UK alternative investment fund managers will be less affected by the loss of the right to operate freely across the EU following Brexit, should it materialise, than counterparts in other financial services sectors, according to new research.
The wording of the Alternative Investment Fund Managers Directive, the key piece of legislation that governs the sector, coupled with the way in which many managers structure their business, means passporting is only of “medium importance” to AIFMs, the research from think tank Open Europe suggests.
“Many of the larger funds already choose to operate European subsidiaries, rather than relying on a passport. A recent industry survey by the Investment Association suggests that 21 percent of assets managed in the UK are tied to EU clients,” it said in a research report published this month.
The AIFMD envisages the possibility of delegating portfolio management functions outside the EU – meaning that in future, UK-based asset managers might be able to keep providing portfolio management services for funds domiciled within the EU/ European Economic Area, it said.
“This would ultimately amount to keeping indirect access to the passport, built on existing regulations. Under such a scenario, only around 7 percent of total assets managed in the UK would be under direct threat from the loss of the passports in this sector,” it concluded.
UK financial institutions, including AIFMs, can currently operate freely within the EU because the country is part of the single market, but it is looking increasingly unlikely it will remain so when it leaves the EU.
Speeches made by top officials, including UK prime minister Theresa May, have pointed to a so-called “hard Brexit” – which would see the country opting out of the free movement of people policy and consequently losing access to the single market (see pfm 10 October).
On Wednesday, the UK’s trade minister Mark Garnier became the first official to admit the UK’s financial passporting rights “will probably be lost” as a result of the Brexit negotiations during an interview with Bloomberg.
Should this happen, alternative managers wishing to market their funds in the EU without setting up a subsidiary will have to wait for the UK to be cleared by EU officials for a third country AIFMD passport.
While technically this should be a straightforward process, as the UK’s financial regime is already in line with that of Europe, political tension resulting from the vote to leave could put the brakes on proceedings.
The European regulator ESMA will be in charge of assessing the regime, but European lawmakers will have the final say on whether or not to grant the UK a passport.