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27 September 2017

Brexit and UK AIFMs

SL is increasingly asked what Brexit will ultimately mean for Alternative Investment Fund Managers (AIFMs) based in the UK. Will UK AIFMs be permitted to continue to manage the Alternative Investment Funds (AIFs) they have under their remit? Will they be able to continue to distribute their AIF investments to European investors post Brexit?

Before we look at this, it's worthwhile having a quick recap on the background to the Alternative Investment Fund Management Directive (AIFMD).

AIFMD was introduced by the European regulator with a view to creating a framework for non-mainstream investments - predominantly hedge funds, private equity and real estate investments - although other alternatives such as investments in UK Traded Endowment Policies and US Life Settlements were also covered by the regulation.

The purpose of the regulation, in broad terms, has been to:

  • Prevent instability within the markets by identifying and correcting systemic risks early;
  • Improve investor protections and transparency;
  • Increase efficiencies and competition by harmonising standards across borders.

The UK transposed the AIFMD into UK law when the regulation was adopted in 2013. Therefore, after the UK leaves the EU - which is likely to be March 2019, but could be as late as March 2021 should a two year transitional period be agreed - the UK implementation of AIFMD laws will still apply in the UK.

However, the UK will then have freedom to diverge away from EU regulation as it develops post Brexit - should the UK choose to do so of course.

What will happen after Brexit? No one really knows at this stage. But, as a leading global financial jurisdiction the UK is very likely to continue to operate a highly regulated Financial Services industry; and keep pace with regulatory developments in other markets to ensure equivalence and UK firms' access to overseas markets.

Importantly, the UK will also be able to consider, where appropriate, a reduction in regulatory intervention where such regulation is viewed to be counterproductive to the efficient and transparent operation of markets.

A good recent example of this can be found in the recent implementation of the EU Solvency II directive in the UK. The motives behind this are of course genuine. However, there are some unintended consequences of the directive in the UK that could be perceived as being detrimental to investors' interests. For example, Insurance companies will no longer be required to make public their annual With Profit Returns to the PRA (the UK bank and insurance company regulator). This further reduces investor transparency in a product that is already notoriously opaque.

Back to the topic in hand - the ongoing management of AIFs post Brexit.

It is clear that UK AIFMs operating UK AIFs (or non EU AIFs for that matter) will be able to continue to do so post Brexit - no change. As all the AIFs SL Investment currently manages are UK AIFs, we envisage no problems in continuing with our AIFM remit on these products post Brexit.

For UK AIFMs managing EU AIFs, there are likely to issues. Post Brexit, they'll need to gain authorisation from the regulator in which the AIF is based prior to being able to continue to manage the fund. As SL doesn't operate any EU AIFs, this won't be a problem for SL to address.

In terms of marketing and distribution of AIFs to EU investors post Brexit, this could be more problematic. Post Brexit, UK AIFMs will lose their AIFMD passporting rights, which currently give them permission to market their products to investors across Europe. The EU could provide authorisation to non EU AIFMs (which SL will be post Brexit) under equivalence - but they don't appear to be in the mood to do the UK any favours at present.

Alternatively, UK based AIFMs will need to establish a presence within the EU; remembering of course that this presence has to be something of substance (i.e. "boots on ground"), and not just a "letter box" entity.

Again, SL Investment has worked in many EU jurisdictions over the years - so whilst there may be some additional complications in distributing AIF product into Europe post Brexit, we don't currently believe there will be major consequences of Brexit, from a regulatory perspective, that will be insurmountable and particularly disruptive to the business.

Alec Taylor (Sept 2017)