Brexit: What Matters Next

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After yet another crisis in Brexit negotiations, it is clear the process will go to the wire. Whether or not an agreement will be reached seems impossible to predict at this stage given the political situation—Brexit in name only (BRINO), EEA Canada Plus Plus or negotiations breaking down entirely are all possible outcomes at this stage. In this confusion firms need to remain focused on ensuring continuity of business models irrespective of any political outcome.

There are three key issues for asset managers to consider.

  1. EU UCITS sold into the UK should be able to continue business as usual until 2021 using the FCA’s newly announced Temporary Permissions Regime (TPR). However, there is no similar arrangement for UK UCITS to continue being sold into the EU. As it stands UK UCITS are likely to become third country AIFs and will be subject to AIFMD under EU law post Brexit. As such they are unlikely to have access to UCITS passports and may only be sold via private placement or to professional investors under ESMA guidelines to NCAs. This is leading a number of firms to move their UK UCITS to Luxembourg or Ireland where substance rules are coming under greater scrutiny by ESMA. What once was deemed admissible under delegation and substance rules needs careful reassessment to ensure business continuity.

  2. While UCITS can be sold into the UK (subject to compliance with TPR by EU firms), UK brokers still need to ensure that transaction arrangements put in place for EU clients will still be viable in a hard Brexit scenario given the lack of reciprocal EU arrangement to the UK TPR. Possible changes to third country and delegation rules are still a possibility with a difference in opinions emerging between EU NCAs.

  3. Leaving long-term concerns regarding access to the UK market for EU UCITS post 2021 as well as how UK products can continue being sold into the EU going forward, if at all. Firms are fast recognising their inability to rely on politicians concluding successful negotiations and commercial reality is setting in for firms on both sides of the Channel. Back in August 59% of participants in our outreach “Brexit: What Matters” had already chosen to implement a worsecase scenario of hard Brexit, focusing on adjusting legal contracts & shoring up delegation arrangements, with 54% expecting this to impact their clients significantly. 81% intended to keep trading desks where they were; while 63% anticipated no additional costs incurred in execution despite a third anticipating a split in liquidity. However, as negotiations evolve, it is clear that a step by step analysis of workflows is now required to identify the challenges. The key issue will be to establish the extent to which co-operation agreements between the UK and the EU are possible, and secondly, what impact the outcome will have on business in the short, medium and long-term.

Lindsey Edmonds