The UK’s exit from the European Union would mean UK fund managers would no longer have automatic access to a pan-European marketing passport under the Alternative Investment Fund Managers Directive, making marketing funds to European investors much more complicated than it is today.
Currently, fund managers domiciled outside the EU must apply to each EU country in which they wish to market their funds for approval under its national private placement regime (NPPR).
Those outside the EU can apply for a passport, and as the UK already has an AIFMD-compliant regime in place it would be “technically straightforward” to extend the passport to the UK, said Simon Currie, private investment funds partner at global law firm Morgan Lewis.
“As part of any negotiations with the EU, the UK ought to be pushing for the [European] Commission to extend the AIFMD passport to the UK and also to make a similar assessment of equivalence of the UK in relation to the Markets in Financial Instruments Regulation, which would then open the way for UK investment firms to provide their services to professional clients across Europe,” Currie said.
“Obviously there may be a political dimension which comes into play about whether the Commission would be prepared to extend the directive to the UK,” he added.
The regulator, the European Securities and Markets Authority, has only recommended three countries, Guernsey, Jersey and Switzerland, for the passport. None have actually been granted.
There is also a chance ESMA will not make this recommendation for the UK before it exits the EU, which would leave a period when UK managers do not have European marketing rights and would have to apply for NPPR approval in each country.
However, a significant percentage of managers, speaking before Brexit, did not feel the benefits of obtaining a passport were worth the cost. “You have to balance the ease of marketing against the weight of further regulation and reporting…I don’t think the benefits outweigh the costs,” noted one GP at PEI’s Women in Private Equity: Europe Forum in December.
UK managers could be in the same position as one US-based fund manager, who said her firm was questioning whether it would be better to steer clear of marketing to European investors entirely rather than risk the threat of more regulation later on down the line.
Following a Brexit, overseas GPs looking to market their funds to UK investors would be subject to the UK's pre-AIFMD private placement regime or any new regulations the UK government chooses to implement.
Another regulation affecting GPs in Europe is the Markets in Financial Instruments Directive (MiFID II), due to come into effect in January 2018, which allows third-country investment firms to provide investment services to professional clients across the EU, subject to registration and approval.
The European Commission has to determine the legal and supervisory regime in the third country is equivalent to European standards to grant this approval. As the UK should have implemented MiFID II before Brexit, it should be straightforward for the Commission to make this decision, Currie argued.