thinking ahead - eversheds sutherland...models of brexit 11 post-brexit eu compliance 14 what...

Thinking ahead The implications of BREXIT for asset managers February 2016

Contents Introduction 3

The current position: What are the UK’s key rights as an EU Member State? 4Effects of EU Membership for the Financial Services sector 7

EU dependencies 8

Models of Brexit 11

Post-BREXIT EU compliance 14

What happens after the referendum? 16

Key 17

Eversheds’ Funds team 18

2

For some, there may be little impact, for others it may be dramatic. As asset managers it is particularly important that consideration is given to the impact on trade and economic prospects of staying in the EU, a potentially reformed EU or leaving the EU.

Whilst these are financial and economic judgments, the legal background is key. In our opinion, no business can reach an informed view of what the UK leaving the EU would be for it unless it understands:

– the nature of the UK’s current relationship with the EU, as well as the UK’s rights and obligations

– the areas that the Government is seeking to renegotiate with the EU and the rationale behind them

– the five possible models of the UK’s relationship with the EU following Brexit

This document considers these questions in relation to asset management.

We are already working with a number of clients to create contingency plans in the event the UK does leave the EU. We would be happy to discuss the potential implications for your business too.

Introduction

Parliament has approved legislation to enable an EU referendum to take place. With the renegotiation of the UK’s EU membership terms already in train, it is important that UK businesses actively start to consider the implications of BREXIT.

Andrew HendersonPartner

Tel: +44 207 919 [email protected]

Julian BrownPartner


Camilla SpielmanLegal Director


For further information

Brexit and Asset Managers briefing paperFebruary 2016

3

Access to the single market

The EU forms a single market across EU member states allowing free movement of goods, people (including the right of establishment for companies), services and capital.

The single market in goods is fully developed, allowing goods to be sold across the EU without trade barriers. The EU is the largest single market in goods in the world with over 500 million consumers.

The free movement of people allows UK nationals to live and work across the EU as well as travel without

restrictions. Approximately 1.8 million UK nationals live and work in other EU member states all year round, with a further 400,000 UK nationals working in the EU over the summer season, whilst approximately 2.3 million non-UK EU nationals live and work in the UK1 not including seasonal migrants (mostly agricultural workers).

Nationals of member states enjoy equal treatment across the EU in relation to access to employment and working conditions. Free movement of people also applies to companies (as legal persons) and allows companies in the EU to establish themselves in other member states and the ability to provide services across the EU.

The current position:

What are the UK’s key rights as an EU Member State?

1. These figures derive from a Fullfact briefing published 26 March 2014: https://fullfact.org/immigration/net_migration_eu_nationals_uk-30857

4


The single market in services is patchy compared with the single market in goods. However, the single market in financial services is well developed and is important to UK based financial institutions.

The free movement of capital allows all capital and currency transfers, irrespective of the nationality of the beneficiaries or origin, to circulate freely in the single market. However, all advanced economies across the world permit free movement of capital.

Access to the Single Market allows UK businesses to trade with other businesses and consumers across the EU.

The single financial market

Financial services, including those which asset managers offer, have a special treatment under EU law in that a focused regime of directives and EU regulations governs their provision and a special regulatory authority, the European Securities and Markets Authority, exercises a limited (but growing) jurisdiction over them. The single Financial Market Directives, particularly the AIFMD, UCITS Directive and MiFID (and MiFID II), rather than the treaties, contain the primary source of managers’ freedoms to provide services on an EU-wide basis, in the form of “passports”.

The directives also set out the basis for the regulation of managers in each member state and their organisational, prudential and conduct of business obligations.

In addition, single financial market measures, such as MAD (soon to be replaced by MAR), MiFIR and EMIR, govern market conduct and trading for asset managers as well as the regimes governing market infrastructure providers, such as exchanges and clearing houses.

Representation

As an EU member state, the UK has representation in various EU institutions including:

– European Council – heads of governments

– Council of Ministers or Council of the EU – the UK minister relevant to the subject under discussion attends, so the Chancellor of the Exchequer when finance matters are discussed

– European Commission – the UK is currently represented by Lord Hill who is the Commissioner for Financial Stability, Financial Services and Capital Markets Union

– European Parliament – the UK has 73 MEPs out of a total of 751

– Court of Justice of the European Union (“CJEU”) – comprised of two courts, the General Court of the European Union and the appellate Court of Justice. The UK is currently represented by Judges Christopher Vajda QC (Court of Justice) and Nicholas Forwood QC (General Court) and an Advocate General, Eleanor Sharpston QC

2. To see the WTO’s World Tariff Profiles 2015 document, visit https://www.wto.org/english/res_e/publications_e/world_tariff_profiles15_e.htm.

3. EU expenditure and revenue 2014-2020 interactive chart on the European Commission website: http://ec.europa.eu/budget/figures/interactive/index_en.cfm. There is debate as to the accuracy of these figures and what should and should not be included in them. We do not comment on the accuracy debate but note that the form these figures are presented in by the Commission permits comparison with other EU Member States on the basis of figures compiled on the same basis.

4. Converted on the basis of €1.4 to £1.


5

What you need to know

The EU regime governing funds and the effect of the UK’s membership of the EU in this respect needs to be seen as a combination of rights and freedoms on the one hand and duties and obligations on the other. The main right and freedom for fund managers authorised in the UK is the ability to market the funds they manage in another EU member state, and to manage funds in those states without these UK funds or managers having to be authorised in that host member state. In return for this, the UK government is required to impose regulatory standards on UK managers that are at least equal to those prescribed in the UCITS Directive, AIFMD and MiFID, as the case may be.

The current position:

Effects of EU membership for the financial services sector

Effects of EU Membership: Financial Services

Rights and freedoms

Services and establishment in

other parts of the EU

Employment of staff from other parts of

the EU

Representation in decision making

bodies

Compliance with standards

Duty to authorise firms

Recognition of powers of European

Supervisory Authorities

Recognition of rights of EU firms

Duties and obligations


7

EU dependencies

The centrality of EU directives and regulations becomes evident when you examine the relationships which an asset management firm has with its clients (retail or professional), service providers, delegates providing outsourced services, market infrastructure providers and trading counterparties. The portfolio management directives – AIFMD, MiFID (and MiFID II) and UCITS Directive – in particular respectively underpin the business of non-UCITS funds, segregated mandates and UCITS funds.

TD SSR

Firm

Trading Counterparties

Professional Clients

Retail Clients

Service Providers

Delegates

Market

MAR

PMD

PMD

PRIIPS

PMD

EMIR

PMD PR

Solvency II CRD IV

BRRD CRD IV

PMD = AIFMD, MiFID II, UCITS

MiFID II CRD IV

MiFID II CRD IV

MiFID II

PMD

For other key definitions see p 17


9

If the UK votes to leave the EU, the form that Brexit will take will depend upon what the UK Government seeks in terms of its future relationship with the EU and the outcome of its negotiations with the EU. It is generally agreed that there are five possible models for Brexit. Four of these models are based on the four different existing relationships between Norway, Switzerland, Turkey and South Korea and the EU and, for convenience, are named after those countries. The fifth model is known as the World Trade Organisation (WTO) model, sometimes known somewhat inaccurately as the Hong Kong model.16

To understand these models, we need to understand the two supranational European trade organisations that stand outside the EU, the European Free Trade Association (EFTA) and the European Economic Area (EEA).

EFTA, comprising Iceland, Lichtenstein, Norway and Switzerland, is a purely free trade arrangement, which involves minimal supranational rules in order to facilitate free trade, without any political or monetary union. EFTA as a body has free trade agreements with 37 countries plus the EU compared to the EU’s 39 plus the EEA. Unlike EU member states, individual EFTA countries remain free to negotiate their own free trade agreements, with Switzerland having further free trade agreements with China and Japan (which the EU does not have). The UK was a member of EFTA before it joined the European Economic Community (as the EU was then known) in 1973.

The EEA was formed in 1992 and became effective in 1994, intended to create closer cooperation between EFTA and EU pending the accession of the then EFTA countries (Austria, Finland, Iceland, Lichtenstein, Norway, Sweden, Switzerland) to the EU. While Austria, Finland and Sweden went on to join the EU, the people of Norway and Switzerland rejected EU membership by referenda. Switzerland left the EEA in 1993 following the referendum that rejected EU membership.

The EEA states have full access to the single market in all those areas in which the EEA has adopted the relevant EU single market legislation, which accounts for around 10% of all EU legislation passed between 1994-2014.17 The only significant area in which the EEA states are outside the single market is in relation to basic agricultural and fisheries products. The EEA shares its secretariat with EFTA and as all EEA states are members of EFTA they have the benefits of the EFTA free trade agreements too.

Following departure from the EEA, Switzerland has negotiated a series of bilateral arrangements with the EU that grant Switzerland access to the single market in respect of specified sectors provided that Switzerland maintains regulation equivalent (although not necessarily identical) to EU regulation of the relevant sector. While Switzerland was able to pick and choose in respect of which sectors it wanted to participate in the single market, where it did choose to participate it had to accept substantially all of the EU’s rules for that sector. Switzerland has also had to agree to a number of measures that are not directly linked to trade, such as minimum standards of employee rights.

Models of Brexit

16. Hong Kong relies upon the WTO in relation to the tariffs other countries imposes on its exports but has also declared unilateral free trade and imposes no trade barriers on imports to Hong Kong.

17. From 1994 – 2014 the EU passed 62,809 legislative measures of which 6,326 were adopted by the EEA, according to a study by the Icelandic foreign ministry and an answer to a written parliamentary question to the Icelandic foreign minister, reported in the Iceland Monitor: http://icelandmonitor.mbl.is/news/politics_and_society/2015/10/21/iceland_has_adopted_10_prosent_of_eu_laws/


11

Norway SwitzerlandRelationships – European Economic Area (“EEA”) – Yes

– European Free Trade Association (“EFTA”) – Yes

– EU Customs Union – No

– Bilateral treaties with the EU – Yes

– EFTA – Yes

– EEA – No


Free movement of goods

– Yes for manufactured goods, as an EEA member

– As Norway is outside the Common Agricultural Policy (“CAP”)

and the Common Fisheries Policy (“CFP”), agricultural and fishery

products are subject to the Common Customs Tariff

– Yes for manufactured goods, under bilateral agreements

– Yes for processed food (eg yoghurt, chocolate, cheese)

– As Switzerland is outside the CAP, unprocessed agricultural products

are subject to the Common Customs Tariff

Free movement of people

– Yes, as an EEA member

– Schengen member

– Norwegian professional qualifications are recognised in the EU

– Yes, provided movement is for the purpose of taking up an offer of

employment and the person departs when their employment comes

to an end

– Schengen member

– Swiss nationals may travel on business in the EU for a maximum of 90

days a year

– Swiss professional qualifications are recognised in the EU

Free movement of services

– Yes, as an EEA member

– Has benefit of the passporting regimes for financial services

– Norwegian firms have the right to establish places of business in

EU Member States

– No, except for non-life insurance

– Swiss companies do not have an automatic right to establish places of

business in EU Member States and generally will need to establish

subsidiaries based in the EU to operate within the Single Market

– To the extent that Switzerland has regulation equivalent to EU

regulation, certain financial products, such as funds, can be sold into

the EU by Swiss financial institutions

Representation within the EU

– No formal representation at the EU

– Has limited power of veto over legislation the EU proposes to extend

to the EEA

– Has power not to implement an EU measure adopted by the EEA

– But if it does all the entire area of competence in which that

measure falls would cease to operate, eg if Norway declined to

implement an EU restriction on bankers’ bonuses, Norway’s

financial services industry would lose its access to the Single

Market


– The EU has made it clear that it does not like the Swiss model

Contribution to EU budget

– Yes

– On a per capita basis, for EEA membership, Norway pays

significantly less than the UK per capita for EU membership

– On a per capita basis, for its bilateral relationships, Switzerland pays

significantly less than the UK pays per capita for EU membership

Free trade agreements

– EFTA free trade agreements, plus Faroe Islands

– Norway is free to conclude its own free trade agreements with

any other nation

– Norway does not have the benefit of the EU’s free trade

agreements

– EFTA free trade agreements plus China, Faroe Islands, Japan

– Switzerland is free to conclude its own free trade agreements with any

other nation

– Switzerland does not have the benefit of the EU’s free trade

agreements

12


Turkey South Korea World Trade Organisation – In prolonged accession talks with the EU since

1987

– Bilateral treaties with the EU – Yes

– EU Customs Union – Yes

– EFTA – No

– EEA – No

– Deep and comprehensive free trade agreement

with the EU – Yes

– EFTA – No

– EEA – No


– Free trade agreement with the EU – No

– EFTA – No

– EEA – No


– Yes in theory, but in practice often no:

– prior approval and licensing required for textiles,

chemicals and foodstuffs

– de facto bans on exports of aluminium, paper

and copper scrap

– it is unlikely that such restrictions would apply to

the UK as our standards are currently EU

standards and can be expected to remain

equivalent to EU standards

– Because Turkey is inside the EU Customs Union it

must impose the Common Customs Tariff on goods

imported from outside the EU

– Yes for most types of manufactured and

agricultural goods

– 98% of goods subject to a nil tariff

– most other goods subject to an interim tariff

falling to nil within 10 years

– No

– Under the WTO’s General Agreement on Tariffs and

Trade, the maximum tariff the EU can impose on

goods imported into the EU from a WTO member

(such as the UK) will be its Most Favoured Nation rate,

which is the lowest tariff it charges to any WTO

member with which it does not have a specific trade

agreement. (For examples of tariff rates, see the

discussion of the EU Common External Tariff on page

5 above.)

– The UK could impose equivalent tariffs on imports

from the EU, or could adopt Hong Kong’s unilateral

free trade approach of imposing no import duties at

all

– No

– Not a Schengen member, but free movement for

Turkish nationals within Schengen currently being

discussed

– No, but visa free travel

– Free movement could be negotiated, or may be

required by the EU in exchange for granting

access to the Single Market

– No

– It is usual for advanced economies to permit visa

free travel for tourism and business trips of up to

90 days a year to each others’ nationals

– Currently the UK operates a points based

immigration policy for non-EU nationals. This is

the most likely starting point for UK immigration

policy in respect of EU nationals post Brexit

– EU Member States, except Ireland18, can be

expected to impose similar restrictions on UK

nationals as the UK imposes on EU nationals

– No

– Turkish companies do not have an automatic right

to establish places of business in EU Member

States and generally will need to establish

subsidiaries based in the EU to operate within the

Single Market

– No

– Free movement could be negotiated

– South Korean companies do not have an

automatic right to establish places of business in

EU Member States and generally will need to

establish subsidiaries based in the EU to operate

within the Single Market

– No

– Under the WTO’s General Agreement on Trade in

Services tariff barriers to providing services across

borders are not generally an issue, however,

non-tariff barriers to trade impede the free

movement of services, even within the EU

– UK companies will not have an automatic right to

establish places of business in EU Member States

and generally will need to establish subsidiaries

based in the EU to operate within the Single

Market


– Turkey’s relationship with the EU is based upon its

prolonged accession talks and the EU dictates to

Turkey what it must do to bring its regulation up to

EU standards


– The EU’s deep and comprehensive free trade

agreement with South Korea is a “living

agreement” and the agreement will be regularly

reviewed, extended and enhanced, with the

consent of both the EU and South Korea


– No

– Turkey makes no contribution to the EU budget

because it is a comparatively poor country

– No – No

– Turkey cannot conclude its own free trade

agreements with any other nation as it must apply

the Common Customs Tariff to any imports from

outside the EU

– Turkey does not have the benefit of the EU’s free

trade agreements

– South Korea is free to conclude its own free trade

agreements with any other nation

– South Korea does not have the benefit of the EU’s

free trade agreements

– The UK would be free to conclude free trade

agreements with the EU, EFTA and any other

countries

18. There is free movement between the UK and the Republic of Ireland under the Common Travel Area agreement, dating back to 1923.


13

Post-BREXIT EU compliance

A post-BREXIT environment for UK and EU asset managers

Although much will depend on the final arrangement negotiated, EU directives, particularly the AIFMD, MiFID II and MiFIR, contain provisions governing the rights and duties of non-EEA or third country firms (assuming the UK did not join the EEA, in which case the AIFMD, MiFID II and MiFIR, as well as the UCITS Directive, would apply to UK managers).

In the case of the AIFMD, some of these provisions are already in force and member states have made laws giving effect to them. Other parts of the AIFMD third country provisions have yet to come into force and the MiFID II and MiFIR provisions are not likely to have effect for a few more years. The further question is whether the EU would give the UK the same treatment envisaged for non-EEA countries under the AIFMD, MiFID II and MiFIR. Although this seems likely, there is a theoretical possibility that a particularly acrimonious “break-up” could result in special treatment for the UK with the result that UK managers are not given the same rights as other third country managers.

Assuming that this is not the case and that the Commission recognises the FCA and UK law, the first table on page [15] contrasts the possible models for the three main types of fund and services UCITS, AIFs and segregated mandates governed by the UCITS Directive, AIFMD and MiFID II and MiFIR, respectively. For professional clients, delegated portfolio management provided to an EU AIFM or EU UCITS manager (as the client) would also relevant.

The position for EU managers is also considered in the second table on page [15].

Some main points to note are the following:

– UK managers providing services to professional clients would likely face much the same duties and enjoy much the same rights in offering funds or management services to EU clients as they would if located in the EU

– a new process under rules of the relevant “Member State of Reference” under the AIFMD or registration with ESMA under MiFIR for per se professional clients (the position for elective professionals would likely be the same for retail clients, below)

– the same would apply for EU managers offering funds and services to professional clients in the UK

– in the retail sphere, the position would potentially be different for UK managers of UK UCITS funds, unless a recognition existed in the EU Member State into which a manager was seeking to market the UK fund or offer management services

– without a recognition regime, the establishment of a new EU fund or transfer of an existing UK fund into the EU, resulting in an EU fund, would be necessary

– the same would apply for EU managers offering UCITS funds and services to retail clients in the UK, although there is a recognition regime under FSMA for third country funds (the recognition regime for EU funds would presumably fall away)

14


UK funds and services - EU

Retail Professional

UCITS AIF Segregated Mandate

AIF Segregated Mandate

*Delegated Portfolio Management

Current – EU / UK Fund

– UK MANCO*

– UCITS Manager Passport

– UCITS Marketing Passport

– EU Fund

– EU AIFM*

– Member State Manager Rules

– Member State Marketing Rules

– UK Manager

– MIFID Manager Passport


– EU / UK / Third Country Fund

– UK AIFM

– AIFMD Manager Passport

– AIFMD Marketing Passport

– UK Manager

– MiFID Manager Passport


– UK Manager (for EU MANCO or AIFM)



Post-BREXIT?

Assuming equivalence determination

– EU Fund

– EU MANCO*



– No change – EU Manager (branch if MiFID II followed)

– Member State Manager Rules


– EU / UK / Third Country Fund

– EU rep-resentative in MSR (AIFMD)

– MSR Manager Rules (AIFMD)

– AIFMD Third Country Marketing Passport

– UK Manager

– MiFID II Third Country Manager Passport**

– MiFID II Marketing Rules**

– UK Manager (for EU MANCO or AIFM)

– MiFID II Third Country Manager Passport **

– MiFID II Marketing Rules **

EU funds and services - UK

Retail Professional

UCITS AIF Segregated Mandate

AIF Segregated Mandate

*Delegated Portfolio Management

Current – EU / UK Fund

– EU MANCO*



– EU / UK Fund

– EU AIFM*



– EU Manager


– UK Marketing Rules

– EU / UK /Third Country Fund

– EU AIFM



– EU Manager


– UK Marketing Rules (FPO exclusions)

– EU Manager (for UK MANCO or AIFM)


– UK Marketing Rules (FPO exclusions)

Post-BREXIT?

Assuming equivalence determination

– UK Fund

– UK MANCO*

– UK Manager Rules

– UK Offering Rules

– UK Fund

– UK AIFM*

– UK Managing

– UK Offering Rules

– UK manager (authorised subsidiary)

– UK Manager Rules

– UK Marketing Rules

– EU / Third Country Fund

– EU AIFM

– UK Private Placement Rules

– As above but no MiFID Manager Passport

– As above but no MiFID Manager Passport

* Delegated Portfolio Management – see column 6** per se professional clients and eligible counterparties only


15

What happens afterthe referendum?

– if, following the UK Government’s renegotiation with the other EU Member States, the UK votes to remain in the EU based on the new terms, the status of the UK within the EU will be even more defined and differentiated compared with that of the other EU member states

– if the UK votes to leave the EU, there will be uncertainty as to the form of Brexit as well as uncertainty as to how

long it will take to negotiate a settlement. This in turn will create uncertainty for businesses

– it is important for businesses to keep abreast of developments in the UK Government’s renegotiations, as the outcome of those negotiations may be enough to sway the outcome of the referendum one way or another

BREXIT Planning

Check own development of new

products and services

Monitor political developments

Monitor development/

application of AIFMD, MiFID II Third Country Provisions

BREXIT: Opportunities

and Threats

16


Key

Definitions

AIFMD Alternative Investment Fund Managers Directive

BCBS Basel Committee on Banking Supervision

BRRD Bank Resolution and Recovery Directive

CRD IV Credit Requirements Directive and Regulation

CSDR Central Securities Depositaries Regulation

EEA European Economic Area

EFTA European Free Trade Area

EMIR European Market Infrastructure Regulation

FPO UK Financial Promotion Order

FSMA Financial Services and Markets Act 2000

IOSCO International Organization of Securities Commissions

MAR Market Abuse Regulation

MiFID II Recast Markets in Financial Instruments Directive and Regulation

PD Prospectus Directive and Regulation

PRIIPS Package Retail Investment and Insurance Products Regulation

Solvency II Solvency II Directive

SSR Short Selling Regulation

TD Transparency Directive

WTO World Trade Organization

FPO Financial Promotion Order

MANCO Management Company

MiFID Markets in Financial Instruments Directive

MSR Member State of Reference


17

Eversheds’ funds teamIn order to succeed in an increasingly international, heavily regulated and technology-enabled industry, asset managers have to reinvent themselves continuously. The challenges faced include capitalising on opportunities arising from fast-growing international markets, developing innovative new products, ensuring regulatory compliance and managing risks.

Our Financial Services legal group is regarded as one of the leading advisers to the investment funds and asset management sector.

We focus on fund management and financial services regulation, covering the full spectrum of institutional, retail and alternative investment funds and the regulation governing the managers of such funds.

We advise on regulatory and compliance matters, including enforcement procedures, and have extensive experience in advising investment managers, life insurers, custodians and depositories, mortgage lenders and pension providers on their products and services and the regulations under which they operate.

Our dedicated legal team currently comprises more than 200 lawyers around the world, including 22 partners, who provide strategic advice and product expertise as well as general legal advice. We also have specialist dedicated tax lawyers who understand the needs and challenges of the industry and the commercial drivers of its players.

Having been at the forefront of investment fund product development and regulatory interpretation for the industry since the 1980s, we bring an innovative and proactive approach to working with our clients. We are involved at the highest level in the industry, helping to shape regulation. We were retained by the then-FSA to work on the COLL Sourcebook, and we have been involved with HM Treasury and HM Revenue & Customs to resolve issues arising from changes to the Stamp Duty Land Tax regime. We were consulted by HM Revenue & Customs on Property Authorised Investment funds including commentary on the draft legislation and were one of only a handful of organisations consulted on the tax transparent investment fund structure including drafting the Investment Association’s standard documentation.

“[Eversheds] has a lot of expertise in regulated funds and that’s demonstrated by the calibre of the people they have...What we get with Eversheds is a very buy-side orientated firm that understands and gets our issues, and whether they’re ours per se or industry-wide.”

“They’re one of the leaders in the market for open-ended funds and UCITS advice... They have a lot of expertise in regulated funds as demonstrated by the calibre of the practitioners.”

Chambers & Partners: UK 2015

18


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thinking ahead - eversheds sutherland...models of brexit 11 post-brexit eu compliance 14 what...

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