Managing and/or marketing funds across the EU – Options for UK fund managers in view of Brexit
Passporting allows UCITS and AIFs, as well as UCITS Managers and AIF Managers registered in Cyprus and licensed by CySEC, to manage and/or market funds across the EU, without having to apply for any additional authorisation.
Cyprus may therefore be used as a base for setting up funds, or for fund management companies looking to take advantage of the country’s advantageous framework to manage and/or market funds across Europe from Cyprus.
Passporting is a valuable asset for funds as it eliminates the red tape associated with gaining authorisation from each country, a process which can be lengthy and costly for a business.
UCITS benefit from the ‘passport’, introduced under the UCITS IV directive, by permitting them to be freely marketed within all EU Member States, without additional authorisation from the competent regulatory authority of each host Member State after successful completion of a simple notification process. Distribution of UCITS funds outside the EU, into selective jurisdictions remain via private placement and thus must satisfy local regulations that are significantly more complex and time consuming than the EU passport notification process.
The Alternative Investment Funds Directive (AIFMD) has introduced a ‘passport’ for the distribution of units of AIFs to professional investors in the EU. Upon authorisation of Cyprus AIFMs, by CySEC, they can market their EU AIFs to professional investors in all Member States, using the simplified regulator-to-regulator notification mechanism. Non-EU AIFMs and non-EU AIFs have to seek permission from each Member State and comply with different national laws – the so called National Private Placement Regimes (NPPRs). The AIFMD provides a more complex and delayed transposition schedule applicable to non-EU AIFMs and non-EU AIFs wishing to raise capital in the EU. In this case and in view of the uncertainty as to when and if the passport will be extended to third countries, the NPPR still remains applicable. It is however foreseen that the NPPRs will soon end, which means fund managers will need to find another route to market their AIFs in Europe, such as using an AIFM compliant platform, such as ‘Fund Hosting’.
United Kingdom and Brexit
On 23 June 2016, the UK held a referendum on its membership in the EU. A majority of those voting voted for the UK to leave the EU.
On the UK’s exit from the EU, the UK will no longer (subject to the outcome of the negotiations with the EU) have the benefit of the UCITS Directive and AIFMD. Therefore, the UK can lose certain rights that EU managers and AIFMs currently have.
These include the following:
- A UK investment manager of a UCITS that is established in another EU member state will no longer have the benefit of an EU passport to distribute its UCITS in the EU (subject to any solution reached in the exit negotiations). Therefore, the UK investment manager will need to either:
- engage authorised distributors with the necessary capacity in the EU member states where it seeks to distribute its UCITS;
- set up its own EU-based distributor (or UCITS ManCo).
- Other solutions could also be available, such as having UCITS board members represent it in cross-border sales (assuming the UCITS itself has passporting rights). However, this solution assumes a corporate UCITS structure and may not apply if the UCITS is externally managed.
In terms of managing EU AIFs, a UK AIFM will most likely have the same rights as a US AIFM (for example). However, a UK AIFM could no longer market its EU-domiciled AIFs cross-border within the EU. Although, similar to a US AIFM, a UK AIFM could act as investment manager to Irish funds and so continue its management activities, cross-border distribution will most certainly be affected.
UK managers that see the EU (even if only a few EU countries) as their target distribution base will need to ensure that they keep a foothold in the EU before enjoying the benefits of EU-regulated entities in the financial services industry.
The available options for UK managers include:
- Setting up a UCITS ManCo or AIFM in Cyprus
- Using a third party AIFM established in Cyprus
- Putting their Fund on a third party platform that is already established in Cyprus.