As 29 March looms with uncertainty still surrounding the type of Brexit scenario that will unfold, there have been a number of regulatory developments at EU, UK and Irish level, which should provide some welcome clarity in the event of a hard Brexit. Key amongst these are recent agreements and announcements with regard to delegation, the CP86 location requirement, marketing in the UK post-Brexit, and settlement.
Both the UCITS and AIFM Directives permit third-country delegation of investment management under specified criteria and many Irish funds and management companies delegate the investment function to portfolio managers based in the UK that are regulated by the Financial Conduct Authority ("FCA"). However, Brexit threatened to disrupt this as delegation to a non-EU manager requires co-operation agreements to be in place between the relevant EU regulator and the regulator of the non-EU manager. On 1 February, the European Securities and Markets Authority ("ESMA") confirmed that it had agreed a Memorandum of Understanding, on behalf of the EU27 national regulators, with the FCA and so delegation of portfolio management from Irish funds to UK based portfolio managers can continue post 29 March, even in the event of a hard Brexit.
CP86 LOCATION RULE
On 4 February, the Central Bank of Ireland released a Notice of Intention regarding the location requirement for directors and designated persons of Irish fund management companies. This rule requires that a minimum number of directors and designated persons be EEA-resident (for example, at least half of the managerial functions should be performed by at least two EEA-resident designated persons).
The notice confirms that, in a hard Brexit scenario, the Central Bank will not immediately move to treat the UK as a third country for the purposes of this requirement.
Although the Central Bank has made it clear that this is a temporary measure while it considers the issue more fully, this confirmation that in the event of a hard Brexit it won't immediately require UK based directors and designated persons to be replaced by EEA based ones will come as a welcome clarification for the Irish management companies of international fund promoters whose UK based staff serve as directors and designated persons for those Irish entities.
UK AIFMS OF IRISH FUNDS
Additionally, the Central Bank has confirmed in the latest update to its AIFMD Q&A that an Irish authorised QIAIF will be permitted to designate a UK AIFM as its AIFM, provided that the QIAIF and its UK AIFM comply with the provisions of the AIF Rulebook that apply in the case of QIAIFs with "registered" or sub-threshold AIFMs. However, as the AIFM will be a non-EU AIFM, marketing of the QIAIF by the AIFM into other EU member states under the AIFMD passport will no longer be permitted and will instead be subject to member states' national private placement regimes.
MARKETING IN THE UK POST-BREXIT – TEMPORARY PERMISSIONS REGIME OPENS
On 7 January, FCA announced that its notification period under the temporary permissions regime ("TPR") for firms and funds had opened. The TPR provides a backstop in the event that there is no transition period and the passporting regime falls away upon a hard Brexit.
Accordingly, funds/fund managers may now start to notify the FCA of their intention to continue marketing funds in the UK post-Brexit. There is no fee to make the notification and the FCA has advised that funds/fund managers should not wait for confirmation of a transition period prior to making their notification. The FCA does, however, advise that fund managers should submit their notification with a full list of the funds they wish to continue marketing and if it is anticipated that they will add funds to their notification before the window closes on 28 March, they should wait until they have a full list before submitting. Once submitted, no amendments are permitted to the notification and so funds/fund managers should be satisfied that all relevant funds are included in the submission prior to completing the notification. However, new UCITS sub-funds will be permitted to notify the FCA to enter the TPR post-Brexit provided that at least one sub-fund of the new sub-fund's umbrella has notified its intention to enter the TPR prior to 28 March 2019 (the date the notification period will close).
The notification must be made through the FCA's Connect system and the FCA has published some operational guidance on how to make the online notification.
Once a firm has received a temporary permission to continue marketing a fund in the UK it will be allotted a time period within which to apply for a new authorisation required to continue this marketing activity and submit its application. The FCA expects the first of these slots to be later in 2019, with the last timed towards the end of the temporary permissions period, currently expected to run for 3 years from the date of exit.
SETTLEMENT - EUROPEAN COMMISSION GRANTS TEMPORARY EQUIVALENCE TO UK CSDS
The European Commission has adopted a temporary equivalence decision ("Decision") under Article 25 of the Central Securities Depositories Regulation (EU/2014/909) in respect of UK authorised Central Securities Depositories ("CSDs"). This means that in the event of a hard-Brexit, UK CSDs, such as CREST, can continue to provide their services within the EU for a specified period. This is a welcome move for Irish securities market participants in particular. Ireland does not have an indigenous securities settlement system and accordingly most trades in Irish securities are settled in the UK via CREST. Therefore, the inability to use CREST post Brexit would have caused significant disruption to the Irish securities market.
The Decision entered into force on 20 December 2018 and, should the UK leave the EU without an agreed withdrawal agreement, will apply for two years from Brexit day (30 March 2019) until 30 March 2021. Following the adoption of the Decision, and agreement of a Memorandum of Understanding between ESMA and the Bank of England, UK CSDs may now apply for recognition from ESMA.
Additionally, in preparation for a potential "no-deal" Brexit, the Irish Government has published a general scheme of the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill (the "Bill"). The Bill, which comprises 17 Parts, is intended to be consistent with and complementary to EU preparations for the UK's withdrawal from the EU. Part 7 of the Bill introduces legislative amendments to support the implementation of the European Commission's Decision and to extend the protections contained in the Settlement Finality Directive to Irish participants in relevant third country domiciled settlement systems.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.