The implications of the “leave” vote for the broader financial services regulatory framework post Brexit and the corresponding effects for Ireland are difficult to forecast. Asset management is an area which is heavily regulated at EU level leading to significant uncertainty surrounding what will happen to the UK's asset management offering.
The three major regulatory regimes affecting the asset management industry in the EU are:
- The Undertakings for Collective Investment in Transferable Securities Directive (UCITS);
- The Alternative Investment Fund Managers Directive (AIFMD); and
- Markets in Financial Instruments Directive (MiFID).
The impact of Brexit on the asset management and investment funds industry may depend on a number of factors such as; where the clients or funds are located, the target markets, the types of investors and the location of the asset manager.
Currently, an entity which is authorised under any of above three regulatory regimes is permitted to market itself on an EU-wide basis and provide services cross border without the necessity for local authorisation, the establishment of a subsidiary or compliance with the local private placement rules. It is likely, in a post-Brexit world that UK investment firms and collective investment schemes will become “third country firms” and cease to benefit directly from the MiFID, AIFMD and UCITS passporting regimes following an EU exit.
What’s the potential impact?
UCITS and AIFs
EU UCITS funds, independent of their investment manager, are entitled to a marketing passport. Therefore, a UK based asset manager should still be able to act as investment manager to an Irish domiciled self-managed UCITS, and that UCITS could still have an EU wide marketing passport. EU UCITS would lose their rights to be marketed in the UK however. It is widely expected though that the UK would allow these funds to be marketed in the UK.
UK-domiciled UCITS would no longer be able to use the EU marketing passport. In order for a fund to be marketed in the EU, marketing could take place under the national private placement regimes or the fund could re-domicile to an EU Member State such as Ireland.
For AIFs, the marketing passport is not granted to the fund itself, rather it is given to the Alternative Investment Fund Manager (“AIFM”). Given that only EU authorised AIFMs can access the marketing passport, UK AIFMs will be at an immediate disadvantage. EU AIFs similar to EU UCITS would lose their rights to be marketed in the UK.
Management Companies and AIFMs
As with UK UCITS funds and AIFs, UK authorised UCITS management companies and AIFMs of EU funds would lose their EU management passports. In order for UK firms to continue to manage EU funds they would have to appoint an EU UCITS management company or AIFM, or conversely the funds would have to become self-managed.
UK AIFMs may still be able to manage EU AIFs but would only be able to market the funds under national private placement regimes. It is however expected that the AIFMD third country passport is extended to the UK.
UK-based fund managers would need to comply with local third country rules to continue EU portfolio management activity. Alternatively, a new portfolio management entity could be established in an EU Member State.
However, if the UK is designated as equivalent under MiFID II, UK fund managers would be able to continue to manage the assets of EU professional clients.
Opportunities for Ireland
In the event of a large scale migration of asset managers and/or investment funds out of the UK, it is possible that many will choose to re-domicile to Ireland.
Ireland already has a significant centre of excellence when it comes to asset management. As of 2015, there is over €3.8tn of investor assets serviced by Irish service providers. Over 800 fund managers from 50+ countries have assets administered in Ireland and 18 of the top 20 global asset managers have Irish domiciled funds.
This experience coupled with its proximity to the UK, it being the only other English speaking country in the UK and of course its favourable tax regime leaves Ireland very well placed to be the jurisdiction of choice for any potential influx of UK funds and fund managers.
How we can help?
Our experienced multi-discipline asset management team are on hand to help firms meet the any challenges and questions that may arise as a result of Brexit.