the firm and its business objectives, to identify risk (and possibly opportunities) and to plan action required.
With a strong knowledge of and depth of experience in Irish regulatory requirements and a strong international network of professionals other European jurisdictions, we are ideally placed to assist.
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]]>The post The votes have been counted and ‘Brexit’ has won the day. first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Whilst the Government considers what exactly that means for the UK as a whole, and what needs to be done – the run up to the Brexit vote seemed to be heavy on aspirations but light on detail – thoughts turn to what the implications might be for the financial services sector.
In terms of breaking away from the EU the, admittedly high-level, process can be found in the Treaty on European Union (TEU), which together with the Treaty on the Functioning of the European Union (TFEU), is the legislation upon which the EU is founded.
The right of the UK, or indeed of any Member State, to cease to be a Member State of the EU is enshrined in Article 50 of the TEU – see link (the link provided is a consolidated version, the relevant article can be found on page 59).
Withdrawal will require the UK to notify the European Council which in turn will lead to negotiations with the Union to conclude an agreement setting out arrangements for the withdrawal, including a framework for the UK’s future relationship with the Union. Unlike firms grappling with the detail of MiFID, EMIR etc. the UK will not have the comfort of ESMA Q&As or Technical Standards to fall back upon to help it ‘conclude an agreement’ – it will be down to hard negotiation on both sides.
Once (or if) a withdrawal agreement is concluded and has entered into force then the ‘Treaties’ (being the TEU and the TFEU) cease to apply. Failing that, the Treaties will cease to apply two years after the notification above – unless the European Council, in agreement with the UK, unanimously decides to extend this period.
Although perhaps not of relevance to the UK case, should a departed Member State change its mind it is entitled to ask to rejoin (Article 50(5)).
The message here is that, like it or loathe it, the UK is still part of the EU – and, in the absence of a withdrawal agreement, is likely to remain so for at least two years. During this period EU Regulations and Directives will still apply on a ‘business as usual’ basis.
The ‘withdrawal agreement’ is, of course, the most important part of the process, during which the possibility of the UK either going it alone or, perhaps, applying to become a member of the European Economic Area – or even some hybrid arrangement – will no doubt be thrashed out. Having said that, like the Government and the EU, no one actually knows what is going to happen so the following is food for thought.
Setting aside requirements based upon the likes of EMIR etc., arguably the foundation stones of the investment world are MiFID, UCITS and AIFMD.
The AIFMD is the most recent of these foundation stones (UCITS V is essentially UCITS IV with ‘add-ons’) so we will turn our attention to this, although the general comments will apply across all these Directives.
Being a Directive it was the responsibility of each Member State to transpose the requirements into national law. Although not the only piece of relevant legislation, in the case of the UK we have ‘The Alternative Investment Fund Managers Regulations 2013’ (SI 2013/1773). Like many a Directive, the AIFMD did not come alone and is supported by a Delegated Regulation which adds flesh to areas such as operating conditions, leverage etc. Unlike a Directive, a Regulation does not need to be transposed into national law and instead is binding in its entirety and directly applicable in all Member States.
If the UK was suddenly, somehow, no longer a Member State then we would be in the odd situation that the Regulation would no longer be binding on the UK – but the Directive would because it has been transposed into national law. The FCA Handbook would also need to address the situation. Whilst this may, hopefully, be an unlikely scenario it does provide a simple example of the need for careful planning by relevant parties and to consider the impact upon existing, and the need for new, UK legislation in the light of a withdrawal from the EU.
Although careful planning by the authorities will be essential, no amount of planning can overcome the basic fact that if the UK frees itself from the burden of Directives and Regulations it will also lose the benefits arising from them.
Passporting is a valuable benefit under the AIFMD, both in terms of the right to manage AIFs established in other Member States, whether directly or via a branch, and the right to market AIFs. As a UK AIFM would be transformed into a ‘non-EU AIFM’ the passporting rights would no longer be available. Whilst the AIFMD allows for the extension of the passport regime to non-EU AIFMs in due course, and assuming that the UK would be assessed in a favourable light for such an extension, the great unknown would be in the period between the UK no longer being able to benefit under the AIFMD as a ‘EU AIFM’ and the, eventual, extension of the passport to the UK as a ‘non-EU AIFM’. This uncertainty would apply to both UK firms that were hoping to obtain a passport for the first time and to UK firms that are already operating under a passport. Although we are looking at the AIFMD for the purposes of this article, it is not unknown for AIFMs to delegate portfolio management to MiFID firms who of course would also face similar problems on the availability of passports under the MiFID regime.
On a positive note, some of these issues, if not all of them, could well be addressed during the ‘withdrawal agreement’ process, although this would presumably depend upon the tenacity of the UK representatives involved.
On the matter of MiFID, the application of MiFID II (and MiFIR), as we know, has been delayed until 3 January 2018. Now this time frame throws up an interesting, but hopefully hypothetical, scenario especially if the UK provides the European Council with its notification to leave the EU sooner rather than later. As mentioned above, based upon Article 50 of the TEU the UK could cease to be a Member of the EU two years from now, if not earlier. UK firms subject to MiFID II may therefore be in the unfortunate position of having to comply with MiFID II on 3 January 2018, only to find that it ceases to be relevant to them later in 2018 when the ‘two year’ period has expired. Of course, what that would mean in terms of UK legislation that transposed and adopted MiFID II is another question.
Possibly the reality (although note the ‘possibly’) would be that the UK would continue to operate under the requirements of AIFMD, MiFID etc. by way of bringing in UK legislation that mirrors those requirements. Whilst the UK would not be a Member State, the effect of mirror legislation would arguably minimise the disruption that would be encountered if, instead, the UK decided to start its financial regime from scratch. Also, possibly (and again note the ‘possibly’) the UK might be looked upon in a more favourable light by the EU when negotiating the terms of a withdrawal agreement if the UK were to continue to be seen to ‘comply’ with EU Directives and Regulations by way of UK legislation.
Although this article is naturally concerned with the ‘financial world’, to gain perspective it must not be forgotten that EU Directives and Regulations extend beyond this to cover many different areas, some of which may also be of relevance to a wider range of firms e.g. ranging from data protection obligations (currently Directive 95/46) to notifications in the banana sector (Regulation 1333/2011)
The post The votes have been counted and ‘Brexit’ has won the day. first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
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