Unintended consequences


In February the European Commission issued a number of public notices and letters to UK Asset Management businesses alerting them to the practical consequences of BREXIT on funds issued by banks, asset managers and insurance companies. These notices advised that from the 30 March 2019;

  • UK UCITS funds and AIFs will become non EU AIFs (Alternative Investment Funds)
  • UK UCITS management companies and AIFs will lose their passporting rights and will be treated as ‘third country’ AIFMs (Alternative Investment Fund Managers)
  • UK AIFM/UCITS management companies will be treated as a branch of a non-EU AIFM

The EC’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union letter to asset managers said “In view of the considerable uncertainties, in particular concerning the content of a possible withdrawal agreement, stakeholders, including managers of investment funds and investors are reminded of legal repercussions which need to be considered when the United Kingdom becomes a third country.

it is the most radical change in funds business since the introduction of the UCITS Directive back in the 1980’s

What does this all mean and is it important? I would venture, it is the most radical change in funds business since the introduction of the UCITS Directive back in the 1980’s and yes it does matter.

Let’s just take a step back for a moment. The UK funds business employees 90,000 people and contributes 1% to the national GDP; it is an important part of UK plc.

Currently under EU rules UCITS funds and their managers must be established and registered or authorised in the EU to manage and more importantly market funds to retail and professional investors across EU.

Will the decision to automatically treat UK UCITS funds and AIFs as third party AIFs impact UK retail investors? Well, if the EU investors withdraw their funds, I would suggest yes. Many significant EU pension funds are unable to invest in non UCITS funds, similarly many investors from the Middle East and Hong Kong have always sought to invest in EU UCITS funds (including those managed and authorised in the UK) because of the control over the investment and borrowing powers imposed by UCITS compliance. The potential withdrawal of these funds could, in some instances, have a significant impact of the funds.

The EU commission is already advising EU investors to review their own investment criteria and consider their compliance with the legal status of the funds they are invested in. The notices did point out that UK firms may still be able access EU investors through National Private Placement Regimes (NPPR), which allows firms to agree a deal with national regulators, on an individual basis, in order to access their markets. However, NPPRs were due to be withdrawn prior to BREXIT and now it appears individual EU member states will have discretion over whether or not to activate NPPRs. What we can say about this, is that it is not likely to be a priority in light of all the other decisions that member firms will need to take in relation to dealings with the UK in the future.

The Central Bank of Ireland is already reporting significant inflows of applications for new Irish AIFMs and UCITS management companies.

I don’t know about you but I didn’t see any of this written on the side of a bus in 4 foot high letters. Of course, thinking about this can we go back to feet and inches and pounds and ounces come March 2019?



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Julia Kirkland, Head of FSTP Limited FSTP is now part of ZISHI and OSTC Group

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