Less than 90 days to Brexit: The five key considerations for asset managers

09 October, 2020

The UK and EU remain at loggerheads when it comes to agreeing the post-Brexit Trade Agreement. With 31 October 2020 being the date the EU has to conclude a free-trade deal, it is apparent that a similar course of events are unfolding to those which took place before the 29 March 2019 Brexit deadline and indeed subsequent deadlines. With the equivalence deadline of 30 June 2020 passed, political negotiations in disarray and the ultimate Brexit FTA outcome as uncertain as ever, you could be forgiven for thinking, haven't we been here before?

Given the similarity in the expected outcome to previous Brexit deadlines as we approach the end of the transition period on 31 December 2020, when the UK will officially become a third country, it will come as no surprise that the messaging in relation to preparing for Brexit has not changed.

Prepare for a no-deal Brexit.

Given the level of uncertainty throughout the Brexit process this message has been consistent. Many asset managers have done exactly that and have successfully implemented Day-1 action plans ensuring they are operationally ready for the end of the transition period. A key element of managers' Brexit planning was establishing an EU presence to continue access to the European market post Brexit. Ireland has been a key jurisdiction for managers in that regard.

Asset managers in this position should now be implementing their Day-2 action plans and ensuring that the Is are dotted and the Ts crossed in advance of 31 December 2020. For example, has the novation of all contracts to a newly established EU entity been completed? Have impacted investors been contacted to discuss and agree actions and timings in relation to these points?

For those firms that may find themselves perhaps a little less prepared than they would like, the key considerations below can help in determining the appropriate actions to be taken before the end of the year.

Benjamin Franklin supposedly once said, "If you fail to plan, you are planning to fail". This feels quite apt when it comes to preparations for the end of the transition period. This would imply Franklin was duly prepared for unforeseen circumstances. So when it comes to your Brexit planning, be like Ben.

Firms should consider the areas outlined below, assess how these may impact their operations post Brexit and ensure adequate contingency plans are in place to address any issues or risks identified.

The five Brexit considerations for asset managers

Equivalence

The revised Political Declaration issued when the Brexit Withdrawal agreement was agreed stated that the Parties should start assessing equivalence with respect to each other under these frameworks, endeavouring to conclude these assessments before the end of June 2020. This has not happened.

The third-country provisions of a number of EU regulations such as MiFID II which will apply after 31 December 2020 require an equivalence decision to have been taken.

For example, the MiFIR Share Trading Obligation (STO). Article 23 of MiFIR requires EU investment firms to ensure that the trades they undertake in shares admitted to trading on an EU regulated market or on an EU trading venue or an equivalent third-country trading venue. ESMA has previously published a statement that all EU ISINs and ISINs from Iceland, Liechtenstein and Norway are in scope of the STO and must be traded on an EU venue.

On a positive note, in the last few days the EU adopted a time-limited decision to give EU financial market participants 18 months to access three UK-based central counterparty clearing houses (CCPs) (ICE, LCH and LME) under EMIR. In the absence of such a decision EU counterparties could not clear OTC derivatives with these UK CCPs. This decision expires on 30 June 2022 and the EU is strongly encouraging EU financial market participants to reduce their reliance on UK CCPs during this period.

UK market access post 31 December 2020

The UK temporary permissions regime (TPR) reopened as of 30 September and will remain open until 31 December 2020. This regime will come into effect from 1 January 2021. Therefore EU managers who wish to market or continue to market into the UK post 31 December will need to apply to the TPR if not done so already, to enable this activity to continue.

Firms that have already notified the FCA need take no further action. However, if new funds have been added by a fund manager since earlier notifications were submitted, the new funds will not be included in the TPR unless the manager updates the TPR notification.

It is also worth noting that if a new sub-fund of an Irish UCITS umbrella is established after the Transition Period, but forms part of an umbrella that was registered under the TPR, the Financial Conduct Authority (FCA) will permit the new sub-fund to be added into the TPR so that they can market to UK retail investors.

However, new AIF sub-funds established after the end of the Transition Period cannot access the TPR, even if the umbrella already had other AIF sub-funds registered under the TPR. Such AIFs can, however, be marketed using the National Private Placement Regime (NPPR) in order to gain access to professional investors in the UK (or via the section 272 registration process if marketing to retail) without having to use the AIFMD passporting process.

The TPR currently enables access for EU managers to the UK market for a period of three years, at which point the new UK overseas funds regime is expected to be effective.

The proposed UK overseas funds regime intends to establish a more appropriate basis for recognising overseas retail funds, including EU UCITS. One of the key issues in relation to this regime will be whether additional requirements will be placed on EU funds being marketed in the UK to align with those applicable to UK UCITS (i.e. value assessments).

Portfolio management or delegation to the UK

There has been some recent market noise about delegation as a result of the ESMA letter to the Commission in relation to the AIFMD review. However, it is important to note that the necessary Memorandum of Understandings (MoUs) are in place to enable delegation of portfolio management to the UK to continue as today after the end of the transition period. The FCA, ESMA and national regulators have confirmed that the MoU put in place in February 2019 will come into effect at the end of the Transition Period.

Data

In the case of a hard Brexit on 31 December 2020, data processing and data flows between the UK and the EU may require additional specific contractual requirements.

The recent ruling by the Court of Justice of the European Union in the Schrems II case is also worth considering with respect to firms' considerations in relation to data transfers to third countries post 31 December 2020. The ruling has significant implications for all personal data transfers between EEA member states and third countries whose data protection regimes have not yet been assessed by the European Commission as equivalent. This will be particularly relevant to firms who transfer personal data to the UK given that it will become a 'third country' for data protection purposes when the transition period expires on 31 December 2020.

The Schrems II ruling means that businesses planning to rely on Standard Contractual Clauses (SCC) post Brexit to continue to transfer personal data to the UK will have to conduct due diligence and may need to put additional safeguards in place to meet their obligations under GDPR.

The Data Protection Commissioner in Ireland has produced guidance on transfer of personal data from Ireland to the UK in the event of a hard Brexit.

Fund documentation

It is important to consider any changes which may be required to fund documents as a result of Brexit and that any changes required are in place before the end of the transition period. In the run up to previous Brexit deadlines, the CBI issued reminders in relation to updates to fund documentation and set deadlines for receipt of the same hence it is likely they may issue a similar request in advance of the end of the transition period.

We are here to help you

There is no denying that as Brexit continues to unfold and firms continue to manage the fall out from COVID-19, the challenges they face are mounting. There's no doubt that the weeks and months in the run up to the end of the transition period are going to be challenging. The priority now is ensuring your business can progress and succeed in uncertainty. We are ready to help you as you face the future. Contact us today.