Brexit: UCITS and AIFM Directives

On June 23rd 2016, the people of the United Kingdom (“UK”) expressed their will to have the UK leave (“Brexit”) the European Union (“EU”) pursuant to the result of the United Kingdom European Union membership referendum (“Referendum”).

Brexit will have an impact on those entities in the UK relying on Directive 2009/65/EC (“UCITS Directive”) relating to undertakings for collective investment in transferable securities (“UCITS”) and on Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD”).

1. Current state of legislation as of 2016

For the time being and considering the advisory nature of the Referendum, the UK is still a member of the EU and the British Financial Conduct Authority (“FCA”) clarified in its statement of June 27th 2016 that financial actors in the UK “must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect”.

In addition, the FCA further clarified that: “Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation”.

From a Luxembourg point of view, this means that UCITS management companies (“UCITS ManCo”) and alternative investment fund managers (“AIFM”) based in the UK may still manage Luxembourg funds on a cross-border basis (the opposite being also true) and UK UCITS and UK alternative investment funds (“AIFs”) may still be marketed on a cross-border basis in the markets of the remaining EU Member States.

Things will change with the triggering of article 50 of the Treaty on European Union (“TEU”) which will start a transitional period (the “Transitional Period”) where the UK is still a member of the EU but will negotiate its new relationship with the EU. The Transitional Period will end at the earlier of (i) the expiry of a two years’ term starting from the triggering of article 50 of the TEU or (ii) the entry into a withdrawal agreement by the UK and the EU.

2. Future impact of Brexit

"At the expiry of the Transitional Period, there are a number of different scenarios which might occur."

We examine the three most likely scenarios below and their impact on the applicability of the UCITS Directive and the AIFMD.

2.1 Norway Option

In this scenario, the UK would leave the EU but join the European Economic Area (“EEA”) in order to keep its access to the European single market. From a legal point of view, this would mean that UK managers could still rely on the UCITS Directive and the AIFMD and the situation would be legally equivalent to being an EU member (except that the UK would not be involved in the shaping of any future amendments to EU law).
In theory, UCITS, UCITS ManCos and AIFMs based in the UK would still be able to operate as if no Brexit had occurred and the relationship of the UK financial actors with Luxembourg entities would remain the same.
However, the Alternative Investment Management Association stresses that the cooperation between financial supervisory authorities may not be ensured to the same extent as between EU members (e.g. certain powers conferred to European supervisory authorities cannot be exercised in the EEA countries) which could mean that in the worst case, access to the single market could be threatened.

2.2 Switzerland Option

Switzerland is not a party to the EEA treaty but ensures, to a certain extent, access to the European single market by entering into bilateral agreements with the EU on a sector by sector basis.
The bilateral approach would give the UK the flexibility to choose the EU initiatives in which it wishes to participate, including financial services (Switzerland does not have a bilateral treaty with the EU in relation to financial services). As with membership of the EEA, the UK would have little influence in the design of such EU rules.
There is no guarantee that the UK would be able to secure a bilateral treaty with the EU.

2.3 Third Country Option

Should the UK not join the EEA or enter into some sort of bilateral treaty, then the UK would be treated as a third country. This would have the following impact:

2.3.1. UCITS

UK UCITS, like their Swiss counterparts, would not be able to be distributed to investors located in the EU (including Luxembourg) under the UCITS marketing passport. This would require UK promoters to establish their UCITS or UCITS ManCos in an EU Member State, as there is no UCITS passport for third countries.

2.3.1. AIFMD

Unlike the UCITS Directive, the AIFMD provides for a passport for third countries. This would require the UK internal laws and regulations to keep their alignment with the AIFMD. In addition, a cooperation agreement between the FCA and the EU financial supervisory authorities will need to be put in place. As of now, the third country passport regime has not been granted to any foreign jurisdiction as regulatory discussions on EU level are still ongoing.