As we are all aware, the UK electorate has voted in the recent Referendum to leave the European Union (EU). What does this mean? What implications will it have for you, your investors and your business? It is early days in the process but we set out below what is currently happening, the processes involved and how this is likely to affect fund managers in the coming months and years.
What has happened in the UK?
There was a view by many in the UK, that the EU regulation, with which it had to conform, was too overbearing and too restrictive. In addition, the UK population has seen fairly high population increases in the last 10 years, primarily as a result of immigration and primarily as a result of the EU’s policy of free movement of labour. As a consequence there was bad feeling towards the EU from the voting population which culminated in the politicians agreeing to a public referendum. The major political parties supported “Remain” and tried to persuade the voting public to vote accordingly. Other smaller parties, and some politicians from the major parties who “switched sides” were in favour of “Out”. The final outcome was a 51.9%/48.1% vote in favour of leaving the EU.
However, this is merely a recommendation from the people to the politicians – it is not binding but the politicians have said they will follow “the peoples” recommendation. Parliament needs to debate and then formerly serve a notice under “Article 50” of the legal agreement between the EU countries. Until the UK serves notice, the UK remains part of the EU and nothing changes either in legislation, taxes or the like.
However the situation has been made more complex by the resignation of the English Prime Minister, David Cameron. Whilst some in the EU are pressing for the UK to serve Article 50 notice as quickly as possible, without a Prime Minister, this is physically impossible. A new Prime Minister has now been selected, although some are speculating that the Article 50 notice will not be given until October or November and some are suggesting that it may not be until 2017.
The reality is that many in the EU did not want the UK to leave. The UK is the second largest economy in the EU and an important trading partner for many e.g. the UK is the largest export market for German car manufacturers. So despite the rhetoric in the EU parliament, many are keen to do a “sensible” deal with the UK.
How will this affect UK domiciled Private Equity and Real Estate fund managers?
The reality is that:
- Nothing is changing in the immediate future
- Nothing further will change in the UK for at least 2 years after the serving of Article 50, whenever that may be
As a consequence there is no need to make any immediate changes to fund structures. However there is no doubt that things will change in the future. The key questions for managers to ask themselves are:
- Do I really need to be in the EU or not?
- What are the advantages/disadvantages?
- What are the implications?
These are questions to think about in the future – and there may be a range of answers.
The UK already has a good range of fund structures – and these are likely to be enhanced. In addition, the UK will undoubtedly be looking to ensure AIFMD passporting for its products even as a third party country. Some are talking about dual streamed products containing both EU and non-EU fund structures to accommodate different sorts of investors (a model already used by some). The reality is that it’s too early to determine which are the best routes to take. But without doubt Brexit needs to be on the agenda – and be actively considered by managers on an ongoing basis.
What about non-EU managers with UK entities regulated by the FCA?
Increasingly, non-EU managers have been setting up UK entities, regulated by the FCA, to support portfolio management and distribution activities both in the UK and throughout Europe. Again the reality of the Brexit Referendum is that (i) nothing will change in the immediate future and (ii) nothing further will happen until the Article 50 notice has been served and the transition period of at least two years has been completed.
This means that in the shorter term, managers can still continue to manage assets in the UK and Europe from their operations in the UK and can continue to market funds across Europe, whether they are via passporting or local private placement arrangements. So the immediate message is that “nothing changes” and it’s “business as usual”.
Going forward, there is no doubt that the UK will gain access to the EU financial markets. The EU want to invest with UK domiciled fund managers and have access to the products they have on offer. The world is increasingly globalised and investors need global diversification. However, how this is achieved has yet to be decided. Once again the message has to be “no panic now but watch this space”.
And non-EU managers marketing their funds into the UK and elsewhere into Europe?
Again – nothing has changed in Europe – although things may be changing in the very near future – but not because of Brexit. ESMA is due to report on the “Passporting” of third countries any day now and that could open Europe up to many fund managers. It could of course also close down the Private Placement Regimes used by many – Germany is already saying it will close its PPR once passporting is in place – but that was before Brexit!!
In many ways ESMA’s announcement will be more important than Brexit. ESMA has already indicated that it would be in support of extending a third country passport to Guernsey, Jersey and Switzerland but rather than give piecemeal approvals and potentially give a competitive advantage to certain domiciles, the Commission then asked ESMA to give further consideration to Hong Kong, Singapore and the US, with a second list of Australia, Canada, Japan, the Cayman Islands, the Isle of Man and Bermuda. ESMA’s announcement, due any day, will have a major effect on how funds market themselves into Europe going forward – and Brexit will be less important.