We asked one of our key speakers at the Fund Marketing and Distribution conference, Manuela Froehlich (Global Head of Business Development at LRI Group) about her thoughts on the following question.
"How do you think UK funds and managers will cope with adopting EU legislation during the transition period once the UK has no official EU influence?"
- No immediate major disruptions: The European Commission has agreed that there will be a temporary and conditional equivalence decision for a fixed, limited period of 12 months to ensure that there will be no immediate disruption in the central clearing of derivatives.
- Loss of influence in negotiations: while some sort of certain deal linking the UK and EU 27 will eventually come to stand, the UK has lost much of its bargaining power in the negotiations and is essentially at the mercy of the EU in regard to legislation.
UK managers will have to adapt to the will of the EU to remain in the market. Britain as a rule–taker not a rule–maker.
"While the UK and European fund industries are extensively interlinked and a total exclusion of UK funds in Europe is unlikely as it would ultimately damage both the UK and EU, the UK stands with more to lose."
- The safest way to ENSURE access to the European market would be to implement contingency plans and move personal funds to Europe. While this a safe way to guarantee access to the European market, it presents significant costs and logistical issue, and one that may not even be necessary given the possibility of an agreement. As for example, passport rules require funds to have a so-called AIFM on EU soil.
- To bridge this uncertain time period Luxembourg stands out for holding excellent solutions for managers seeking to bridge the transition period. To avoid costs from salaries, services fees and new technology and bridge the current Brexit status quo, asset managers can appoint a third party Luxembourg Management Company (ManCo) to manage their funds. ManCos would select the appropriate structures and handle distribution strategies allowing asset managers to focus on their core competencies: sourcing deals and investment management.
- This Luxembourg solution exists through the current fund delegation model, which allows funds to be set up by asset managers in one EU state while delegating the investment management to fund managers in another country. ESMA has expressed tougher regulations on delegation post Brexit to combat the establishment of letterbox entities must provide substance (in form of permanent staff for their employees) Already the CSSF is enforcing ESMA´s request and requiring that at least two senior executives to be based in the country or near the border to negate the existence of empty shell entities.
- ESMA has warned that firms wishing to keep offering services in the EU must have a fully authorized legal entity inside the EU bloc by March 30.
"No one can anticipate 100% what will happen, many are guaranteeing access to the EU by moving funds to Jersey and Guernsey to accommodate U.K. based investors and set up a second vehicle in Luxembourg/Ireland for European investors."
Please note that opinions are those of the professional mentioned in this article and not the views of their employer.
If you’d like to find out more about what the effect of Brexit and how you can ensure you implement successful marketing, distribution and regulatory strategies for your funds, register for the Fund Marketing and Distribution conference here.