“Post exits the European Union. Introduction There is

Brexit the UK asset management industry will need to look to the Alternative
Investment Fund Managers Directive (AIFMD) as the basis for trading within the
EU market.”


review the likely legal and economic positions of fund managers when the UK
finally exits the European Union.

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There is no question that the UK asset management industry is a major
source of wealth for the British economy, being the 2nd most
developed fund management industry worldwide (behind the US) and the most
developed in Europe 1.


Currently, as the UK is still a member of the EU, UK fund managers have
to comply with EU legislation in the financial sector, in particular MiFID,
UCITS directive and AIFM Directive.

The Undertaking for the Collective
Investment in Transferable Securities (UCITS) Directive covers all collective
investment schemes 2,
specifically speaking, funds that are managed in the retail investor level.


The Alternative Investment Fund Directive3
regulates the funds where only professional investors can enter, that are
defined by the directives as being “funds
that are not regulated at EU level by the UCITS directive”4. The majority of
capital inserted in the fund management industry in the UK comes from these funds
(estimated in £2 trillion).


allows fund managers, or any other financial firm based in a EU/EEA member
state, to provide financial services or products freely inside the EU single
market, which we call the “passporting rights”, that are also provided by AIFM and
UCITS Directives.


However, on 23rd June 2016, the British people voted to leave
the EU, and, on 29 March 2017, the British Parliament has notified the European
Commission that the article 50 of TFEU, that provides for the withdrawal
procedure from the EU, was triggered.


 Meaning that if there is no binding agreement
between the UK and the EU before the term of negotiation period, UK fund
managers, greatly dependent on EU market, will cease to benefit from
passporting rights 6.

Given these facts, unless the
British government manages to secure the access to the single market in their
negotiations with the EU, Brexit will clearly impact the UK asset management
industry heavily.


 Meanwhile, several post Brexit scenarios are
being discussed during negotiations between the British government and the European
Commission, particularly the signature of the European Economic Area (EEA)
agreement, third country equivalence and a bilateral agreement.

During these negotiations, there
are political factors that will certainly shape the future relationship between
the UK and the EU, by which they will weigh the pros and cons of each scenario.


 However, before we discuss the most probable scenario
of the relationship between the UK and the EU post Brexit, we will need to
assess the UK current legal position within the EU market and the consequences
that Brexit will have in it (I). After assessing the current situation of the
UK, it is required to analyse and criticize the different potential scenarios
being discussed in the negotiations between the British Government and the
European Commission (II) and finally point out the most realistic and possible
scenario for the UK fund managers after Brexit in 2019 (III).


current legal and economic position of UK fund managers in the EU



 Until the end of the negotiations period
between the British Government and the EU, fund managers in the UK are still in
the obligation to comply with EU legislation and still benefit it from it, the
UCITS and AIFM Directives, that apply directly to fund managers and investment


 The AIFM Directive was transposed in UK legal
system by the Alternative Investment Fund Managers Regulation (2013),
introducing the legal categories of Alternative Investment Funds (AIF) and
Alternative Investment Fund Managers (AIFM)7.


 This Directive (AIFMD) was created as a
response to the global financial crisis of 2007-098
by the EU that realized the need to oversee and regulate the activity of
investment funds at the time considered to be a part of the “shadow banking
system” because it moved great amounts of capital based on speculative activity
(hedge funds). EU regulators saw the danger of such regulatory gap when several
hedge funds collapsed during the aftermath of the financial crisis of 2008.9


 This Directive applies to Alternative
Investment Funds (AIF), that are defined as being the “funds that aren’t
regulated under the UCITS Directive”, such as hedge funds, private equity funds
and others. According to the AIFM Directive, it applies not to investment funds
directly, but to the fund managers of the alternative investment funds10.


 This Directive imposes several obligations
upon AIFM’s for them to exercise their activities such as an authorisation from
a competent authority in a home member state11,
an annual valuation of the assets held by the fund by a valuer12
and the requirement of a depositary13.

 Once a UK or non-EU AIFM obtains an authorisation
from the FCA or any other competent authority in a home member state to provide
services and products, the AIFM earns automatically the right to exercise his
activity in any EEA or EU state without having to demand any additional
authorisation from the host state. This policy is called the passporting


As we know, the city of London is
an international hub of financial services and it was shown by fund managers
poll numbers that 40% of the assets managed by the UK asset management industry
comes from overseas clients and 55% of those assets are directly connected to
EU clients, according to the Investment Association14.


 Given these facts, it is clearly evident that
Brexit, whether it is a “soft” or a “hard” Brexit, will have a great impact in
these numbers, because by leaving the EU, the MiFID, UCITS and AIFM Directives
will no longer apply to the UK as a third country and as such the UK fund
managers will not have access to the passporting rights and will not be able to
access freely the EU market, being subject to greater expenses to obtain new
authorisations, to comply with other countries requirements, creating other
branches and also losing EU clients/investors that will redirect to other firms
in the EU.

 The funds that are now qualified as UCITS
funds, after Brexit, they will no longer be considered as such because this
qualification only applies to funds within the EU. Furthermore, the UCITS
directive doesn’t provide a third country regime, so UK asset managers will be
forced to turn to the AIFM Directive which is the only directive that provides
the most complete third country regime15
for fund management, so what was previously considered as a UCITS fund in the
UK will now be qualified as an alternative investment fund which falls under
the scope of the AIFMD, if the country meets the requirements of the Directive
to obtain the passport.


 After trigging article 50 of the TFEU, the
British government has started negotiations with the EU in order to provide a
transitional or definitive agreement by the time the UK leaves the EU. 

During these negotiations, several
possibilities have been considered as to what kind of relationship the UK and
the EU will maintain, those being the signature of the EEA agreement by the UK,
also called the “Norway model” by several authors, the third country
equivalence regime and a bilateral agreement.


II – The post Brexit potential
scenarios of the relationship between the UK and the EU


The first scenario that is
considered to have the less impact on the UK fund management industry is the
situation where the British government decides to join the European Economic Area
(EEA) agreement or join the European Free Trade Association (EFTA), also called
the “Norway model”.

signing this agreement, the UK would still have access to the single market
which encompasses the free movement of goods, capital, people and services.
 This scenario would maintain the status
quo without interrupting the current access of UK fund managers to the EU
single market.


Although they would have the
advantage of keeping the access to the EU market, they would still have to
accept the free movement of people into the UK, which is against the current
political position of Westminster, that insists in regaining control of its
borders and escape the jurisdiction of the CJEU.

Furthermore, by signing this
agreement, they would be excluded from participating at the legislative process
within the EU but would still be in the obligation to comply with EU
legislation because most of EU legislation is applied to the EEA agreement16
and even make a financial contribution to access the market. This position
would not be favourable to the UK, given the fact that the UK prefers to adopt
an independent stance in terms of legislation, because of the particular needs
of the UK economy.


In a second scenario, the UK could
seek to obtain third country equivalence, as specified in the AIFM Directive17,
in the MiFID II and MiFIR (will only be enforced in January 2018). The
equivalence is granted by the European Commission under the advice of the
European Securities and Markets Authority (ESMA) and other European

The equivalence is assessed through
a series of criteria 18
and requirements 19
but the key question is whether the regulatory framework of the country amounts
to the same results as EU legislation, so it is not a matter of formality.

However, this process is long
because other countries have not yet obtained equivalence and there is also the
fact that equivalence is an uncertain and fragile regime, because it can be
removed at will by the European Commission on the grounds of bad conduct of a
firm leading to the conclusion of a regulatory gap in the country, for example.


In a third scenario, the UK could
sign a bilateral agreement with the EU and EEA members, like Switzerland signed
an agreement with the EU that enabled the country to access EU market in
certain sectors. However, this type of agreement requires a lengthy process of
negotiations as we see in the case of Switzerland, that took almost 16 years to
achieve a stable agreement (practically impossible to achieve in 2 years for
the UK) due to a series of agreements in specific sectors and it also required
a partial financial contribution20.
 Meanwhile, UK fund managers would be
without any legal background to protect their interest in the EU market.

In the Swiss approach, the country
had also to accept the free movement of people, which once again is not in
alignment with the political stance of the UK.

Another type of agreement is the
extensive free trade agreement that was signed between Canada and the EU, also
called the Comprehensive and Economic Trade Agreement (CETA).



III – The most probable scenario of
UK-EU relationship post Brexit


The declarations of the British
government in late March 2017 have made clear their intentions for the future
relationship between the UK and EU as they intend to create free trade
agreement that will ensure the access to UK fund managers to the EU market:


“Instead, we want a bold and
ambitious Free Trade Agreement with the EU. This will enable free-flowing
trade in both goods and services, and ensure the freedom for UK companies to
trade with and operate within European markets.”21


In an economic and legal
perspective, if this agreement is concluded, UK fund managers interests in the
EU market will be guaranteed, so there will be no changes in their actual
position. However, giving the short period of time until the official exit of
the EU, this agreement will certainly not be concluded before Brexit, because
it took Canada about 7 years to complete this type of agreement, although its
efficacity.  Until the agreement is
concluded, UK fund managers will be in a “legal limbo” after Brexit, unless
they find ways to secure their position in the EU market through other legal




Until the negotiation period is
concluded between the UK and EU, UK fund managers will be surrounded in a
climate of legal and economic uncertainty, due to the conflicting political
positions of each side and the timing of each solution presented, whether it is
joining the EEA/EFTA, acquiring equivalence or creating a bilateral agreement.

However, we can clearly observe that the British Government prioritizes
the economical stability of UK fund managers and their position in the
financial services sector.

there aren’t any definitive and perfect solutions, fund managers can use other
resources to secure the access to the EU market and reduce the economic impact
of Brexit on their marketing services.




1 Gillian Lofts, Paul Stratford, “The
implications of Brexit on UK asset managers”, Oxford Economics report, EY, 2017


2  Directive
2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the
coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities (UCITS) (Text
with EEA relevance)


3 Directive 2011/61/EU of the European
Parliament and of the Council of 8 June 2011 on Alternative Investment
Fund Managers (AIFM) (Text with EEA relevance)


4 European Commission (website),” Investment funds”, Paragraph 4 (https://ec.europa.eu/info/business-economy-euro/growth-and-investment/investment-funds_en)


5 Directive 2004/39/EC of the European
Parliament and of the Council of 21 April 2004 on markets in financial
instruments amending Council Directives 85/611/EEC and 93/6/EEC and
Directive 2000/12/EC of the European Parliament and of the Council and repealing
Council Directive 93/22/EEC, Article 6. (4)

6 Eilis Ferran, “The UK as
Third Country Actor in EU Financial Services Regulation”, Legal Research Paper
Studies Series, University of Cambridge, Faculty of Law, Paper no. 47/2016, September

7 Rodrigo
Olivares-Caminal, Marco Bodellini, “The UK Regulation on Alternative Investment
Fund Managers: a Difficult Compromise between two Legislative Approaches”, Macmillan Publishers, 2017

8 Alastair
Hudson, “Law of Finance”, 2nd edition, Sweet & Maxwell, p.185,
paragraph 7-101

9 Rodrigo
Olivares-Caminal, Marco Bodellini, “The UK Regulation on Alternative Investment
Fund Managers: a Difficult Compromise between two Legislative Approaches”, Macmillan Publishers, 2017

10 Directive 2011/61/EU, AIFMD, Recital 10

11 Directive 2011/61/EU, AIFMD, article 6

12 Directive 2011/61/EU, AIFMD, article 19

13 Directive 2011/61/EU, AIFMD, article 21

14 Gillian Lofts, Paul Stratford, “The implications
of Brexit on UK asset managers”, Oxford Economics report, EY, 2017

15 John
Adams, « Brexit for Fund Managers: time for coolheads”, 2016, J.I.B.L.R

16 Sam
Kay, Jeremy Elmore, “Legal Brexit”, Chambers Global Practice Guides, 2016,
Travers Smith LLP

Directive 2011/61/EU, AIFMD, article 37

18 MiFIR
(Regulation 600/2014 on markets in financial instruments), arts 46 –48 Title
VIII: “Provision of Services and Performance of Activities by Third
Country Firms following an equivalence decision with or without a branch”.

19 Scott Morrison, “Third-country equivalence: a Brexit scenario for
UK financial services”, I.C.C.L.R, (2018)

20 Allen & Overy, “Impact of Brexit on asset and fund managers”,
July 2016

21 Foreign & Commonwealth Office, Home Office, “Exiting the
European Union”, 29 March 2017