On 8 October 2018, HM Treasury published the Draft Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018 (Draft AIFM UK Regulations) as well as the Draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018 (Draft CIS UK Regulations) (together, the Statutory Instruments). The Statutory Instruments are part of a wider programme seeking to ensure that, in the event of a no deal Brexit, the UK will have a fully functioning financial services regulatory regime in place, also known as ‘onshoring’.
The Draft AIFM UK Regulations
With a view to ensuring smooth transition, the Draft AIFM UK Regulations introduce the following amendments:
- Amendment of the definition of an ‘AIF’: An Alternative Investment Fund (AIF) will be defined as “any investment fund that is not subject to the UK UCITS regime” (although note the amendments to the UCITS regime below), rather than the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive, as is currently the case. As a result, all non-UK funds, including EEA UCITS, will be categorised as AIFs. However, EEA UCITS will continue, in general, to be treated as automatically non-complex instruments so that they can be sold to retail clients in the UK without requiring an appropriateness test. Also, until 31 December 2019, an exemption to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation will continue to apply to EEA UCITS.
- Provision of information under the NPPR: Currently, Alternative Investment Fund Managers (AIFMs) marketing third country AIFs to institutional investors in the UK must notify the Financial Conduct Authority (FCA) in accordance with the National Private Placement Regime (NPPR). Under the Draft AIFM UK Regulations, funds recognised under section 272 of the Financial Services and Markets Act 2000 (FSMA) will not have to meet the information and reporting requirements under the NPPR when marketing to retail investors.
- Reporting on portfolio companies and asset stripping provisions: Reporting requirements regarding portfolio companies and restrictions on asset stripping will be applicable only when a UK AIFM acquires control of a UK company, rather than an EU company, as is currently the case.
The Draft CIS UK Regulations
The Draft CIS UK Regulations set out the following rules for UCITS:
- UK UCITS framework: The Draft CIS UK Regulations introduce a UK UCITS framework for funds established and authorised to be marketed to retail investors in the UK. “UK UCITS” are therefore distinguished from EEA UCITS under the UCITS Directive.
- Eligible investments of UCITS: In order to ensure continuity, investment rules under the UCITS Directive will continue to apply, including preferential treatment of investments in EEA assets over third country assets, under certain circumstances.
- Cash of UCITS: It will still be possible to book cash of a UK UCITS in accounts opened with any EEA credit institution and therefore to use settlement accounts in other member states.
- Cross-border and domestic mergers: cross-border mergers between UK UCITS and EEA UCITS will no longer be possible after exit day.
The Temporary Permissions Regime for investment funds
Currently, EEA AIFMs can market AIFs in the UK using the passporting regime. Similarly, EEA UCITS can be marketed to retail investors in the UK through passporting by becoming a recognised scheme under FSMA. If the UK leaves the EU without an implementation period, then passporting will no longer be available and EEA AIFs and EEA UCITS will become third country investment funds. However, with a view to ensuring continuity and minimising disruption, together the Statutory Instruments aim to create a Temporary Permissions Regime (TPR) for fund marketing activities into the UK.
During the TPR, EEA AIFMs and EEA UCITS that currently passport into the UK and that have notified the FCA (in accordance with the procedure adopted by the FCA in due course) will be able to continue their marketing activities in the UK under, broadly, the same terms and conditions and for a limited period of time. More specifically:
- Duration: The TPR will operate for a maximum of three years and may be extended for up to 12 months.
- Notification: To be able to use the TPR, EEA AIFMs and operators of EEA UCITS must notify the FCA of their intention to do so before exit day. The FCA consulted on its proposed notification procedure in CP18/29.
- Supervision: During the TPR, AIFMs and UCITS operators will be required to continue to comply with the obligations that were imposed on them in relation to a host member state, which were previously implemented by the home member state. The FCA will continue to be able to revoke or suspend an AIFM’s right to market an AIF, as is currently the case under the NPPR. Additionally, the operator of the EEA UCITS shall provide the FCA with the following:
- a notification of a variation or cancellation of the authorisation of the scheme in the home state;
- all information currently provided to the FCA in its capacity as the host state competent authority; and
- information previously provided to the home state competent authority, which would then have been shared with the FCA.
- Exiting the TPR: To continue the relevant marketing activities after the end of the TPR, AIFMs must notify in accordance with the NPPR and a UCITS fund must be recognised under FSMA, within two years from exit day.
The FCA has published consultation paper CP18/29 explaining how the TPR will operate in practice, setting out details about the notification process as well as the FCA supervision of and applicable rules to investment funds during the TPR. You can find more information about the FCA TPR consultation paper here.
Marketing of investment funds in the UK after exit day outside the TPR
After exit day, EEA AIFs that have not entered the TPR will be treated as third country AIFs. Therefore, both UK and EEA AIFMs marketing EEA AIFs in the UK shall be required to notify the FCA under the NPPR.
Similarly, EEA UCITS outside the TPR will need to:
- either apply for recognition under FSMA to continue marketing to UK retail investors; or
- the operator of the fund will need to notify the FCA under the NPPR and market it as a third-country AIF to continue to market to institutional investors.
Depositaries, trustees, managers and operators of UK authorised funds
UK authorised funds, which includes UCITS, Non-UCITS Retail Schemes (NURS) and Qualified Investor Schemes (QIS) are required to have a depositary that is established and has a place of business in the UK. Currently, EEA firms may meet this obligation by establishing a branch and receiving top-up permissions to carry out depositary services in the UK. Post-Brexit, EEA firms will be treated as third-country firms and, consequently, the following requirements will have to be met:
- The manager and trustee of an authorised unit trust or the operator and depositary for an authorised contractual scheme must each be a body corporate incorporated in the UK, the affairs of each must be administered in the UK and they must each have a place of business in the UK.
- The depositary of an open-ended investment company must be a body corporate incorporated in the UK, and have a place of business in the UK. The sole director must also be a body corporate incorporated in the UK.
However, if the EEA firm has entered the relevant TPR, then it will be able to continue carrying out regulated activities in the UK for a limited period of time and therefore the incorporation requirements of the depositary, trustee, operator and / or manager will not be applicable during the TPR.
Supervisory cooperation
After exit day, the UK supervisors will not be unilaterally obliged to cooperate and share information with the relevant EU authorities. Instead, cooperation and information sharing will be conducted on a reciprocal and discretionary basis as is currently the case under the existing domestic framework for supervisory cooperation with countries outside the UK.
HM Treasury plans to lay the Statutory Instruments before Parliament in the autumn.
and then 