The asset management industry welcomed a recent proposal to extend the Brexit transition period to the end of 2020, but when it comes to contingency plans, there’s no time to slow down.
The recent proposal to extend the Brexit transition period by 21 months was welcome news as it greatly reduces the possibility of a cliff-edge exit and retains existing trade agreements until 31 December 2020. The proposal states that the UK will remain subject to EU rules, stay within the single market and customs union, and continue to accept the jurisdiction of the European Court of Justice until leaving the EU officially on 1 January 2021. The proposal includes several concessions that certain parties previously considered political “red lines.” The negotiations now appear to have a greater level of pragmatism and softened tones.
Essentials Asset Managers Should Know:
Only Known Unknowns
The proposed extension is not yet set in stone and remains subject to parliamentary approvals in both the EU and UK. As Europe’s Chief Negotiator for Brexit says, “nothing is agreed until everything is agreed.” Further, the proposed transition has no legal basis and adds no additional legal certainty to UK-EU relationships post-Brexit. It is because of this legal uncertainty that cross border asset managers should continue unabated on their contingency plans.
Don’t Rely on Temporary Permissions
In an effort to assure EU companies wishing to continue operating in the UK post-Brexit through the Temporary Permission Regime (TRP), the UK government announced in December it would legislate for firms and funds passporting into the UK if needed. More recently, the Bank of England and the Financial Conduct Authority asked firms who wish to avail of the TPR to contact them to discuss. However, the EU has not yet confirmed they are willing to offer the same terms. Given the significant level of uncertainty as to both the nature and timing of a Brexit deal, firms should take decisive action now to ensure seamless business continuity whichever way the ultimate agreement leans.
To Delegate or Not to Delegate – That is the Question
A primary consideration for any asset manager assessing whether to setup shop in the EU as a Brexit hedge depends largely on the nature of delegation that will exist in a post-Brexit environment. Since the European Commission published proposals touching on allowable delegation parameters in September 2017, the industry has been debating the appropriateness of delegation reforms. Understandably, the industry has been particularly resistant to altering delegation requirements, stating the current system works. Meanwhile, some policymakers remain keen to ensure as many activities as possible are retained within the EU. Critically, in a Brexit context, the ability to delegate certain activities back to the UK from an EU regulated entity dictates an asset managers post-Brexit corporate structure. A reduction in allowable delegated activity will require an increase in EU-based resources.
In recent weeks, it has become increasingly evident that there is little consensus in Europe on the proposals and there’s been an evident softening of stance in public commentary. The head of ESMA recently said “delegation is not a dirty word.” What is clear is that there is a trend of UK asset managers setting up an EU presence to ensure adequate regulatory substance. Dublin and Luxembourg are seeing a steady stream of asset managers, UCITS management companies, and AIFMs and are emerging as two important EU financial centers.
A view of the Irish Financial Services Centre (IFSC) which continues to expand and ready itself for an expected influx of UK asset management professionals looking to secure “substance” within the EU to ensure business continuity in a post-Brexit environment.