Investment Funds Update - Europe: Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles - July 2016 - Issue 6: United Kingdom

by Dechert LLP

Brexit: UK Votes to Leave EU

The 23 June 2016 referendum on the UK’s continued membership of the EU resulted in a vote to leave the EU.

Under the EU Treaty, the exit process should take at least two years. During this two-year period, UK-based asset management entities, including UK subsidiaries of US and other overseas firms, will continue to take advantage of current EU rights but will need to adapt their businesses to the new reality.

In the absence of any special arrangements agreed in the final terms of separation, this will include:

  • UK-domiciled Undertakings for Collective Investment in Transferable Securities (UCITS) funds and alternative investment funds (AIFs) would lose their EU marketing passports. UK UCITS funds would become AIFs. If EU marketing is required, UK funds could either be marketed under the Alternative Investment Fund Managers Directive (AIFMD) national private placement regimes (where these are permitted) or they could be re-domiciled to an EU member state. Extending the AIFMD third country passport to the UK would mean UK AIFs could continue to be marketed into the EU without substantial change, and UK UCITS funds could be marketed to professional investors in the EU as AIFs. Existing and new Irish, Luxembourg and other EU-based UCITS and AIFs will, subject to the following, continue largely as before and the two-year period will allow plenty of time to add new ones where required.
  • UK-based UCITS management companies and AIFMs of EU funds established outside the UK would lose their EU management passports. To preserve these, funds will need to become self-managed or appoint a (non-UK) EU UCITS management company or AIFM. If the AIFMD third country passport is extended to the UK, UK AIFMs will be able to continue as before without substantial change.
  • UK-based distributors would lose their EU passports to provide cross-border marketing services. To continue marketing into the EU, distributors would need to comply with local third country exemptions. Alternatively, a new distribution entity could be established in an EU member state. However, if the UK is designated as equivalent under the Markets in Financial Instruments Directive (MiFID II) (and the UK should implement MiFID II itself before the end of the two-year exit period), MiFID II’s new third country regime should permit UK distributors to continue to market to professional clients throughout the EU, which may avoid substantial change to their current business.
  • UK-based portfolio managers of separately managed accounts would be in a similar position to UK-based distributors. To continue managing EU accounts, they would need to comply with local third country exemptions, but some investors are prohibited from contracting with third country managers. Alternatively, a new portfolio management entity could be established in an EU member state. However, if the UK is designated as equivalent under MiFID II as can be expected, UK portfolio managers would be able to continue to manage the assets of EU professional clients without substantial change.
  • EU UCITS funds and EU AIFs would lose their rights under EU directives to be marketed in the UK. However, the UK is likely to continue to permit these funds to be marketed in the UK broadly as they are now, especially where they have a UK investment manager.

FCA Consults on a New Wind-Down Planning Guide

The FCA published a consultation (GC 16/5) on 23 May 2016 on a proposed new FCA guidance release: the Wind-Down Planning Guide (WDPG).

The FCA explained that firms and their professional advisors have asked for clarification on what wind-down planning should cover. The FCA has discussed this with individual firms as part of its supervisory response to identified concerns. In May 2015, the FCA provided feedback to the wider industry as part of its prudential forum. The FCA now believes that a non-binding approach document would benefit firms and their advisors, and lead to better outcomes.

The FCA believes that an effective wind-down plan should help a failing firm to cease its regulated activities and achieve cancellation of permission with minimal adverse impact on its clients, counterparties and the winder markets. As a consequence, the approach document aims to help a firm factor these considerations into its wind-down planning. The FCA explains that the approach document does not impose an obligation on firms to create wind-down plans. It merely suggests a logical approach for firms that have decided to engage in wind-down planning. As a result, the proposed approach document is not subject to cost-benefit analysis. The FCA accepts that there are many different approaches to wind-down planning, and encourages firms to take the approach document into consideration as a starting point to tailoring a model that best suits their circumstances.

The approach document will become general guidance under section 139A of the Financial Services and Markets Act 2000 (FSMA). As such, it will take the form of a "regulatory guide" and will not be part of the Handbook.

Comments can be made on the proposals until 22 July 2016.

Read "GC16/5 - Proposed guidance on winddown planning".

FCA Consults on Further Changes to Implement UCITS V and the SFT Regulation

The FCA published a consultation (CP16/14) on 19 May 2016 on proposals to amend the Client Assets sourcebook (CASS) and the Collective Investment Schemes sourcebook (COLL) following the adoption of the UCITS V Level 2 Regulation.

The UCITS V Level 2 Regulation introduces new requirements for UCITS depositaries. The consultation proposes amendments intended to ensure consistency with the UCITS V Level 2 Regulation. Affected firms must comply with the new requirements by 13 October 2016.

The consultation also proposes minor changes to the Senior Management Arrangements Systems and Controls sourcebook (SYSC), and consequential amendments to COLL and the Investment Funds sourcebook (FUND), to reflect certain measures in the Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (SFT Regulation).

Proposals include:

  • Amendments to CASS 6.6 to dis-apply certain rules and guidance for consistency with the requirements under the UCITS V Level 2 Regulation.
  • New guidance in COLL 6.9 to highlight the conditions for meeting the independence requirements introduced by the UCITS V Level 2 Regulation.
  • Amendment to SYSC 19E.2.9R(1) to set out the circumstances in which a UCITS management company must appoint a remuneration committee.
  • Copying out into COLL, the provisions of the SFT Regulation that require managers of UCITS funds and alternative investment funds (AIFs) to disclose details of their use of securities financing transactions and total return swaps in the funds' pre-contractual documents and periodical reports to investors.

Comments can be made until 19 July 2016 and a policy statement is expected in the third quarter of 2016.

Read the Consultation Paper CP16/14: "UCITS V Level 2 Regulation, SFTR and Consequential Changes to the Handbook".


Written by:

Dechert LLP

Dechert LLP on:

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