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 marketing for EU UCITS that:
- Are already marketed into the UK prior to Exit
Day
- New sub-funds that launch in an umbrella where
some sub-funds are already participating in the TPR
Existing funds must notify the Financial Conduct
Authority (FCA) of their intention to participate in the TPR prior to Exit Day.
New sub-funds must notify the FCA that they are going to utilise the TPR prior
to the commencement of marketing in the UK. The TPR may be extended by HMT
under certain circumstance by further periods of up to 12 months at a time. A
funds participation in the TPR expires:
- On expiration of the TPR generally
- When the fund has been assessed and recognised
under s272 of FSMA
- When recognition under s272 of FSMA has been
refused.
The TPR may not be
applied to:
- Standalone funds that launch following the UK’s
exit from the EU
- Existing funds that are not registered to market
into the UK under FSMA s264 prior to the UK’s exit from the EU and consequently
have not applied for the TPR prior to the UK’s exit from the EU
- Funds within a new umbrella fund
- New funds within an umbrella fund that does not
have any funds registered under the TPR
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
Regime | UCITS Passport | FSMA s272 Recognition |
Used by | EU UCITS funds | Non-EU funds (currently) EU UCITS funds (post-TPR) |
Allows | Marketing to all types of investor, including retail | Marketing to all types of investor, including retail |
Registration/recognition fee | £600 for standalone fund £1,200 for umbrella fund | £8,000 |
Timescale | Up to 10 working days | Up to 6 months |
Documentation | UCITS attestation/certificate Fund Rules Prospectus UCITS KIID Annual Report UCITS IV passport notification | Fund Rules Prospectus PRIIPs KID Annual Report Comparison to UK Scheme Management Agreement Conflicts information Investor protection details Business or marketing plan Form 272 (25 pages) |
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” and have notified the FCA that they
will be making use of the TPR
- New Funds that launch within an umbrella fund
that already has at least one fund registered under the TPR
Any other funds 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
Regime | AIFMD Passport | Article 42 NPPR |
Used by | EU AIFs | Non-EU AIFs (currently) EU AIFs (post-TPR) |
Allows | Marketing to institutional investors | Marketing to institutional investors |
Notification fee | Nil | £250 |
Timescale | Up to 20 working days | Within 1 day |
Documentation | Notification Letter Fund Rules Details of the Depositary Description of the AIF Information of Master AIF Article 23 Disclosures Marketing information Authorisation Statement | Notification form |
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