The path un-travelled


As the UK government starts to consider what a post-Brexit Britain might look like, it must consider what the new model will mean for fund managers, says Sam Pearse of Pillsbury Law

Post-Brexit, what kind of model would be the most beneficial for the UK financial services industry? What are the potential outcomes, and which is most likely?

For financial services, the best option could be the Norwegian model, whereby we leave the EU but join the European economic area (EEA) and remain subject to various existing laws, legislation and directives. That model would mean life in financial services, from a regulatory standpoint, wouldn’t change too much. It would also give us the greatest alignment with the EU regime, and the best chances of equivalency. With regard to legislation such as AIFMD, it would mean that UK fund managers would be considered ‘alternative investment fund managers’ within the definition, and so the automatic passport would apply.

The problem is that access to the single market will almost certainly come at the cost of having freedom of movement for workers, which is a contentious issue for some UK leave voters, who are very focused on controlling the borders. It would be a bold move from the UK government to retain that free movement. I don’t think we will adopt the Norwegian model, but that’s not to say we will adopt something that is so far away from that model that the financial services sector is threatened.

There is also the Swiss model, which is quite interesting from a financial services perspective, because they have a parallel regime for AIFMD that you can opt in to. Even more interesting is that Switzerland and Germany are engaged in an ongoing process to intensify cooperation between the two countries in the financial services sector. They have agreed a regime that allows Swiss firms to operate in Germany without needing a licence from the German regulator. The simplified exemption process is not dissimilar to the EU passport. Swiss companies can apply to the supervision of the German regulator and they become free from various things, such as the requirement for a German intermediary. It just makes that process much smoother and the German markets more accessible.

The fact that the Germans and the Swiss have already negotiated that deal might provide an indicator that it will be possible for the UK to negotiate a similar kind of arrangement. We’re not re-inventing the wheel here. We are a valuable trade partner to the Germans, so they might be a bit more moderate than some people fear.

I don’t think the competing interests within the UK mean that we suit an existing model. I think we will come up with our own UK model, and I think the preservation of the financial services sector and the ability to passport around is very high on the agenda for the negotiations.

Once the terms of the exit are confirmed, which EU regulations/directives do you think will remain? Which are likely to change?

There is a temptation to mock over-zealous EU regulation, to cut them just to get rid of the red tape. But the further we move away from European regulation, and from what we have now, the more difficult it is for the European authorities to accept that we have equivalency and should be able to get a passport.

Actually, regulations in the UK are not as strict as in some other EU member states—we didn’t go overboard on gold-plating everything, so I think a lot of the EU regulations and directives will substantively remain. Moving away from the regulations that Europe have could be a threat to financial services.

There is a lot of money to be raised around Europe for funds, and it’s not as if the UK dominates the market. We can’t assume that we can drive the conversation here, because this is not where all the fund managers and potential investors are.

How will Brexit affect alternative investment fund managers in the UK, in terms of AIFMD? Will they have to apply for an AIFMD passport?

For now, we don’t know what Brexit looks like, so nothing changes for fund managers except, perhaps, considering alternatives just in case things go sideways.

We keep talking about having the funds passport, but if we’re out of the EU and we don’t join the EEA, then we’re relying on the European Securities and Markets Authority undertaking due diligence on our new laws to determine whether we have sufficient equivalency to justify a third country passport. We know they’re not doing this quickly, so we will just end up joining the queue with no idea of when we will be assessed.

If we end up in a position where we’re not in the EU or the EEA and we haven’t yet been granted a funds passport, managers may have to consider setting up shop elsewhere. They could potentially re-jig their arrangements, appointing a third-party fund manager in Europe, with the investment management services delegated back to the UK office. That will inevitably cost more money, and they will have to be very careful not to be seen to be abusing the directives and creating ‘sham’ fund managers that aren’t doing anything.

How will the trade negotiations affect the funds industry in the UK? Is there a danger that the UK will become a less attractive jurisdiction?

It’s certainly a risk. We may have to be quite careful, because if we stop being part of a trade association because we’re no longer part of the EU, that will make certain sectors more difficult to perform business in. The ripple effect is that those sectors will also be more difficult to invest in.

This is definitely something we could get wrong, and trying to balance public sentiment with what is best for the UK is going to be very difficult. Something is going to have to give, and one party has to be a bigger loser than the other.

My hope is that the government recognises the value of financial services to this country and is not prepared to sacrifice it.
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