The European Commission also warned asset managers that the end of the Brexit transition period spurs obligations on investor disclosures and that “the change of legal status of the UK funds” could require EU-based managers to delegate some of their operational functions to UK-based providers.
The advice is set out in a new notice to stakeholders, which urges asset managers to “assess the consequences of the end of the transition period” and “take appropriate action”.
In a separate recent communication it published, the Commission also confirmed that, at least in the short to medium term, it does not intend to designate the UK’s regulatory and supervisory regimes for the provision of investment services to professional clients and eligible counterparties as ‘equivalent’ to the EU’s framework. An equivalence designation, under Article 47(1) of MiFIR, would make it easier for UK-based investment companies to continue marketing their services in the EU after the Brexit transition period expires.
Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: “Although many investment firms have organised their businesses so that they will not be reliant on Article 47 equivalence, nonetheless there will be a good number who were hoping to use this option. This in spite of the fact that to do so would have meant significant reporting obligations, especially once the new EU Investment Firm Directive and Regulation (IFD and IFR) come into effect.
“It appears that the EU has decided that it has simply run out of time to complete the process as it had not received sufficient responses on equivalence questionnaires from the UK by the end of June. Even if the equivalence had been granted, the timetable for a firm to register with ESMA under the Article 47 regime is such that firms would have had to contend with a gap of several months,” she said.
“Firms who do want to provide services into any EU jurisdiction will need to confirm the extent to which each country will permit it under their local laws or consider whether the level of business means that a more permanent solution needs to be found either by setting up a subsidiary or branch, or possible entering into a joint venture arrangement with an EU based business,” Budd said. “In the longer term it is possible that equivalence will be available but without a deadline to aim for it is possible to foresee that this may drift for a period of time.”
After the Brexit transition period ends on 31 December, the UK will be considered a ‘third country’ for the purposes of EU law, unless a different trading relationship is established via a new EU-UK free trade agreement currently in negotiation. The result of this change in relationship is that many asset management companies, among others, will need to change the way they are structured and operate.
The changes industry will need to respond to concern both UK-based asset managers who manage EU-based funds and EU-based managers managing UK-based assets.
From the UK perspective, the forthcoming change in the UK’s relationship with the EU means that many UK-authorised managers, who have to-date been able to manage certain funds in the EU market under a so-called ‘passporting’ arrangement, will no longer be able to do so from 2021.
“AIF managers need to be established and authorised in the EU to be allowed to manage and market AIFs to professional investors across the EU,” the Commission said in its notice to stakeholders.
The Commission also said that all collective investment undertakings registered or authorised in the UK will become non-EU alternative investment funds after the Brexit transition period expires, though it confirmed that EU subsidiaries of UK-authorised collective investment undertakings will be considered to be “EU companies and can continue to operate on the basis of their authorisation as UCITS management companies or AIFMs in the EU” after 31 December. This exception does not extend to EU branches of UK managers, however.
For many asset managers authorised in the EU but managing UK funds, the end of the transition period will force them to obtain fresh authorisation to continue managing those then non-EU funds to continue marketing them in the EU, or delegate certain functions to UK-based providers.
EU-based asset managers will also face investor disclosure obligations spurred by the end of the transition period, the Commission said.
“AIFMs must disclose to investors any material change to the information that is required to be disclosed in accordance with Article 23 of Directive 2011/61/EU, which includes, but is not limited to, the legal implications of the contractual relationship entered into for the purpose of investment,” the Commission said.
“According to Article 72 and 78 of Directive 2009/65/EC, UCITS management companies must keep up to date the essential elements of prospectus and a key investor information document. This includes information on Member States in which the management company is authorised, where the UCITS is managed or marketed cross-border,” it said.