AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing alternative asset managers globally

Brexit - The implications of the UK’s exit from the EU

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On 23 June 2016, the British electorate voted by a margin of 52%-48% to leave the European Union.  While there is some discussion about whether the UK government will ultimately respect the instruction delivered by the “Brexit” referendum, it appears highly likely at this stage the UK will now follow through and leave the EU.

Legal Process

Article 50 of the Lisbon treaty defines the process by which a Member State can leave the EU, requiring the UK government to make a formal notification to the European Council of its desire to leave the EU. This will commence a maximum two-year period during which a withdrawal agreement is to be concluded between the UK and the European Council acting by qualified majority, with the consent of the European Parliament. Upon the entry into force of the withdrawal agreement or, failing that, the expiry of the two year period, the EU Treaties will cease to apply to the UK unless an extension is agreed unanimously by the European Council.

While the European Parliament and Commission are pushing for the UK to make a swift notification under Article 50, it may be a number of months before the UK makes this notification in order to give itself time to determine its negotiating platform for the withdrawal discussions. This could mean that Brexit does not actually take place until 2019 or beyond.

Future relationship between the UK and EU

One of the key questions for service-based industries is what the UK’s relationship with the EU will look like after Brexit; in particular, will the UK maintain access to the EU’s Single Market for goods and services or will the relationship parallel that of other “third countries”, such as the United States? Pressure is already mounting from some portions of the business community for the UK to preserve Single Market access - something that is available to countries such as Norway, who are not members of the EU, but are part of the “European Economic Area” (EEA).

The potential political stumbling blocks for the UK are that EEA membership entails accepting free movement of workers from other EEA countries, making payments to the EU budget and full compliance with EU rules - three things that were central to the arguments made to the British electorate about why they should reject a remain result in the referendum. Notably, EEA countries also have no say on the regulation which they must follow in order to obtain access to the Single Market and have no vote in discussions at the level of the European Supervisory Authorities, such as ESMA.

From the perspective of the hedge fund industry, it is not immediately clear that something resembling the EEA model would be desirable, particularly given that the UK would be excluded from the EU process to write the applicable rules - including those related to the marketing of non-EEA funds in the EU. It is hard to envision anything other than more onerous standards from the remaining EU Member States, which by and large do not have domestic hedge fund industries to protect.

The alternative to EEA membership is a pure bilateral arrangement between the EU and UK to preserve free-trade and reciprocal market access. This could be largely based on the EEA agreement, with specific compromises from both parties around the main points of political contention, unrestricted free movement of people and contributions to the European budget. Nonetheless, there are significant political forces that will seek to prevent the UK from ‘cherry-picking’ the benefits of EU membership without incurring any of the costs. It is also an existentially important for the entire European project that other Member States are not incentivised to follow the UK’s example.

We do not have any certainty on the future relationship between the UK and EU at this stage, although it is clear that this will be a negotiation of immense economic and political significance for both the UK and the EU, and will generate vast amounts of work for politicians, civil servants and industry.

 

Implications for the hedge fund industry

There will be various direct and indirect consequences of Brexit for the alternative asset management industry, posing both risks and opportunities. Unanswered questions include:

  • the availability of the third-country passport for UK AIFMs and non-EU AIFs under AIFMD;
  • whether sub-delegation of UCITS fund management responsibilities to a London based investment manager will continue to be possible;
  • the willingness of the Commission to grant equivalence under EMIR to UK CCPs and under MiFIR to UK trading venues;
  • the availability of equivalence under MiFIR to enable UK investment firms to provide MiFID services on a cross-border basis to professional clients and eligible counterparties in the EU;
  • the future of existing financial services legislative files and projects such as the Capital Markets Union initiative;
  • whether the UK will seek to repeal certain aspects of the EU Short Selling Regulation; and
  • the degree to which the UK regulatory regime may diverge with the EU whilst maintaining unhindered access to those markets via equivalence.

Notwithstanding the direct regulatory consequences for UK/EU cross-border business, Brexit will nonetheless provide the UK government with much greater control over its policymaking and domestic regulatory regime. In particular, it will also enable the UK to take opportunities to negotiate and sign free-trade agreements with other key financial and non-financial jurisdictions globally - potentially including the provision of financial services.

 

AIMA role

The first pieces of work for AIMA will be to develop a series of policy statements to guide future work by the association in this area. To this end, AIMA has formed a Brexit Task Force from a cross-section of manager and service provider members to assist in AIMA’s work.

Key output from this Task Force will include separate positions of the alternative investment management industry to be expressed to:

  • the UK government and FCA;
  • EU member states, the European Commission, ESMA and the EBA; and
  • non-EU countries and regulators.

It is the intention to help inform these positions through input from the broader membership, as well as the Brexit Task Force. Due to AIMA’s global membership, AIMA’s work will take place in multiple countries and take into account the multiple perspectives that members from different countries may have.

 

AIMA / MFA Survey

To assist in the development of AIMA's position, AIMA has collaborated with the MFA to publish a joint Brexit Survey to map hedge fund and private client manager members' exposures through their geographical positioning, regulatory structuring, staff demographic and investor base. It also asks members for their views for the new UK/EU relationship going forward.

The Joint survey is available here and will be open to responses until mid-September 2016.

 

Where can I find more information?

Please contact AIMA’s Brexit team for more detail on any issue of concern.  

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