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The five key Brexit considerations for asset managers

Oct 16, 2020

With Brexit looming before us, how can asset managers ensure they are operationally ready for the end of the transition period? Trish Johnston outlines five key considerations that should help.

The UK and EU remain at loggerheads when it comes to agreeing on the post-Brexit Trade Agreement. Many asset managers have been preparing for a no-deal Brexit and have successfully implemented a day-one action plan, ensuring they are operationally ready for the end of the transition period.

Asset managers should now be implementing their day-two action plans, confirming that every detail has been examined 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 on actions and timings in relation to these points?

For those firms that are a little less prepared than they would like, the five key considerations below can help determine the appropriate actions to be taken before the end of the year.

1. Equivalence

The revised Political Declaration, which was issued after the finalisation of the Brexit Withdrawal Agreement, noted that the UK and EU should start assessing equivalence regulatory and supervisory regime frameworks with respect to each other. The aim was to conclude these assessments before the end of June 2020. However, this has not happened. It is worth noting that the third-country provisions of several EU regulations, which will apply after 31 December 2020, require an equivalence decision to have been taken.

On a positive note, the EU has adopted a time-limited decision to give EU financial market participants 18 months to access three UK-based central counterparty (CCP) clearing houses under the European Market Infrastructure Regulation (EMIR). In the absence of such a decision, EU counterparties could not clear over-the-counter 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.

2. UK market access after 31 December 2020

As of 30 September, the UK Temporary Permissions Regime (TPR) reopened 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 after 31 December 2020 will need to apply to the TPR to enable this activity to continue, if they haven’t already done so.

Firms that have already notified the Financial Conduct Authority (FCA) do not need to take further action. If, however, 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 Undertakings for the Collective Investment in Transferable Securities (UCITS) umbrella is established after the transition period, but forms part of an umbrella that was registered under the TPR, the FCA will permit the new sub-fund to be added into the TPR so that they can market to UK retail investors.

However, new Alternative Investment Fund (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 Alternative Investment Fund Managers Directive (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. A critical issue for this regime is whether additional requirements will be placed on EU funds marketed in the UK to align with those applicable to UK UCITS (i.e. value assessments).

3. Portfolio management or delegation to the UK

There has been some recent market noise about delegation as a result of the European Securities and Markets Authority (ESMA) letter to the Commission concerning the AIFMD review. However, it is important to note that the necessary Memoranda of Understanding (MoUs) are in place to enable delegation of portfolio management to the UK to continue 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.

4. 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 concerning 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 for firms who transfer personal data to the UK.

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

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

5. Fund documentation

It is essential to consider any changes that may be required to fund documents as a result of Brexit and to implement any necessary changes before the end of the transition period. In the run-up to previous Brexit deadlines, the Central Bank of Ireland issued reminders concerning updates to fund documentation and set deadlines for the receipt of same. It is therefore likely that they will issue a similar request in advance of the end of the transition period.

Trish Johnston is Leader of PwC Ireland’s Asset & Wealth Management Practice.