On 23 June 2016, Britain took the historic referendum decision to leave the EU. There has been considerable political fall-out, both within the UK and internationally, arising from this decision. Currently there is considerable uncertainty as to the “how” and “when” of the UK’s exit from the EU, with the absolute minimum departure period being two years following delivery of the formal “Article 50” notice to the EU Council.  Asset managers based in or with operations or business in the UK need to ramp up their contingency plans so that they are positioned to protect themselves from the consequences of Britain’s departure from the EU. These plans will include analysing the location of investors in their products, assessing the domiciles of the funds under management, and mapping out where the placing of deals and other related activities takes place.  In the context of these plans, the following are some of the key Brexit-related issues expected to affect asset managers and the Funds industry:

1. Restricted EU market access for UCITS products: UCITS established in the UK may, post Brexit, no longer be capable of being marketed via passport within the EU or perhaps recognised in important markets outside the EU such as Hong Kong and Singapore. Consideration may have to be given to re-domiciling UK UCITS products which rely on the EU passport to elsewhere in the EU. The depositary of a UCITS must be established in its home Member State and, if the UCITS has an external management company, this must be EU-based. Therefore, apart from re-domiciling the UK UCITS, some of its key service providers will or may also have to change if they are currently UK-based.
2. Restricted EU market access for hedge funds: Currently, UK alternative investment fund managers (AIFMs) may market EU alternative investment funds (i.e. EU hedge funds) within the EU via passport. Post-Brexit, depending upon the domicile of the AIF, the UK AIFM may or may not be entitled to manage it, but the EU marketing passport would be unavailable and national private placement regimes (NPPRs) might have to be relied upon. For UK AIFMs managing and marketing non-EU AIFs into the EU, the post-Brexit environment would change certain NPPR rules to which they are subject.
3. Restricted UK market access for funds products generally: EU UCITS products and EU AIFMs wishing to market AIF products in the UK could not rely on the existing EU passports and would be subject to the relevant UK NPPR.
4. Restrictions on “Depositary” service providers: UK banks would not, post-Brexit, be eligible to act as depositaries of EU UCITS or EU AIFs.
5. Recalibration of portfolios: Fund portfolios and segregated mandate portfolios which have limitations based on investment in EU-based issuers may have to be re-calibrated in the event of Brexit. Additional adjustments may have to be made regarding UCITS portfolios as UCITS may only invest in other open-ended funds which are UCITS or equivalent non-UCITS funds and the maximum investment in non-UCITS funds (e.g. UK UCITS funds post-Brexit) is 30% of the investing UCITS’ assets.

William Fry’s dedicated Brexit team (which includes members of our Asset Management and Investment Funds Team) is available to advise on all legal, regulatory and tax implications of Brexit for your business. Please contact your usual William Fry contact for legal advice.

Contributed by Patricia Taylor