Published on March 8, 2021 by Wilfred Peter and Asha Rakesh Maniar
What is Brexit?
Put simply, it is the decision of the United Kingdom of Britain, Wales, Scotland and Northern Ireland to leave the European Union (EU).
It started with the UK invoking Article 50 of the Treaty on European Union in 2016; invoking this kick-starts the formal exit process and allows countries to officially declare their intention to leave the EU. It was concluded in December 2020. The UK and the EU held several rounds of discussions on trade and treaties throughout the transition period. The UK formally left the single market and custom union in January 2021.
What is its impact on asset management firms?
We focus on just a few implications that are likely to have the most impact:
End of the passporting era. Passporting essentially allowed financial firms in the UK to provide services across the EU without additional regulatory clearances. With the UK now leaving the EU, it would become expensive for UK firms to serve their EU-based clients and vice versa. They would have to run their businesses according to country-specific rules and regulations. Compliance teams would now need to be more vigilant in terms of complying with local regulations and obtaining the necessary regulatory clearances.
Marketing of funds. Marketing of UK funds in the European Economic Area (EEA) and vice versa will no longer be possible under the current passporting agreements. UK firms will now require permission from each EEA country to market funds or go through the National Private Placement Regime (NPPR). In addition, firms in EEA countries will require regulatory approval from the Financial Conduct Authority (FCA) and registered with FCA under the Temporary Permission Regime (TPR) to have funds marketed under the UK NPPR regime. The respective compliance teams would have to be aware of this change and put effective controls in place to ensure their firms adhere to regulations and requirements before marketing a particular fund in an EU state after Brexit.
UCITS. Undertakings for Collective Investment in Transferable Securities (UCITS) funds should be domiciled in an EU-managed company. Therefore, following Brexit, UK UCITS funds would have to migrate to an EU member state unless they are self-managed. After Brexit, UK UCITS funds would no longer be called UCITS for EU law purposes and may need to be reclassified as ex-UCITS funds. It is also the responsibility of the firms involved to ensure that UK UCITS are reflected as ex-UCITS in legal documents. Moreover, UK UCITS cannot be marketed to EEA retail investors, but they can be marketed with an individual private placement regime.
What have these firms been doing?
They have been setting up offices/legal entities within EU member states to uphold their passporting rights there.
Equivalence may also be available — where the EU examines if the regulatory and supervisory controls in a bank’s base home market are equivalent to those of the EU. However, it would not be the same as passporting, especially with some of the core financial services such as lending, deposit taking and payments being excluded. Furthermore, equivalence can be revoked unilaterally with 30 days’ notice on the condition that the UK and the EU have reserved the right to take autonomous decisions based on the change in their regulations.
Secondment of individuals from the UK to the EU
The European Central Bank (ECB) considers secondment useful for business, even though this can be rolled out at the initial business setup. However, if there is a need for a long-term secondment, firms in the UK would have to provide the ECB an appropriate reason for it. Additionally, the employee concerned would need to be closely working with the business of the European authorised firm and have no conflict of interest, for the agreement to be approved.
Work permits. Prior to Brexit, employees across the EU had working rights across the bloc with no restrictions; however, they now need to have the appropriate work permits/visas before they can work in the UK.
Top three key takeaways
- Passporting for funds from the UK to other EU countries has ended; firms now need to have controls in place to market funds across the EU with an alternate option like registering the fund for sale in the specific EU member state or to go through the National Private Placement Regime (NPPR).
- Firms would need to relook at secondment agreements with the ECB; when an employee moves from the UK to the EU, they must ensure they meet secondment requirements such as proof of travel and use of office space
- Asset management firms need to look at ways in which they can work with regulators in the EU to market UK UCITS funds in the EU without impacting business
It seems to be an uphill task for asset management firms to ensure most if not all boxes in their to-do lists are ticked for their businesses to function smoothly, facing no Brexit-related challenges.
That said, any of these challenges can be overcome. Firms such as Acuity Knowledge Partners can partner with you to help you overcome them and handle day-to-day activities from a compliance perspective.
Acuity Knowledge Partners is an influential player in the global market, offering compliance expertise and a wide array of other services. We enable our compliance clients to manage increasing demands on their teams by providing customized managed services solutions, based on specialized skills and technology, and by delivering operational efficiency, resilience, and significant cost savings. We believe our offering is even more relevant in the post-COVID-19 economic and operating environment, where compliance teams have seen a significant increase in workload in tasks such as trade surveillance, communications surveillance, distribution compliance and virtual client on-boarding and transaction monitoring. Please refer to Acuity’s compliance offerings in details here.
Originally published at https://www.acuitykp.com.
About the Authors
Wilfred Peter, Delivery Manager, Compliance Operations, has over 11+ years of experience in compliance and Investment banking having worked for firms including State Street Global Advisors and HSBC. His expertise spans across compliance and risk sector, focusing on compliance reviews of marketing/advertising materials and social media contents. At Acuity Knowledge Partners he is part of the central compliance team and specializes in marketing material review and social media reviews. Wilfred is a graduate (Bachelors of commerce) and hold a degree from St Joseph’s College of Commerce Bengaluru.
Asha Rakesh Maniar, Senior Associate, Compliance, has 7+ years of experience in compliance and has been associated with Acuity Knowledge Partners for about a year. Prior to joining Acuity Knowledge Partners she worked as a senior analyst with Goldman Sachs — PWM and Forensic compliance. At Acuity Knowledge Partners she is part of the corporate and forensic compliance team where she monitors electronic communication and performs trading surveillance for a client. Asha holds a MBA degree from the ICFAI Business School Hyderabad.