Brexit may have been delayed, however it is still on the horizon. The potential impact it may have on the cross-border provision of financial services and products, particularly in the case of a “no deal” Brexit, is significant given that provision of such services and products both from the European Union into the United Kingdom and vice versa currently operates under a series of EU Directives.

At present time the majority of foreign funds sold into the UK come from the EU, predominantly from Ireland and Luxembourg. This is because funds from EU countries can “passport” into the UK either for sale to retail investors under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive or for sale to institutional investors under the Alternative Investment Fund Managers Directive (AIFMD).

Non-EU foreign funds have other routes for sale into the UK. For selling to retail investors a fund must register under section 272 of the Financial Services & Markets Act, 2000 (FSMA). This is far more onerous than the UCITS passport process and requires completion of a 25-page form, a recognition process that may take up to six months, and payment of a fee of up to £8,000. A Key Information Document (KID) under the Packaged Retail and Insurance-based Investment Products (PRIIPs) Directive will also be required.

For sale aimed only at institutional investors only the foreign funds can only market when registered under the National Private Placement Regime (NPPR) as allowed for under Article 42 of AIFMD. Compared to the passport process for EU funds this is faster and requires provision of less documents. For marketing to institutional investors only the NPPR is a viable route.

What is the UK fund sales landscape likely to look at in a post-Brexit world? For this we look to the draft Statutory Instruments published by Her Majesty’s Treasury (HMT).

UCITS post-Brexit

The situation for UCITS post-Brexit is dealt with in Part 6 of The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018.

The first, and most important, thing to note is that the recognition of EU UCITS funds for sale to retail investors in the UK (currently recognised under section 264 of FSMA) will end.

There will be a 3-year “Temporary Permissions Regime” (TPR) enabling EU UCITS that are already marketed into the UK to continue to do so provided they notify the Financial Conduct Authority (FCA) of their intention to do so prior to exit day. The TPR may be extended by HMT under certain circumstance by further periods of up to 12 months at a time. The TPR may not be applied to funds that:

• Launch following the UK’s exit from the EU
• Are not registered to market into the UK under FSMA s264 prior to the UK’s exit from the EU
• Have not applied for the TPR prior to the UK’s exit from the EU

The intention is that any funds that wish to continue marketing into the UK once the TPR expires will have to register under FSMA s272, the route as any non-EU fund must currently follow. The s272 route will also apply to funds that do not qualify for the TPR or fail to notify the FCA that they will be utilising the TPR.

Table 1: Comparison of UCITS passport (into UK) vs FSMA s272 recognition

AIFMD post-Brexit

The situation for Alternative Investment Funds (AIFs) post-Brexit is dealt with in Regulation 14 of The Alternative Investment Funds Managers (Amendment) (EU Exit) Regulations 2018. Again, the passport regime (under Article 32 of AIFMD) would cease to function for all types of AIFs, including but not limited to:

• European Venture Capital Funds (EuVECA)
• European Social Entrepreneurship Funds (EuSEF)
• European Long-term Investment Funds (ELTIFs)
• Money Market Funds (MMFs) which use an AIF structure

For EU funds currently utilising the AIFMD passport process the draft SI proposes a similar TPR to that proposed for UCITS funds, which again may be extended beyond three years in certain circumstances by HMT. Again, the TPR will only apply to:

• Funds that are in existence prior to “exit day”
• Funds that are already marketed under the AIFMD passport into the UK prior to “exit day”
• Funds that have notified the FCA that they will be making use of the TPR

New funds and funds not already marketed into the UK will have to register under the UK NPPR (the same as non-EU funds currently do). Following expiration of the TPR an EU AIF that wants to continue marketing into the EU must be registered under the NPPR.

Table 2: Comparison of AIFMD passport (into UK) vs Article 42 NPPR

Overall Effect – Closing the Gap

As can be seen above, and subject to any agreement between the UK and the EU on recognition of funds post-Brexit, the recognition “gap” between EU funds and non-EU funds will closed once Brexit has taken place and any Temporary Permissions Regimes have expired.

When marketing funds into the UK there will no longer be any benefit to using EU funds instead of non-EU funds. Furthermore, looking at the requirements for recognition of funds under FSMA s272 it would seem much less burdensome to restrict marketing of funds to institutions rather that registering them for full retail marketing.

It is also worth pointing out that under the Exemptions from the restrictions on the promotion of non-mainstream pooled investments (NMPIs) it is possible to promote funds ordinarily sold to institutional investors to:

• Certified High Net Worth Investors
• Certified Sophisticated Investors
• Self-Certified Sophisticated Investors