Passporting post-Brexit – how the EU referendum will affect AIFMD

We spoke to our clients about the EU referendum and what the outcome means for ESMA

With the referendum less than three weeks away, opinion over the regulatory implications of the Brexit is still divided. For AIFM’s, the impact on regulations following a Leave vote is a key factor, as the effects on passporting and restrictions will not be fully understood before the referendum. For those who report under the Alternative Investment Fund Manager’s Directive, the prospect of seeing the first decrease in regulation since 2008 is appealing. However, the finance industry must consider the inevitable disruption of being the first nation to withdraw from EU.

There are broadly two outcomes of a Leave vote. One scenario will see Britain join countries such as Guernsey and Jersey in the European Economic Area, and one where is does not and exists wholly outside of Europe. If the UK does not become part of the EEA, then Britain will most likely adopt a US or Hong Kong-style approach to AIFMD. “In our view, Brexit would have no impact on the AIFMD – or rather the requirements a fund manager would deal with as the UK [would remain] committed to this type of financial oversight,” says Imtiaz Arian of Gallaghers; “It is highly likely that the Brexit would incentivise AIFMs to concentrate their business and fundraising activities in the UK. The regulations in the UK are much closer to the standards established in the US.”

The prospect of fewer regulations for financial markets (and certainly fewer introduced from Brussels) has generated support for the Brexit. “I expect that if the UK votes to leave the EU, the amount of regulation will reduce. Any new regulations will not be put forward until the current rules have time to be fully implemented and bedded in.” adds Thomas Kilgore of ArcLight. “The industry is changing rapidly and new rules will be required, [we would] hopefully see a lighter touch.” Fewer regulations would result in cost savings for the industry, and some fund managers see the Brexit as an opportunity for the UK to develop its own off-shore fund structure.

Total autonomy on AIFMD and other forms of regulation is an attractive prospect, but the most likely outcome of a Leave vote would see Britain as a member of the EEA, and business as usual for AIFMD and MiFID II. Joining Iceland, Liechtenstein and Norway, British firms would report to ESMA either on a quarterly or annual basis as they do now. Regardless of the eventual outcome, there is unanimous agreement that any form of Brexit would cause disruptions. As directives such as UCITS must be located in EU domiciles, fund managers will need to restructure their funds, either through complex reauthorisation and redomicilation, or by physically moving the UCITS.

Reducing the influx of financial regulation introduced by the EU is an appealing idea, but how much sovereignty Britain will regain following a Brexit is debatable. The UK often perceives itself to be lacking autonomy in Brussels, with no way to control the new regulations and laws introduced. Despite this perception, the UK is one of only four nations with ‘opt-out’ powers. The UK holds an opt-out for four key policy areas, and are far more regular users of this right than Ireland, Denmark or Poland. If fund managers want to passport in the EU then their AIFMs would still need to be highly regulated, the most likely scenario seeing the UK continue to report to ESMA. If Britain were to leave the EU, it is possible that fund administrators could see the worst of both worlds; continued regulation from Brussels with no authority to opt-out or introduce change.

Whilst UK fund managers have considered the impact of post-referendum AIFMD filing, the Brexit will affect funds all over Europe and beyond; “The knock on effect is that EU investors may well find their global opportunity set even further limited” adds Gallagher’s Imtiaz Arian. A thriving post-Brexit Britain enjoying less regulation and the same direct access to passporting under the EEA would be a disastrous scenario for the EU. With this in mind, gaining cross-border passporting access may not be as simple as it has been for other Third Countries.

The result of a Leave vote for Britain ultimately depends on where the UK’s place in the world market truly is. Some feel that the UK’s success is directly linked to the access to the EU market, with the ability to passport to the European Single Market without restriction. For others, the UK’s domestic framework holds its own, and London’s place as a World city will elevate the UK without the restrictions of the EU. Despite the uncertainty, the nation remains split over the vote with 13% of the public still undecided.*

The wider question remains whether or not the long term effect of the Leave vote will offset the immediate disruptions, both economic and social, of being the first nation to leave the EU.

* YouGov, EU Referendum: UK tied 03/06/2016