Investment Funds Update - Europe: Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles - February 2017: United Kingdom

by Dechert LLP

Dechert LLP

UK Supreme Court Rules UK Parliament Must Approve Brexit Notice to EU

Under Article 50 of the EU Treaty, the process for the UK to leave the EU is commenced by service of a notice on the European Council, which starts a two year process for negotiating the terms of exit. Any extension of the two year period would require the unanimous approval of the UK and each of the remaining 27 EU member states (acting through the European Council). The terms of exit (if any) would need to be approved by the European Parliament and a qualified majority of the remaining 27 EU member states (acting through the European Council). If no terms of exit and no extension are agreed, the UK will exit the EU at the end of the two year period in any event.

The position of the UK government had been that the decision to serve the Article 50 notice is a matter of “royal prerogative” exercisable by government ministers acting alone and which did not therefore require the approval of Parliament.

This view was challenged in the courts and, on 24 January, the UK Supreme Court ruled by a majority of eight to three that the prime minister cannot use royal prerogative to trigger the Article 50 process. The President of the Supreme Court, Lord Neuberger, held that it would be inconsistent for such a far-reaching change to constitutional arrangements to leave the EU to be brought about by ministerial decision or action alone. Ministers would need primary legislation in Parliament to trigger Article 50.

Authority for the prime minister to trigger the Article 50 process has therefore been sought in the European Union (Notification of Withdrawal) Bill 2016-17. The bill had its third reading in the House of Commons on 8 February and thereafter moved to the House of Lords where it has gone through two readings. The House of Lords is due to vote on the bill on 1 March, after which it should move to the report and third reading stages on 7 March. From there, any amendments will be considered by both houses before it receives Royal Assent and becomes law.

The government has repeated its intention to commence the Article 50 process before the end of March.

FCA Extends Annex IV Reporting to Un-marketed Master Funds of Non-EEA Feeders Marketed in the UK under Article 42 National Private Placement

Under the FCA’s current AIFMD National Private Placement Regime (NPPR) requirements, where a non-EEA feeder fund is registered for marketing in the UK but its corresponding non-EEA master fund is not, there is discrepancy on whether detailed information on the master fund needs to be included in Annex IV reporting depending upon whether the AIFM is a non-EEA AIFM (using the AIFMD Article 42 NPPR) or a full-scope UK AIFM (using the AIFMD Article 36 NPPR). A full-scope UK AIFM is required to report the additional master fund information, but a non-EEA AIFM is not.

From 29 June 2017, the FCA is changing its rules to require non-EEA AIFMs also to include in their Annex IV filings the additional information on un-marketed non-EEA master funds that is currently required to be reported by full-scope UK AIFMs.

This change only applies to a non-EEA AIFM if it is subject to quarterly Annex IV reporting and will therefore not apply to those which report on a half-yearly or annual basis (yearly reporting being the norm for many private equity funds).

The changes will also permit full-scope UK AIFMs to report the additional information on un-marketed non-EEA master funds only if they are subject to quarterly Annex IV reporting.

The FCA Handbook is available here

FCA Publishes a Discussion Paper on Open-Ended Funds Investing in Illiquid Assets

On 8 February 2017, the FCA published a discussion paper (DP17/1) considering some of the risks that arise when consumers use open-ended investment funds to gain exposure to illiquid assets (that is, assets that may be difficult for fund managers to buy, sell, or value quickly). Illiquid assets may include land and buildings, infrastructure, and financial assets such as unlisted securities.

The paper includes discussions of:

  • The impact of the UK’s Brexit referendum vote on funds invested in UK property;
  • The range of liquidity management tools available to FCA authorised funds, including UCITS Schemes, Non-UCITS Retail Schemes (NURS) and Qualified Investor Schemes (QIS); and
  • Possible approaches to improving liquidity management.

FCA authorised NURS operating as Funds of Alternative Investment Funds (FAIF) and listed closed ended funds are expressly out of scope of the discussion paper.

The FCA discussion paper is available here

HM Treasury Publishes Draft MiFID II Changes to the FSMA Regulated Activities Order

On 9 February 2017, HM Treasury published a draft order amending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO) to transpose parts of MiFID II.

Amongst other things, the draft order:

  • Introduces a new regulated activity of “operating of an organised trading facility” (OTF);
  • Introduces “emission allowances” as a new type of regulated investment;
  • Extends the regulated activities of “dealing in investments as agent”, “arranging deals in investments”, “managing investments” and “advising on investments” to cover such activities in relation to structured deposits; and
  • Suspends the overseas persons exemption (in Article 72 of the RAO) for investment firms established in non-EU countries which ESMA has decided are equivalent for the purposes of the new third country regime in MiFID II. (Under this new third country regime, such investment firms in equivalent non-EU countries would be able to provide investment services to professional in the EU by registering with ESMA).

The Order proposed to come into force on 1 April 2017 for the purposes of enabling applications to be made for initial authorisations and variations of permission and for approved persons.

Alongside the draft Order has been published a draft explanatory memo, a transposition note and final impact assessment.

The draft order is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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