UK investment managers are becoming increasingly vocal in the Brexit debate, with the June referendum possibly marking a turning point for the industry. These are top players in the European fund management industry, yet their dominance is dependent on the ability to do business across the continent. In this sense, regulation matters … a lot. Aside from MiFID, the Undertakings for Collective Investment in Transferable Securities (UCITS) and the Alternative Investment Fund Managers Directive (AIFMD) are two key pieces of European legislation affecting the industry. Should managers expect less burdensome regulations and business continuing as normal if Brexit was to occur?
First, let’s ease into UCITS. Unlike an alternative investment fund (AIF), a UCITS fund can only be established in the European Union and, implicitly, the impact of a Brexit on such funds is likely to be significant. Managers seeking to remain active in the UCITS market would be required to rework their business models, restructuring operations and moving fund addresses to the EU. In the absence of a negotiated settlement with authorities in Brussels that would permit the UK to remain a domicile for UCITS, all the hassle of re-domiciliation to an EU country and reauthorisation under the UCITS directive will be time-consuming and costly.
Building a parallel UCITS-style investment vehicle also seems a pricy, if not infeasible, option. UCITS funds are now a premier brand for retail asset investment, proving extremely successful in the EU and other regulatory jurisdictions, such as Asia. This means that a new UK UCITS hybrid fund would face tough competition when trying to win over new investors.
Regarding the AIFMD, the UK is likely to develop more autonomy by opting out of the EU when it comes to marketing and passporting of funds. Nonetheless, the AIFM directive would require non-EU AIFs to still conform with certain EU guidelines, such as the capital requirements and pay guidelines. Therefore, managers wanting to continue marketing their funds across the EU would not be exempt from the regulatory burden imposed by Brussels. Indeed, under the AIFMD, non-EU legislative initiatives must be deemed equivalent for the cross-border provision of investment products and services.
Ultimately, there will be no single impact of a Brexit on the UK investment management industry, but a whole hotchpotch of issues and considerations will arise. It is simple to assume that, to maintain their UCITS or AIF status, UK-based funds might only have to relocate within the European Union. However, the ramifications of such a move would likely be a taxable event for fund investors – and they might not be too ‘happy’ about this.