As the scheduled date for the UK’s departure from the EU draws nearer – and just as speculation increases that the UK will not actually leave at the end of March, but will instead ask for its leaving date to be deferred – some European legislators have started to think about how to minimise the disruption that would ensue if the UK did leave suddenly, without having agreed a deal, in just over a month’s time.
The UK has been working on its own transitional regime for financial services for some time, and EU firms are now able to notify the regulator, the Financial Conduct Authority, that they intend to make use of it. But regulators and policymakers elsewhere in the EU have been reluctant to follow suit. At last there are signs that this is changing, but the approach differs from country to country, meaning that UK investment firms who want to make use of any transitional relief (only necessary if there is a ‘no-deal’ Brexit) will have to navigate a patchwork of different regimes – most of which will require a notification to be given to the relevant regulator before Brexit.
Among those countries ahead of the pack was Germany, which is proposing to hand its regulator, BaFin, the power to extend certain passporting rights for UK MiFID firms (those authorised under the EU’s Markets in Financial Instruments Directive) to the extent necessary to “prevent adverse effects for the function and stability of the financial markets.” The precise scope of these provisions is not yet clear, but they will be limited to “legacy” MiFID business and, therefore (depending on how narrowly “legacy business” is interpreted), may be of limited value. Some other countries are set to introduce more wide-ranging transitional regimes, including the Netherlands, Italy and Norway. On the other hand, Luxembourg, Finland and Sweden are among the countries where, although it is clear that there will be a regime, its value may be more limited – although Luxembourg’s proposal would allow cross-border management of funds, which will help some UK-based private fund managers.
But the utility of the regimes will be questionable for private fund managers. In most cases, it seems unlikely that marketing permissions under the Alternative Investment Fund Managers Directive will be preserved – meaning that funds which currently benefit from the marketing passport will need to re-register under national private placement regimes, if the host country operates such a regime. In that regard, there is at least some good news: co-operation agreements have apparently been concluded between the FCA and each of the 27 other regulators, facilitating use by UK firms of whatever NPPRs are available.
The main beneficiaries of the envisaged transitional regimes will therefore be firms that have MiFID permissions and are marketing funds that are already capable of being marketed to professional investors in a particular country, either because they are managed by an EU manager and benefit from the passport, or because they are already registered under the relevant NPPR. But firms will need to be ready to act quickly if they want to take advantage of rules that are still being worked on.
And, before doing so, firms should also consider the consequences of taking advantage of these regimes – for marketing, they only provide limited relief and are only necessary in those EU states in which the firm’s activity may be treated as a MiFID activity (which is itself not always clear). Using the regime also implies that the firm will need to demonstrate at a later point that it has either a permanent permission or has ceased activities in the jurisdiction.
Furthermore, in many countries there is still no information about if or when a transitional regime will be put in place, let alone what it will cover. Some, like France, are saying that they will not make any announcements until a “hard Brexit” is confirmed – hardly helpful for a firm trying to plan its Brexit strategy – while many others have said little or nothing at all about any transitional relief. That means it will be practically impossible for market participants to be fully prepared.
UK firms won’t be surprised that other regulators are not going out of their way to smooth their transition to a post-Brexit world, but it is hard to see how anyone’s interests are best served by a lack of clarity and potential cliff-edge disruption. It is to be hoped that regulators in jurisdictions where legislators have not provided a helpful temporary permission regime will take a reasonable approach, and apply the rules in a way which will minimise disruption to marketing processes.
Simon Witney is special counsel and Patricia Volhard is a partner at Debevoise & Plimpton.
This is part of a series, European Funds Comment, by Debevoise & Plimpton.