Brexit has caused uncertainty in the UK funds industry and UK investment fund managers have been devising and implementing a variety of contingency plans based upon various post Brexit scenarios.
Since many UK based fund managers already use Irish or Luxembourg UCITS and alternative investment fund (AIF) platforms for pan-European distribution, the effect on the UK as a fund domicile is likely to be relatively limited, although there has been some evidence of asset managers seeking to rebalance their operations and build greater presence in the EU where they did not already have this.
The big issue for the UK asset management industry is the risk of changes to delegation rules that enable MIFID investment firms, alternative investment fund managers (AIFMs) and UCITS management firms to delegate to a UK based investment manager.
On 20 March 2018, the chair of the European Securities and Markets Authority (ESMA) sought to clarify earlier comments on delegation that the European Supervisory Authority made in its July 2017 sector specific principles on relocations from the UK to the EU27. He stated:
"As I have repeatedly clarified, we are not looking to question, undermine or put in doubt the delegation model. We know that this is a key feature of the investment funds industry and that the flexibility to organise centres of excellence in different jurisdictions has contributed to the industry’s success. To put it more bluntly, to us delegation is not a dirty word.
What our opinions are seeking to address is the risk of letterbox entities. I hope you would all agree that it is in no-one’s interest to allow the creation of such entities. Both the UCITS Directive and the AIFMD explicitly require there to be enough substance in the entity established in the home Member State.
In other words, financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms, like speed and efficiency, but in all cases the EU rulebook should be consistently applied. Otherwise, there could be insufficient substance in the EU27, which may pose risks to ESMA achieving its stability and investor protection mandates."
In terms of other recent activity, the Alternative Investment Management Association published a position paper in April 2018 in which it argued that the UK should seek a deal with the EU that ensures UK firms’ relationship with EU investors and clients can continue uninterrupted by virtue of ‘grandfathering positions’. A series of technical points that need to be addressed during the transition period are outlined in the paper, with the aim of ensuring a smooth journey for asset management firms as they revise their approach to reflect the UK’s new third country status.