The UK’s delayed departure from the European Union gives asset and wealth managers a potential window of opportunity to finalise their post-Brexit arrangements - but does not change the necessary choices firms must make about how they operate in the future.
In particular, the delay is potentially valuable to AWMs hoping to implement a long-term permanent Brexit solution if they were unable to put arrangements in place by 29 March, the original Brexit day. They may now have time to file applications with regulators for new licences to increase or establish substance in a new jurisdiction and have them approved before exit day. Those that submitted late applications to regulators now have a greater chance of being fully licenced on time.
This ‘flextension’ does not change the likely future landscape for AWMs, but it does provide just a little more time for those that are not already primed for the loss of passporting.
Firms can take advantage of this extra time to reassess and optimise their Brexit plans, but in our opinion, shouldn’t be looking on the delay as an opportunity to take a breather.
The delay will also be welcomed by funds that are seeking to appoint a third-party management company to provide certain regulated functions. Following Brexit, the UK located management group may no longer have the necessary regulatory permissions to perform these functions into the EU27.
AWMs’ ability to secure licenses and appoint third-party management companies will depend both on them doing the work and on the capacity of regulators and service providers; nevertheless, this is a second chance to get post-Brexit planning optimised and completed on time.
The bottom line for AWMs has not changed: following a no-deal Brexit, or at the end of any transition period agreed in a Brexit deal, the UK becomes a third country for regulatory purposes; at this point, UK firms will immediately lose the passport rights that currently allow AWMs to access the single EU market for financial services. These passport rights enable an AWM authorised by the UK FCA to provide services or establish a branch in any other EU member state without the need for any further authorisation or licence from that member state, so this will be a significant moment.
While there is still no certainty on the final detail of the Withdrawal Agreement or the accompanying Political Declaration, arguably, the chances of a no-deal Brexit now appear to have diminished, while a deal including some form of customs union has become more likely. However, this will make no practical difference to AWMs: whether the UK leaves the EU with or without a deal, UK firms will lose their passporting rights. This remains the case even in a customs union, since this would not apply to financial services. UK AWMs are set to lose their status sooner or later – the only uncertainty concerns the date on which passporting rights end.
If there is a no-deal Brexit…
At this time, in order to access the EU single market, UK AWMs would need to rely on third country equivalence provisions in the respective EU legislation. Some (but not all) member states have already approved measures to provide transitional relief in the event of a no-deal Brexit or announced plans to do so. However, these would be interim in nature.
In Luxembourg such transitional reliefs include;
Importantly, the Withdrawal Agreement focuses on goods rather than services. As such, it simply buys some time for AWMs, during the transitional period, as the UK and the EU negotiate the detail of their future relationship. During this time,
AWMs will be able to do business as usual, but will need to implement their post Brexit solutions while continuing to monitor developments relating to the future regulatory permissions landscape for cross-border asset management.
The options for AWMs today
It’s crucial to note that while certain EU legislation contains third country equivalence provisions, in some cases these provisions are not switched on. For example, the UCITS directive does not provide for any third country equivalence; the provisions under AIFMD have not yet been activated.
Moreover, in comparison to passport rights, equivalence offers piecemeal and limited access to the EU single market. Also, unlike passport rights, which are permanent, equivalence may be unilaterally withdrawn by the European Commission.
As a result, post Brexit UK AWMs will not be able to perform certain activities, such as acting as management company, for certain funds and products, such as EU-domiciled UCITS and AIF products (other than under transitional relief measures referred to earlier).
Likewise, once the UK’s temporary permissions regime expires, EU AWMs may not be able to perform such activities for UK-domiciled products.
This is why many asset managers have implemented - or are planning - permanent long-term product and group restructuring to ensure they can continue to operate without passport rights following Brexit.
For products, this has typically involved launching parallel EU27 and UK funds. At a group level, UK AWMs have been establishing or expanding substance in EU27 locations and EU AWMs have been doing the same in the UK. Groups have also been moving EU branches from a UK to EU27 parent to enable them to access the EU passporting rights going forwards.
In Luxembourg we have seen this shift from a short term fix mindset to a long term sustainable and strategic EU based flagship entity (often in Luxembourg) authorised with a full range of permissions to undertake portfolio management (including segregated mandates), distribution and Branch management functions, across both UCITS and AIFs.
In addition, more effort is going into Target Operating Model design, combining the much welcomed prescription of Circular 18/698 with a pragmatic balance of leveraging Group entities where “centres of excellence” can be integrated, resulting in TOM’s which are effective, efficient and compliant.
The other core consideration for Luxembourg based funds is long-term access to the UK market for distribution. Managers of such funds will need to carefully consider whether their primary route to market will continue to embrace a TPR and subsequent FCA “permissions” outcome, or whether a more sustainable (to their distribution channels) option is to set up parallel UK funds. Ironically, this latter option could see a dramatic rise in the popularity of the UK third party ManCo model, created by demand from the very centres that established it in the first place.
Crucially, the delay to Brexit does not change the key objective of determining the best course of action post Brexit – or enable AWMs still in the process of implementation to relax. There was a big push by AWMs and regulators themselves to prepare, review, scrutinise and approve applications for new licences by 29 March. Many of those applications involved relocations of staff and business activities, and commitments to ensure suitable levels of substance would be located in the licencing jurisdiction. AWMs now face the challenge of living up to those commitments.
AWMs which may fall short risk losing the licences and the relationships with the regulators that they have worked so hard to establish. In particular, AWMs that have commitments to refine and expand plans post licence approval will need to ensure they communicate any changes to these plans with the regulator to avoid unwanted conflict in the near future.
Key dates following the extension of Article 50 to 31 October 2019:
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Partner, Asset & Wealth Management Leader - PwC EMEA, PwC Ireland (Republic of)
Tel: +353 1 792 6247
EMEA Brexit Leader, United Kingdom
Tel: +44 (0)7734 607485
UK AWM Brexit Leader, United Kingdom
Tel: +44 (0)7469 033107
Managing Director, PwC Luxembourg
Tel: +352 49 48 48 3601
Partner, PwC Luxembourg
Tel: +352 49 48 48 2116
Markets and Strategy Financial Services Leader, PwC Luxembourg
Tel: +352 49 48 48 4174
Partner, PwC Luxembourg
Tel: +352 49 48 48 3299