Start-up and emerging investment managers could face a host of different challenges post-Brexit, depending how the situation plays out and the impact that it has on the UK regulatory framework. Obstacles could range from issues surrounding the loss of passporting rights to a scarcity of compliance talent and complications recruiting or retraining. While larger and more established investment managers may have the resources in place to negate these problems, emerging managers may find it more difficult to be adequately prepared.
Loss of passporting rights and the current situation
Post-Brexit, the UK will probably lose its passporting rights and be deemed a ‘third country’, meaning its ability to continue marketing to investors will be dependent on equivalence.
In January, EU and UK regulators did agree a deal that could help protect the UK asset management industry after Brexit. The European Securities and Markets Authorities announced that a deal had been agreed ‘in substance’, which would allow the process of delegation to continue.
Temporary permissions have also been granted that will allow EEA-based firms passporting into the UK to continue regulated business within the scope of their current permissions and will also allow EEA-domiciled funds to temporarily continue marketing into the UK.
While it is positive that the UK has obtained permission to be deemed equivalent before Brexit has happened, there are still challenges for start-up and emerging investment managers to consider. In order to keep EU equivalence, the UK will need to maintain EU regulation. There is also the possibility that the EU could revoke equivalence at any time, so the arrangement is less permanent than the current passporting regime. Equivalence depends on the European Commission’s determination of whether supervisory regimes have the same outcomes.
The sentiment in the investment management sector is apprehension: in a recent industry survey, two thirds of investment managers said their biggest concern was continued access to EU27 customers or investments.
Calls for lighter regulation
There have since been calls for lighter regulation post Brexit, which may complicate the equivalence issue further. In a speech in April, FCA head Andrew Bailey said that the regulator would look to be able to pursue a “same outcome, lower burden” approach in any post-Brexit deal. He went on to say that the regulation should focus on whether different rules achieve common outcomes rather than harmonising rule books, which is in the spirit of the current principles of equivalence. The lack of clarity, though, potentially makes it tricky for start-up and emerging fund managers to prepare for Brexit, especially given the potential lack of passporting rights.
UCITS and ‘equivalence’
It’s also worthy of note that there is currently no third-party equivalence in place for UCITS, just for AIFMD and MiFID. If the UK loses passporting rights, UK UCITS may have to divest in the absence of equivalence. Ultimately some asset managers would need to change the way they manage and market their funds, as it's likely that the UK regulator would categorise the funds as AIFs meaning they would fall under AIFMD.
Impact on wider directives
In addition to the potential changes to the regulatory framework as a direct result of Brexit, investment managers and advisers also need to consider some of the other updates to directives that are imminent, such as the Fifth Anti-Money Laundering Directive (5AMLD), which comes into force in December, and the Senior Managers and Certification Regime (SMCR). 5AMLD, for example, will see the necessity for enhanced due diligence, including an obligation to obtain evidence on beneficial ownership and the background to a transaction. 5AMLD also includes an updated list of countries that are deemed ‘high risk’. In the case of a hard Brexit, the UK will become a third country and while it will not be deemed high risk – and the definition of high-risk countries will remain the same as under the current regime – this list will now be updated by the FCA and is therefore likely to diverge from the European standard over time.
Implementing contingency plans
For larger asset management firms, the planning that needs be undertaken to prepare for the uncertainty of Brexit is far less onerous. Many will have already considered whether to relocate operations to another EU country or apply for new licenses from EU regulators. In March, the UK asset managers trade body, the Investment Association, urged its members to start implementing Brexit contingency plans, and research from New Financial revealed that 43 asset managers had already selected an EU base to transfer staff to, to ensure continuity of operations.
The benefits of a regulatory hosting platform
For emerging and start-up investment managers though, it’s likely that establishing a new legal entity in the EU and operating it after obtaining local authorisation will be prohibitive. Using a regulatory hosting platform could instead be key to handling the myriad of implications of Brexit and getting a contingency plan in place to maintain continuity. Firms without direct authorisation will still be able to carry out regulated activities and take advantage of the arrangements that the host has made to mitigate the risks of Brexit. A Luxembourg AIFM solution, for example, can give access to integrated fund solutions and ManCo services, including AIFs, UCITS and RAIFs. It can offer a cost-effective, integrated regulatory infrastructure across different jurisdictions for start-up and emerging investment managers without the necessity to relocate or set up new operations.
Using a regulatory hosting platform negates many of the other challenges of Brexit besides the loss of passporting rights. As evidenced by Andrew Bailey’s comments, even with a good equivalence deal, there are likely to be many regulatory changes on the way as EU directives become transposed into British law instead. In fact, in its 2019/20 business plan, the FCA stressed that “while it continued to face the considerable burden of extracting Britain’s financial services from the EU, the changes also presented an opportunity to rethink how it operates.” A regulatory hosting platform offers access to a robust infrastructure and risk governance function to help navigate such change.
About Lawson Conner
Lawson Conner has its own regulatory platform, provided by either G10 Capital or Sapia Partners (both part of the Lawson Conner group), which are authorised and regulated by the FCA and could help start-up and emerging investment managers to overcome the potential post-Brexit challenges they could face. To find out more, please don’t hesitate to contact me:
DD: +44 (0) 203 696 2568