No Match Found
In the first of a two-part blog, we’re addressing some of the marketing challenges AIFMs have experienced since 1 January 2021 with the falling away of MiFID passporting rights. Our second part, to be issued in early February, will discuss the future of the Channel Islands for fund domiciliation.
As anticipated, the EU-UK Trade and Cooperation Agreement (“TCA”) which came into effect at midnight on 31 December 2020 was, as the name implies, primarily a trade deal and so provided little by way of agreement on financial services.
Most importantly, this meant that passporting rights - the foundation of the single market for financial services which enables firms authorised in one member state to provide services to clients in any other - ceased for UK firms, restricting their ability to interact with EEA clients.
The EU-UK Declarations supporting the TCA include a commitment to agree a Memorandum of Understanding by the end of March to establish a cooperation framework for financial services, including on equivalence decisions which could reintroduce passporting in certain areas. However, it is unclear what such an agreement may contain or how far cooperation will extend and it remains the case that the equivalence concept is not recognised in all EU financial services related directives and regulations.
PwC are actively working with several Channel Island (“CI”) GP/LP fund structures with previously UK-based marketing teams to enable their continued interaction with EEA investors post-Brexit whilst they await clarity on the future EU-UK relationship.
CI GP/LP fund structures commonly engaged UK-based distribution and investor relations teams. Those teams were typically regulated by the FCA under appropriate MiFID permissions and were therefore able to avail themselves of the MiFID passport to distribute funds in the EEA during the UK’s membership of the EU and the transition period. Marketing took place subject to a permissive National Private Placement Regime (“NPPR”) being available in investors’ member states of residence and, although not available across the bloc, provided access to the majority of key markets.
Where the UK firm was also the AIFM, MiFID II explicitly exempted from its scope management and marketing activities in relation to their own funds. This was on the basis that their regulation primarily fell under AIFMD and it was desirable to avoid duplicate regulation, risking overlapping or even contradictory requirements. For these AIFMs, Article 36 of the AIFMD enabled them to market their non-EEA AIFs to professional investors in the EEA under NPPRs.
For UK AIFMs of CI funds, distribution permissions under Article 36 of the AIFMD ceased on 1 January 2021, but can continue through similar channels under Article 42. Although this requires notifications in each relevant country where they wish to continue marketing activities, they should not be materially restricted in their ability to distribute compared to the previous regime.
For fund distributors which are not the fund itself or its principal manager and therefore fall under the MiFID regime, the end of the transition period and the TCA not providing for ongoing passporting from the UK to the EEA meant their MiFID passporting rights were lost. Despite being appropriately regulated in the UK, the ceasing of passporting rights means they are no longer able to market into the EEA without understanding fully the regulatory rules and potential safe harbours in each jurisdiction, i.e. the equivalent of the UK’s Overseas Persons Exemption.
Although both AIFMD and MiFID II contain reverse solicitation or “own exclusive initiative” provisions, there is an expectation from regulators that this is rarely going to be a fund’s sole route to market and it is a risky strategy which could lead to legal challenges and potential regulatory breaches.
In the absence of a solution, Non-EEA AIFs which had previously marketed into the EU through UK distributors will be restricted in their ability to engage with potential investors going forward.
We’re working with a number of clients to develop and assist with the implementation of a variety of solutions; the precise approach will depend on inter alia the current structure and jurisdictions of substance, regulatory permissions and future launch plans.
Overcoming the MiFID challenge is the primary concern and an obvious solution is to appoint a MiFID-registered EEA manager or distributor. This offers the benefit of a marketing passport but can be expensive and may suffer from long lead-times if regulatory permissions need to be obtained.
Another potential solution would look to the above referenced MiFID II exemption for AIFMs marketing or managing their own funds. This provides an opportunity to, for example, restructure certain functions and resourcing of the CI GP to enable it to perform marketing activities going forward.
Any solution requires careful consideration of the regulatory and tax implications in both the CI and the UK, which has brought together our UK and CI advisory and tax practices to collaborate and deliver effectively for clients.
While some managers need to prioritise immediate challenges like those set out above, many will also be thinking about future fund launches.
We will see an evolution of EU-UK relationship for financial services over the coming months and years but there remains considerable uncertainty; March’s MoU may or may not provide a way forward on passporting and we’ll have to wait to see how AIFMD will develop as a result of the consultation closing on 29 January.
Despite continued Brexit uncertainty, the Channel Islands will continue to be popular domiciliation jurisdictions for new fund launches and I’m delighted that my colleague Rob Mellor will be joining a Jersey Finance Funds Masterclass on 4 February to provide some further insight into our current work as well as discussing the future of the Channel Islands for fund domiciliation. Without wishing to steal his thunder, I’ll leave Rob to provide his insight at that event and we will summarise much of this in the second part of this blog shortly thereafter.