The Future of UK Fund Marketing
The Financial Conduct Authority opened last January 7th 2019 the window for notifications to be made by foreign EEA firm of their intention to avail themselves of the Temporary Permission Regime TPR (find out more here about the TPR). The TPR aims in principle at ensuring that both EEA firms providing services and EEA funds being marketed currently inbound in the UK can continue to do so for a transitional period, before requiring a permission issued by the local regulatory authority in the United Kingdom.
But what happens to latecomers who don’t have or will not have an inbound presence in the UK before Brexit?
The third-country approach
Part of a broader initiative of onshoring EU Law in United Kingdom, the TPR signifies mainly and principally the effort made to ensure smooth transition in the relations between the UK and EU and preservation of some sort of the status quo for market participants and products already present in the UK market.
This effort from the UK authorities has been recently reciprocated at EU level with two sets of Memorandum of Understanding (please see relevant article here). A multilateral one with the various EU national competent authorities on the cooperation for the exchange of information as well as one with ESMA. Of course, the process at EU level involves also other moving parts, like equivalence assessments to name a few and is also characterized by more constraints and requirements for consultations and reviews of stakeholders as well as cost-benefit analysis. What is clear and reciprocal at this point between the UK and the EU though is that both will be looking at each other in terms of third-countries. Accordingly, and restricting the analysis to foreign EEA funds, marketing inbound in the UK of EEA foreign funds in the future will be made under the assumption that these are third-country funds and using the existing avenues that the UK regulatory system already has in place for dealing with local offers of these types of funds.
For all the latecomers that will not be on time to set foot in the UK before Brexit, below a brief overview of the third country regime that will be applicable to their fund marketing authorisation in the UK.
Fund Marketing Authorisation in UK – UCITS
In order for EEA UCITS to be marketed after Brexit, two avenues will be available depending on whether fund marketing authorisation in UK will be required for offer towards institutional investors only or also retail investors.
In order to obtain fund marketing authorisation in UK for offer to institutional investors, the manager of an EEA UCITS will need to make use of the national private placement regime available already under AIFMD. This is a consequence of the main assumption that on Brexit day, any EEA UCITS fund will be considered to be an AIF. This process of fund marketing authorisation in the UK is tried a tested and has already been in place for a few years now. We expect this not to pose significant concerns for EEA UCITS managers, nor the costs for compliance to be significantly higher if not for the requirement to produce the so-called Annex IV reporting.
The process for fund marketing authorisation in UK towards retail investors instead will take the route contained under section 272 of the UK Financial Services and Markets Act. Whilst this route was so far utilised mainly by funds established in the Channel Islands, it is nowadays also used for Hong Kong Funds, after the mutual recognition established recently. Accordingly, we expect that a specific version of the form for such fund marketing authorisation in UK for EEA UCITS will be created by the FCA on time and that the relevant process of recognition will not be more cumbersome or expensive.
Fund Marketing Authorisation in UK – AIFs
Even more straightforward the situation for fund marketing authorisation in UK to be requested by both UK and EEA AIFMs when marketing EEA AIFs in the UK. In fact, it will no longer be possible to make use of the passport if the UK leaves the EU without a deal. Fund marketing authorisation in UK for both UK and EEA AIFMs will need to occur under the national private placement regime. Even more so in this case, we don’t believe that this has altered significantly access to UK institutional investors and actually it will not make it more expensive either.
The existing third country regime is sufficiently flexible to be able to accommodate for fund marketing authorisation in UK post Brexit in a relatively straightforward and efficient manner. But whilst the regulatory structure itself is not a concern, commercial considerations will have to be taken into account before considering the UK for fund distribution projects, especially in light of investor preference in terms of non UK funds.