A UK EU memorandum of understanding arrangement has been reached recently. This is just about on time for Brexit and is one step closer to shape into more details the new dynamics for the relations between the UK and the EU. It seems now clear that the path to be followed is the one of the third country approach from both sides.
Whilst the reached agreement has been associated mainly with the ability of the UK fund managers to receive delegation of portfolio management and risk management by EU management companies in the context of both UCITS and AIFM directives, realistically the existence of a UK EU memorandum of understanding will also be very useful in some other areas of financial services regulation like the national private placement rules under AIFMD and the third country access under MiFID/MiFIR.
Types of Memorandum of Understanding
The UK EU memorandum of understanding arrangement will result in two separate types of memorandum of understanding in light of a potential no deal scenario for Brexit.
An agreement for a multilateral UK EU memorandum of understanding was reached with a view to cover the following areas: i) cooperation on supervision; ii) information exchange and enforcement.
There is also a second type of memorandum of understanding that the UK agreed to enter directly with ESMA with a view to cover supervision of both Credit Rating Agencies as well as Trade repositories.
Notes on UK EU Memorandum of Understanding
Of course, the existence of cooperation arrangement between a specific third country and the relevant EU national competent authorities has relevance, as discussed above, in many scenarios under the financial services regulation in Europe. In fact, there are some consolidated principles in terms of third country approach and they all revolve on the existence of cooperation arrangements amongst authorities at a certain level. We have seen this exercise carried out already at the onset of AIFMD, with third countries entering into similar memoranda of understanding with EU national competent authorities.
The agreed multilateral UK EU memorandum of understanding will unlock for the UK the third country access provisions, allowing the UK as a third country and its industry participant and market actors to be able to interact with EU entities in case of a no deal scenario.
UCITS and AIFMD
The importance of the existence of cooperation agreements with the competent regulatory authorities of the third-country states is clearly evidenced under article 13 of UCITS directive. In fact, in terms of delegation under UCITS, in case the home state law of a management company allows for delegation to third parties of certain activities of the management company, for the purpose of ensuring that overall conduct of the business is carried out more efficiently, one of the conditions necessary to allow for such delegation to third country undertakings is that cooperation arrangements exist between the national competent authority of the home state of the management company and the authority of the third country where the delegated undertaking is established.
Similar conclusion can be found in the AIFM directive, where delegation, of both portfolio management and risk management, can be made to third country undertakings only in case there can be assurance of cooperation arrangements between the EU national competent authority and the one of the third country where the delegated undertaking is established.
Within the AIFMD ecosystem, the existence of such cooperation arrangements plays an important role also in terms of marketing of third country AIFs. In fact, amongst the AIFMD preconditions imposed on national private placement regime under article 42 AIFMD, it is required that appropriate cooperation arrangements for the purposes of ensuring oversight over systemic risks in the form of an agreement for the efficient exchange of information are in place between the relevant EU national competent authority and the corresponding third country authority. The same applies also under article 36 AIFMD for the private placement rules applicable to EU AIFM marketing non-EU AIFs.
The existence of cooperation arrangements with ESMA for third countries, along with a mechanism for exchange of information, is one of the key elements also provided for under MiFIR for the equivalence assessment and the ensuing ability to take advantage of the third country regime provided in this framework for the provision of services and carrying out of activities regulated in EU.
The Third Country Approach
Of course, if we take the example of MiFIR, but the same rationale is applicable also on the extension of the AIFMD marketing passport to third countries, we understand that whilst the UK EU memorandum of understanding is one good step in the right direction and ensures more clarity for market participants, there are also other moving parts required at EU level, like the existence of a positive assessment of equivalence of the UK regime with the European one. Whilst this in principle should not pose any technical concerns apparently, there is of course the process to be followed for requesting an equivalence decision that should follow the official withdrawal from the EU and may be tainted again by political considerations.